‘Is this abnormal?’ asked Abrahams.
‘No. It’s a high level of ownership, but not abnormal. We had a massive influx of sovereign wealth fund capital in the aftermath of the financial crisis and it’s been going on ever since. I’m not saying this is necessarily significant, but it’s a fact we should be aware of that the company leading the rout in the markets right now has a high ownership by foreign state funds. If you add up the foreign government interests in Fidelian – that’s the Chinese, Russian and Qatari stakes – you’re in the region of forty per cent. In reality, the PIC stake alone is so large that this company couldn’t do anything against the PIC’s approval. You can’t go against a twenty-five per cent shareholder.’
‘But if they were driving the price down in some way,’ said the president, ‘that would go against their own interest as an investor.’
‘Absolutely. Even if you want to divest stock, you don’t just dump it on the market.’
‘Mr President,’ said Perez, ‘we should be clear that sovereign investment funds claim to act purely as investors like any other investor in the market. Every government says it’s a hands-off relationship, and that would include China, Russia and Qatar.’
The frown was still on the president’s face. There was something deeply unsettling about what Opitz had just told him. ‘Susan, we don’t have any evidence that one of these funds is doing anything that would influence this, do we?’
‘No, sir. As I said, I don’t think there’s anything to suggest that. I’m just raising the ownership issue so we’ve got it on the table.’
‘They may be using state money, but they’re shareholders like anyone else,’ said Perez. ‘As long as they’re acting as true investors without any other agenda, they’ll hurt as much as anyone.’
The conditional in Marty Perez’s statement rang loud.
‘We wouldn’t tolerate it if they weren’t acting in any way but true investors, would we?’
‘Absolutely not,’ said Opitz. ‘That would be market manipulation.’
There was a knock on the door. The president’s personal aide came in to say that the pilot of Marine One had informed him that if they didn’t leave within the next couple of minutes they would be behind schedule for the speech. The preliminary cocktail reception with university dignitaries had already been canceled.
Still the president sat. If you didn’t take the opportunity to think about a problem when you had the opportunity, he had learned in his time at the White House, chances were you’d never get back to it. He pondered Opitz’s remarks further. It was only her judgment that the apparent attack on Fidelian wasn’t political. She didn’t
know
it.
The obvious political reason for doing it would be to influence the midterms. If a foreign state was doing that through an investment fund that it owned, or even thinking of doing that, it was unacceptable.
‘I wonder,’ he said eventually, ‘whether we need to give someone a message.’
BOB LIVINGSTONE USHERED the Chinese ambassador in. Zhu Hongwei was a thin man with a fastidious air and a tendency to turn combative. He was close to President Zhang and was less emollient than previous Chinese ambassadors to the US. Zhang had put him in place and presumably wanted him to exercise that style in Washington, which he was well known for doing.
The two men each had an aide who would act as interpreter if required. In addition, one of the commissioners of the Securities and Exchange Commission, Michelle Morris, was in the room.
Livingstone did the introductions. When they were settled he told the ambassador that the United States had a specific concern it wanted to raise with the Chinese government.
‘Indeed,’ said Zhu in English. He looked at the secretary of state with a humorless smile.
‘That’s why I asked Commissioner Morris along. We would like to be sure that the government of the People’s Republic understands how the securities markets work in this country.’
‘I’m sure my government is aware of this, Mr Secretary,’ said the ambassador.
‘We’d like to be sure that all agencies of your government are aware of it.’
‘Do you have any agencies specifically in mind?’
‘Well, I guess we would be talking about the agencies that might be involved in the securities markets in this country. In particular your sovereign investment funds.’
Zhu raised an eyebrow. ‘The managers of our investment funds are very experienced people in the financial area, I believe. I would not be surprised if many of them have worked for American corporations at some point in their careers. I myself am not aware of all the regulations governing the securities markets in the United States, but I have no reason to think that they would not be.’
‘We’re not pointing the finger at any one individual, Ambassador.’
‘Is this in relation to the recent turmoil in your markets?’
‘Why don’t I ask Commissioner Morris to take this further at this point,’ said Livingstone. The secretary of state himself didn’t know much more about the SEC’s concerns. He had received a call from Marty Perez asking him to set up a meeting with the Chinese ambassador so that one of the SEC commissioners could talk to him, and the briefing paper he had received from Perez spoke vaguely about concerns over recent market activity and the behavior of Chinese state investment funds.
‘Thank you, Mr Secretary,’ said Morris. ‘Ambassador, just to make sure we get off on the right foot, we don’t use the term turmoil when we talk about our markets. That term suggests that the markets are not orderly and the securities markets in the United States certainly are orderly, sir.’
Zhu smiled slightly. ‘Forgive me. Slip of the tongue. I think my language is not as careful as yours, Commissioner.’
‘No, your language is excellent, sir. I don’t mean to offend.’
‘No offence.’
Livingstone laughed. ‘You wouldn’t want to see us trying this in Mandarin, Ambassador.’
Zhu smiled politely.
‘Sir,’ said Morris, ‘we have at the SEC a division called Trading and Markets. Perhaps you’ve heard of it?’
Zhu shook his head.
‘Amongst the SEC commissioners I have oversight of that division. Its role is to maintain fair, orderly and efficient markets. It takes action where there is good reason to believe that participants in the market are acting in such a way as to subvert the operation of the markets so as to render them unfair, disorderly or inefficient. I’m sure you appreciate the importance of this.’
‘Naturally.’
‘Now we’re aware that some of the companies most heavily affected by recent activity in the securities markets have a high degree of ownership by investment funds owned by your government. Any shareholder who has a significant holding in a company owes a particular duty to ensure that its activities are in keeping with SEC regulations and that its activities in general must not only be above board but be seen to be above board.’
‘But surely they are above board,’ said Zhu.
‘We would like to be sure that’s the case,’ said Morris.
‘But if it is not the case, the market would not be orderly, and you have just told me, Commissioner, that the market is orderly.’
Morris looked back at him coldly. She wasn’t amused by his show of schoolboy logic. ‘Regulation of our markets is not a laughing matter, sir.’
‘Apologies,’ said Zhu. ‘I do not mean to imply that it is. I agree, Commissioner, this is a serious matter. That is why I am anxious to understand precisely what you are accusing my government of.’
Morris pulled a set of booklets out of her briefcase. ‘These documents summarize a number of key areas of SEC guidelines and the regulations relevant to shareholders in the trading of securities. The full regulations are available on our website but I thought it might be a good idea to leave you with copies of the summaries.’ The commissioner leaned forward and put them on the table in front of Zhu. ‘Mr Ambassador, we take these issues with the utmost seriousness in the United States. We do not tolerate insider trading, the making of a false market, or market manipulation in any shape or form. The penalties we will apply to market participants who indulge in those behaviors are severe. They’re outlined in the booklets and they do not stop short of criminal liability.’
Zhu was silent for a moment. ‘Again, I must ask, what exactly are you accusing my government of?’
‘I’m not making an accusation, Ambassador. I am simply taking the opportunity to …’ Morris paused, seeking the right words, ‘provide a timely reminder of the obligations of an investor in our securities.’
‘And you think my government needs this reminder?’
‘It’s possible, sir, that some of your investment funds may need this reminder. And since your government is the ultimate owner of these investment funds, its shareholder, if you will, it seems appropriate to speak to the owner.’
‘And the accusation is …?’
‘Ambassador, there is no accusation. It simply seems a timely moment to make sure everyone knows what their obligations are. I’m sure I don’t need to explain why this is a timely moment.’
‘I see,’ said Zhu. He picked up one of the booklets and glanced through it, his lip curled superciliously. Then he put it down. ‘So I am to take it this is a general lesson you have chosen to give me at this timely moment about the obligations of investors in American securities and the excellence of your regulatory system.’ The ambassador looked at Livingstone. ‘Is that how I understand this, Mr Secretary? Out of the goodness of your heart you and the Commissioner have decided to give me a lesson in your regulatory affairs. Well, it is a very useful lesson.’
‘Dr Zhu,’ said Livingstone, ‘I wouldn’t take it like that. I think we’re just trying to make sure there are no grounds for misunderstanding or misinterpretation in what’s turning out to be quite a challenging time in our markets. I think you can understand why we might think it’s a good idea to do that.’
Zhu nodded. He turned to Morris. ‘Commissioner, I think you are … how would you say it? On a fishing expedition.’
‘Sir, we’re not fishing for anything. As I said, I’m not making any accusations.’
‘I wonder why not.’
‘I would think of this more as cautionary,’ said Livingstone.
‘Cautionary of what?’ Zhu waited a moment, then looked at Morris. ‘Thank you for these books.’ He gathered them up. ‘I’ll make sure they’re sent to the appropriate people.’
‘And they can download them from our website.’
‘Of course. From the website.’
‘Ambassador,’ said Livingstone. ‘Please make sure your government understands our concern. We expect your investment funds to act responsibly. Commissioner, am I right in saying we haven’t seen them do anything other than that in the past?’
‘Yes, Mr Secretary, I think that’s fair. But at this particular time–’
‘Yes.’ Livingstone smiled, cutting across her. ‘See, Ambassador Zhu, this is simply a point check, if you will, to make sure responsible behavior continues. That’s our message. If you can take that message to your government, we would be grateful.’ Livingstone glanced at Morris. ‘Is that a fair summary, Commissioner?’
‘Yes, sir. But I do want–’
‘Then I think we should leave it at that.’
Zhu watched them, waiting to see if Morris was going to say anything else.
She was silent.
‘Good,’ said Zhu eventually. ‘That is very clear.’
AFTER THE AMBASSADOR had gone, Morris looked at Livingstone with a bemused expression. ‘Is he always like that?’
Livingstone shrugged ruefully. ‘Dr Zhu’s a prickly character. Show him a high horse and he’s never too slow to get up on it. Hardly seems worthwhile getting you down here for that. I could have done it myself.’
‘No, sir. I think it was important the ambassador saw how seriously we’re taking this.’
‘Are we really saying we think we’ve got manipulation going on?’
‘At this stage, Mr Secretary, we can’t prove it. But they own at least a quarter of Fidelian Bank, which has tanked for no apparent reason. You own that much of a company and you can do pretty much anything with its stock price until people realize what you’re doing.’
‘And then?’
‘Then we throw the book at you.’
Bob Livingstone laughed.
‘Mr Secretary, if I may, I am a little concerned that the way … with respect, the way you pitched the message at the end was a little more moderate than perhaps the way it might have been done. I realize it may not be my place to say this, and I realize you know the ambassador and I don’t know him at all, and you were trying to get through to him, and he was on a high horse, as you say, but … I don’t know if we were hard enough with him at the end.’
‘How so?’
‘If they really are doing anything, then at this stage in our political cycle, with the midterms only a couple of weeks away, this isn’t just a financial issue, this is interference in our domestic political process.’
‘I presume you were about to make that point when I cut you off, Commissioner.’
‘Yes, sir. As I said, it may not be my place to say this.’
Livingstone smiled. ‘The point had occurred to me, but I thought it would be better not to raise it. I’ll tell you why. We don’t actually know that this Chinese investment fund is engaged in any kind of manipulation, do we?’
Morris shook her head.
‘No. Well, if they’re engaged in it, they know perfectly well what they’re doing. The Chinese government is very well aware of our electoral cycle, Commissioner, and its implications. They don’t need to be told that we would regard any attempt to influence it with the utmost seriousness. Giving them a reminder about our rules is enough. In case they’re doing anything, it lets them know we’re on to them. Ambassador Zhu and President Zhang will know perfectly well what we’re saying.’
‘Then why not say it?’
‘Because, as you said, we don’t know if they
are
doing anything. What if they’re not? What if they’re not engaged in any kind of manipulation and their fund is simply acting as an honest shareholder?’
‘I don’t get it, sir,’ said Morris. ‘What’s the concern?’
‘How much anxiety about our domestic political process do we want to reveal? Just how vulnerable do we want to show them that we feel?’
‘It’s a serious issue. I don’t know how much more serious it can be.’
‘I agree. It doesn’t get more serious. But you say they may not actually have done anything.’
‘So what’s the concern?’
‘That we might just have put an idea into their heads.’