ED GREY HAD one of the screens in his office tuned to CNBC constantly. It was around eleven o’clock when he noticed Jim Rosario doing a piece. On the bottom of the screen a headline said
Threat to Short Sellers
.
Ed turned the volume up. Rosario was saying that he had heard a rumor that the SEC would be prepared to consider a temporary ban on short selling if it felt that the market was being disproportionately driven down by short activity. He couldn’t report on the truth of it but he had reason to believe it emanated from reliable sources within the administration, demonstrating the government’s determination to keep US markets safe and orderly.
Everyone knew that Jim Rosario was close to Treasury. When he started talking about reliable sources in the administration, that was the department that he meant. In fact, it probably meant that Treasury had asked him to say it.
Ban short selling? At first it made Ed laugh. Then it made him angry. It made him want to go out and short a bunch more stocks just to show Treasury what he thought of it.
And that, when he considered it, was the thing that made him worry.
Grey knew that if his reaction to the statement was to show what a dumbass idea it was, that would probably be the reaction of just about every other DIV on the street. And if Rosario really was reporting something a Treasury official had told him, Ed Grey doubted that was the reaction the official was hoping to achieve. Somehow he was pretty sure Treasury didn’t want every DIV in the city going out and shorting a bunch of stocks just to thumb their nose at them. Not to mention all the DIVs who were thinking, just in case the rumor was true, they should go and out and short a bunch more stocks while they still had the time. Discounting the possibility that that was what Treasury was hoping for – and the chance of that, Ed figured, was about as high as the chance that every DIV in the city would cease and desist right away – this statement was an error. A very, very bad miscalculation.
In fact, it could get a lot worse. If people really thought Treasury was serious about this, they’d jump to one conclusion: Treasury must know about something coming down the line that was a lot worse than anything the market knew. It must be getting ready for that thing to hit them. When the administration gave that impression, anything could happen.
That really worried Ed Grey. It could have pleased him. If this dumbass threat or a fear of something Treasury knew drove the banking sector even further down, he’d have a load more profit. He had north of half a billion exposure through shorted bank stocks now, and if he bought those stocks and closed out the positions he’d be over a hundred fifty million up. But Red River also had a bunch of positions in other sectors of the market, positions that pre-existed the correction in banking stocks, and they were betting on stock prices going up. Already, the fall in the banking sector was beginning to contaminate other stocks. The contagion was seeping out. From stocks it might seep into commodities. Correlations rippled across asset classes. Ed Grey didn’t want to see a collapsing market. He didn’t want a rout. He wanted the banking sector to go down, bottom, and go back up once Fidelian had announced its cash call and everyone heaved a sigh of relief. If the rest of the market dropped like the banks had dropped, Red River wouldn’t be a hundred fifty million up. It would be up to its knees in blood.
Grey wanted this to be contained. The president’s statement a few days previously in Florida had been perfect, it had had the right tone, the right pitch. But this rumor – if it did come from Treasury – made it seem as if the administration feared losing control. It had the whiff of panic.
Tony Evangelou put his head around the door. ‘You seen what Rosario just said?’
Grey nodded.
‘What the fuck are they doing?’
‘I have no idea.’
‘I just shorted another twenty million of Fidelian.’
All over the city, Grey figured, exactly the same thing was happening.
‘Tony, come in and take a seat for a second. You think we should go short some other stuff?’
‘I’m tempted,’ said Evangelou, grabbing a chair. ‘Treasury keeps saying stuff like this, we’re going to make more money than we did in 2015.’
‘Yeah, but we’re long. Overall we’re long the market.’
‘But this is bullshit, Ed. If we’ve got a three to six month horizon, I’m comfortable. Let’s make some hay but it won’t last. We started it, remember? How much could Fidelian need to raise? Five billion? Ten? It’s just one bank. There’s nothing in this. A little overvaluation, but the market’s already gone past that. It has to come back. The fundamentals are fine.’
‘Maybe they’re not.’
‘You heard something?’
‘No, but maybe they’re not. Maybe Treasury knows something.’
‘Yeah. I think they’re bluffing. I think they just want to pull us back ahead of the midterms.’ Evangelou laughed. ‘Hell of a way to try to do it.’
Grey frowned. ‘Maybe we didn’t start this. Maybe we just thought we did. Maybe we opened something up and now it’s going to run. And if it runs … If it runs, if it’s a general collapse, that’s a whole different story.’
Tony watched him.
‘Construction, retail, mining. All the cyclicals, they’re going to go.’
‘They’ll come back. We’ll wait it out.’
Grey shook his head. Red River was heavily leveraged, more heavily than at any time in the fund’s six-year history. The more successful the fund had been, the more debt he had taken on. If the markets fell, he wouldn’t be able to sit it out. The banks would be after him with margin calls on their loans. That would mean he would have to sell assets to raise the cash. He would be selling those assets into a falling market. Everyone else would be in the same position, all trying to sell assets to raise cash for their banks, all driving prices even further down.
‘Get the guys to do a stress test, Tony. I mean a real worst case. Let’s assume we have a twenty per cent fall in equities across the board for a start.’
‘We should do forty if you want to make it a real worst case.’
Grey nodded. ‘Get one of the quants to run the correlations. Maybe we should take out an option to hedge the Dow.’
‘Too late. We’ll be paying way too much.’
‘You think?’
Evangelou nodded.
‘What if we short another billion?’
‘Across a bunch of sectors?’
‘If we can get the stock.’
‘Let me get some work done on this.’
Grey nodded. ‘I’m going to make some calls.’
Over the next couple of hours, Ed Grey spoke to a half dozen other Divvies. The general reaction was exactly the one that he had expected. If Treasury was going to start making threats – whether they knew something or were just talking tough – the market would show what it could really do when it set to work.
As he talked, screens on Grey’s wall showed the result. He watched the markets moving down all morning. Margin calls would be coming in all over the Street, he knew. People would be selling because of that. Prices would fall further.
There was money to be made out there. There always was. But Grey had a lot of bets stacked on the market going the other way. He did some rough calculations on a notepad while he waited for Tony’s scenarios. He didn’t need too much detail to figure out which way they pointed.
He gazed at the figures on the notepad. Then he picked up the phone to his assistant.
‘Zoe, can you get me through to the US Treasury, please?’
‘In Washington, Mr Grey?’
‘That’s right. See if you can get me through to the office of the Treasury secretary. Her name’s Susan Opitz. Ask her assistant to let her know that Ed Grey would like to speak with her.’
SHE RANG HIM back that evening. Grey had known Susan Opitz for twenty-plus years. They had been associates together at the New York office of McKinsey, the management consulting firm, when they were fresh out of business school. Grey had stayed there only a couple of years before moving into funds, and Opitz had stayed barely any longer before moving into the utilities industry, where her stellar career had taken her to the CEO post at GrandWest Pacific before joining Tom Knowles’ cabinet. In those couple of years they had spent ten months together on the same assignment. Ten months of eighteen-hour days creates a bond you don’t readily forget.
‘Ed,’ said Opitz, ‘I should tell you right away I’ve got a note-taker on the line. I don’t mean to imply anything but I think it’s appropriate in the circumstances.’
‘Sure, Susan,’ said Grey. ‘I understand. Hello note-taker.’
There was no response.
‘What can I do for you, Ed?’
‘Susan, I appreciate you calling me back.’
‘Yeah. How’re you doing, anyway?’
‘Good. You?’
‘Good. Listen, I haven’t got a lot of time. I’m sorry about that.’
‘No problem. You know, Jim Rosario, on CNBC today, said something about a rumor that you guys might ban short selling.’
‘Yeah, I heard about that.’ Opitz didn’t say anything else. Rosario had been briefed by her own communications director.
‘Stop me if I’m saying something I shouldn’t, Susan, but if that came from one of your officials, I’m not sure what effect he thought he was going to have, but if he thought he was going to be helpful, well, we had about all the help we can take. I assume you know what happened on the markets today.’
Opitz knew. ‘Ed,’ she said, glancing at the aide who was taking notes, ‘I’m going to have to be careful here. You’ll clearly have an interest in which way the markets go and I’m going to assume you’re not trying to influence me in any way.’
‘Susan, I can make money whether the markets go up or down. That’s not what this is about.’
In her office, Opitz raised an eyebrow. She had liked Ed Grey in the time they worked together. He was one of those big, energetic guys who treated the world like a playground created for his personal amusement. He could be a lot of fun. But she had had glimpses of another side of him, a raw, egocentric brutality when it came to looking after number one. He was attractive but dangerous, the kind of guy you could enjoy working with but wouldn’t want to get too close to. And now he ran a DIV, one of the biggest in the market. She didn’t trust a word he said.
‘What worries me,’ said Grey, ‘I think what worries all of us, is if it looks like you guys don’t know what you’re doing. Now, I’m assuming this was some relatively junior guy who got it into his head to float some kind of balloon with Rosario under the misguided impression that was going to calm the markets. Am I right?’
Opitz didn’t reply. She avoided her aide’s gaze.
‘Well, I don’t expect you to tell me. There’s only one justification for letting out a threat like that, and that’s if you know something really bad.’ Ed paused, listening. His primary reason for making the call was to get the message across that a veiled threat to ban shorts – or anything like it, in case Treasury had plans for anything else as stupid – would achieve the exact opposite effect they wanted. But if Treasury did know something he didn’t, and he could find out about it, it certainly wouldn’t hurt.
‘Ed, I couldn’t possibly tell you what we know and don’t know.’
‘Sure. Well, if this did come from your department, and if whoever said it was trying to put a leash on the shorts, he’s had the opposite effect.’
‘Why do you think that is?’ asked Opitz carefully.
‘Susan, it’s the market. It’s the psychology. If you’re going to come out hard against us, you’ve got to do it right away. Threats don’t work. It looks weak. You show weakness and we’re going to rip your throat out just for the hell of it.’
‘Is that what’s happened?’
‘Partly. You guys have shown fear. Loss of control. Then like I said, some other people are going to be thinking, if this is actually serious, what do they know that we don’t? Better get in quick. I think that’s driven a wave of short selling through the market today that wouldn’t have been there if no one had said anything. Obviously I have no figures, so it’s just my assessment from looking at the way the market’s gone and from our own trading interactions. You know, I think if you guys want to put a floor under this you just sit back and let the market do what it does.’
Opitz frowned. No one in her department had suggested the market would react like that. They had all managed to persuade themselves that the markets would see it as an indication of their resolve. Maybe there were other reasons for what had happened today. One thing she knew for certain was that Ed Grey wouldn’t be saying this if it didn’t serve his own financial interests.
‘Ed, I can’t talk about any interventions we may or may not be thinking about.’
‘I know that, Susan. And I guess it must be politically difficult for the president to let this ride with the midterms coming up. I thought his statement was good, but this thing has undone that and then some. Look, my take is that what’s been happening here for the past couple of weeks is just the market doing what it does. It’s no big deal. It’s just some people who have obviously decided there’s a little froth in there right now and so maybe it’s time to take that away.’
‘So you don’t think there’s anything fundamentally wrong underlying it?’
‘I’m not sure,’ said Grey. ‘What do you think?’
Ed listened for Opitz’s answer, still hoping to find out if the Treasury knew something he didn’t.
Opitz glanced at her aide, thinking.
Suddenly she turned back to the speakerphone. ‘Have you been shorting Fidelian?’
Grey laughed. ‘Wow. That’s direct.’
‘Ed, have you? Who’s lending the stock? Ed, who’s lending Fidelian stock out there?’
‘Even if I had been shorting Fidelian, what difference does it make?’
‘I’d like to know where the stock’s coming from.’
‘Does it matter?’
‘Yes. It does.’
Grey was silent. This was interesting. Why did it matter where the stock came from? Normally, all that mattered was how much stock was being shorted, not who was lending it.
‘Ed. I want to ask you something. It’s not about what you’ve been doing, okay? It’s just about what you’ve seen.’