PRESIDENT ZHANG PUT down the phone. His advisor, Qin Jiwei, who had been present at the conversation, looked over his notes as the interpreter left the room.
‘President Knowles is a worried man,’ said Zhang.
‘Yes,’ said Qin. ‘The question is, what is he really worried about?’
Zhang nodded. ‘Go and get Bai.’
Qin got up to get the finance minister, who was waiting in an adjacent office.
Zhang waited, going over the conversation in his mind. He had no desire to help President Knowles with any domestic political difficulties he might be having. The way the American leader had unilaterally launched his initiative in Uganda had angered him, and for that reason alone he would not have been predisposed to help. Then there was the situation in South Africa, which was an issue of wholly different magnitude. In South Africa, if China was able to get its way, it would show its ability to step into disputes outside its own region as the Americans had done for so long, the mark of a true world power. Internationally, this would create a new context for negotiations on the great global issues of the world, a context in which China would have immeasurably more weight, the kind of influence that had been promised after the western downturn of 2008 and ’09 but which had never materialized. At home, it would show that the true source of China’s strength in the world was its economic influence – the reason the South African government was listening to China – and not its military force.
This was important to Zhang. Four years on from the disturbances of 2014, the three men who emerged in power retained their positions. Zhang himself had the loyalty of the internal security forces that he had led during the crackdown. Much of the army, Zhang knew, would side with General Fan if it came to a showdown. Defense Minister Xu drew support from parts of the military that did not back Fan, in particular elite units within the air force and certain naval elements. In this triangle, Xu was the waverer. The weakest of the three, the defense minister had no prospect of overcoming the other two, but could swing the outcome decisively one way or the other depending on where he chose to place his support. For four years he had played a game of sitting on the fence, holding on to his own position by keeping the two other men competing for his backing.
This couldn’t go on. For the first couple of years after the disturbances it had been possible. But by now, Zhang was thinking about the group of leaders who would succeed him, and so was Fan. To put their own men in place and give them time to prepare for power, they must first have undivided power themselves. It was obvious that Fan was no more ready to tolerate the situation than he was. The attitude of Fan’s loyalists in the army was becoming almost unbearably arrogant. Incidents took place when they confronted men from the security forces. The struggle was coming to a head.
Each man was battling for loyalty from groups in the regime outside their own core of supporters. Fan had no concept of China’s strategy to offer but the idea of greater and greater military strength. For Zhang, the failure of Fidelian Bank came at a fortuitous time. The supplication of the US president to save the bank gave him another way – like the South Africa situation – of showing that his way was the more promising, that economic strength gave China the ability to exercise power, even against the United States, in a way that military force could never match. But this opportunity created its own pressure. If Zhang gave in now to the American president and did as he asked, Fan would use the episode to show that China’s economic power was illusory or that he, Zhang, was too weak to wield it.
But he would not put China’s economic stability at risk. If it was necessary to help the American president in order to protect China’s economy, he would do it. He would have to find a way to deal with whatever Fan threw at him.
Qin came back with Bai.
‘There will be an offer,’ Zhang said to the finance minister.
Bai nodded.
‘It will not be as much as Hu asked for.’
‘How much will it be?’
‘Lower,’ said Qin. ‘Much lower.’
‘President Knowles said there will not be a higher offer,’ added Zhang. ‘This is the final offer.’
‘Minister Bai,’ said Qin, ‘would you believe that?’
‘I did not hear the conversation,’ said Bai pointedly. He had wanted to sit in on the call.
Qin shrugged. ‘Knowles is so concerned that he rings himself, and yet he cannot find a few more billions to meet our request? President Zhang, put yourself in his place. Would you call and have nothing in reserve? If he is really so worried, he will still find a way. As long as he gives them enough money, the Wall Street banks will do what he says. He will sit them down and they will come up with a deal. It is in their own interest.’
Zhang frowned. His understanding of the way the economy functioned in the United States was almost non-existent. He had worked in the security apparatus for his entire career. If it had not been for the 2014 disturbances, a man such as him would never have become president. He relied almost totally on Qin and Ambassador Zhu for his understanding of the United States.
‘The more worried he is, the more certain it is,’ said Qin. ‘If he had
not
called you, then I would say he has no alternative. If we give in to him now, all we are doing is saving his face with Wall Street. We lose the extra money that Wall Street would pay.’
The money at stake wasn’t the issue, as all three men knew.
‘So we should say no?’ said Zhang.
‘Of course. Let him go back to Wall Street and lose his face there.’
‘How does that help us?’
‘Then he is weaker. He will rescue the bank at a high price and everyone will say he has spent money to save his friends on Wall Street. This will not help him in the elections. He is weaker if the Republicans do badly.’
Zhang nodded.
‘And everyone will see,’ added Qin. ‘Fan and Xu and all their people.’
‘What do you think?’ Zhang asked Bai.
‘I am not so sure as Minister Qin that the president will save this bank if we reject the offer.’
‘Bai, look what happened the last time!’ said Qin.
‘If he said it is a final offer, perhaps it is a final offer. He may not be able to offer more. But if it is, that is because if the bank fails, he does not think it will lead to a collapse. Otherwise, I would agree with Minister Qin, he would save it.’
‘So are we saying something different?’ said Qin.
Bai shook his head. ‘I think we are saying the same thing for different reasons. This is political. It is entirely political. It’s about the elections. Why else do a deal so quickly? Why be in such a rush to announce?’
‘The bank must make an announcement,’ said Zhang. ‘He said it must make it before the American markets open today.’
‘And tomorrow is their election. If he doesn’t have a deal, when the market opens in New York, it will fall. If the market falls, he will do badly in the election. Therefore Knowles wants an announcement of a deal. Well, if he wants an announcement, I agree with Minister Qin. Let him make Wall Street pay the top price and let him put money into the deal and let the world see what he has paid.’
‘But if it is his final offer?’ said Zhang.
‘What is the effect of such a bankruptcy? On the election, considerable. But beyond that?’ Bai shrugged. ‘For a few days there will be panic. But this is not like 2008. The Federal Reserve keeps saying the system is fundamentally sound, and that also is our view. After a few days, the panic will stop. There will be no great impact. It is because it is these few days when they have their election that Knowles is so worried. If it was next week, he would not call you.’
‘If there is a great impact, we too will suffer.’
‘There will not be.’
‘Understand me, Bai,’ said Zhang, ‘I do not want to create a collapse in the United States. I do not want any such thing. If there is a risk of such a thing, I will take this offer.’
‘I understand, President Zhang. President Knowles does not want a collapse either. That is why he will not let this bank fail.’
‘I thought you said if this bank fails there will not be a collapse,’ said Zhang, pouncing on the apparent contradiction in Bai’s remarks.
‘Correct, there will not. There will be a panic. A few days. That will have no impact on us. And that is if Knowles does not save it. But I agree with Minister Qin. He will probably save it because this panic will make his party lose the election.’
‘See?’ said Qin.
‘The difference is, what I am saying, is that if he does not save it, we have a small panic, but not a collapse.’ Bai smiled. ‘A panic, President Zhang. A short panic during his election.’
Zhang glanced at Qin. The other man nodded.
A phone vibrated in Bai’s pocket. He took it out and read the message.
‘This is from Vice-Minister Hu,’ he said. ‘He has received the offer.’
‘What is it?’ said Zhang.
Bai gave him the number.
There was silence.
‘What time do the American markets open?’ asked Zhang.
Bai told him. Zhang looked at his watch.
Zhang Yong liked to make his decisions alone. He asked both men to leave the room and wait outside.
Qin seemed sure that Knowles could get other banks to pay the sum that Hu demanded. Zhang himself was not so certain. Knowles’ words on the phone had not sounded like those of a man who had an alternative. But even if he did not save the bank, Bai said there would be no collapse. A short panic, but not a collapse. That would be enough to explain the tone of seriousness, if not desperation, that had been in Knowles’ voice. He feared a big loss at his election. But there was nothing for China to fear in this, or in a short panic. And why should the American president expect his assistance? It was one thing to deliberately set out to harm someone, another merely to decline to help. He had not set out to harm. The circumstances had arisen fortuitously. And helping, it turned out, would harm Zhang himself. It would give ammunition to Fan. Whereas declining to help would show Xu and those who were undecided that China’s real strength lay in its economic power, not in the missiles that Fan kept building.
But even Bai could be wrong. That was the one thing that worried him. A panic could turn into a collapse. There was a risk.
Zhang was not a great gambler. He preferred a certainty to a risk.
Yet it was also a certainty that he would have to find a way, soon, to deal with General Fan.
And Bai had seemed very sure.
Zhang thought about it.
He looked at his watch.
He had to make a decision, he knew. Time was passing. The American markets would soon be open.
THE ANNOUNCEMENT CAME just after eight-thirty. Ed Grey was on the phone to a client in Paris, feet up on his desk, gazing out the window at the office block opposite. Tony Evangelou opened his door and looked in. Ed turned and shooed him away. Tony pointed to one of the screens on Ed’s wall. Ed looked. The sound was muted, but a headline on the screen told him all he needed to know.
He stared.
His client was talking, but Ed wasn’t listening. ‘Gilles,’ he said, ‘I’m going to have to call you back. Gilles, I’m sorry, I’ll get back to you.’
The headline was still there at the bottom of the screen.
FIDELIAN BANK FILES FOR BANKRUPTCY
.
Evangelou was watching him.
Grey sat. He was numb. All he could think about was that he had closed out his short positions a week earlier. For a moment, the knowledge of what he had done completely froze his brain.
He got up and left his office.
A tense, eerie stillness hung over the funds desk. The managers and analysts were staring at a screen high up on the wall above the room. An interview was going on between an anchor and a reporter on a street somewhere in the financial district. A minute later it cut to a pundit in the studio.
‘Anyone said why they’re doing this?’ asked Grey.
‘Writedowns on developing markets businesses,’ said Maria Lomax. ‘And a bunch of other stuff. They can’t raise the capital to cover it.’
‘Twenty-three billion,’ said Boris Malevsky. He was pale.
Grey looked at him. ‘
Twenty-three
?’
‘The Chinese should be giving it to them,’ said Malevsky. ‘I don’t understand this.’
The chairman of the Fed was on the screen. Ron Strickland looked worn out, haggard.
‘This is a serious development that will doubtless have short-term consequences for our banking system. But the point is, we have a fundamentally sound system, we have a wind-up facility in place to deal with this bank in an orderly fashion, and we stand ready to put liquidity into the market to ensure that the effects of the failure of this one bank are contained and that we don’t have a credit squeeze as a result. This is one bank. Let me repeat that, this is one bank. This is not a repeat of 2008. We do not have a string of other banks where we’re going to be seeing problems. I’m very confident of that and the safeguards, in any case, are all in place. We’ve learned an awful lot–’
‘Shut the fuck up!’ yelled Evangelou. He tore off a shoe and threw it at the screen. ‘Who the fuck’s gonna believe a word you say?’
Grey’s mind tried to process what he was hearing. How could the Fed not have known what was going to happen? This was the first bankruptcy of a major investment bank since Lehman Brothers in 2008. It had become an article of faith that that would never be allowed to happen again. The fatal error with Lehman was that the government had refused to provide support to ensure that a rescue could be arranged. When Wall Street had refused to rescue Lehman without it, the government had stepped back and let it fail. The unwritten rule was that would never happen again.
Grey looked at one of the screens on the desk showing stock prices. One by one, like bubbles popping, the numbers were turning red.
Suddenly he was conscious of all the eyes in the room looking in his direction.
They were in the realm of a vanishingly low probability event. Anything could happen. His mind began to race. The Fed was almost certainly going to drop interest rates, probably that morning. Bond prices would rise. The dollar would fall. This was going to affect just about every asset class they owned, in developed and developing markets, in equities, in bonds, in currency, in derivatives of all kinds.
‘You,’ he said to a couple of analysts. ‘Work the model. Assume rates go down twenty-five basis points, fifty, a hundred. Take the Dow down ten per cent, twenty, fifty. Get the correlations.’
He thought a moment longer. Whatever happened longer term – and right now, that meant days – just about every market in the world except bonds was going to fall over the next few hours. Anything you could offload now, you’d be able to buy back cheaper tomorrow.
Every manager in the room was watching him. The three guys who worked the trading desk, executing trades as the managers instructed them, were waiting, phones in hand.
‘Whatever you’ve got,’ said Grey, ‘sell.’
But he wasn’t the only one who was saying it. Out of thousands of offices just like Red River’s, from thousands of portfolio managers, a tsunami-sized wave of sell orders was roaring towards the market.
ED GREY SPENT the next couple of hours on the phone, talking to whoever he could talk to, trying to find out what he could discover. So was everyone else. No one knew anything. No one could understand why a bailout hadn’t been arranged. Rumors were flying through the market about the full extent of Fidelian’s losses and other banks that were under threat. A number of banks had been forced to issue statements denying that they faced a liquidity crunch, which did about as much as it always did to reassure the markets. Their stocks were down fifteen, twenty per cent and falling. As he spoke, Grey kept one eye on the prices on the screens in his office. He watched them plunging. Even with only half a mind on the numbers, he figured he would have been a billion to the good if he hadn’t closed out his short positions the previous week. Now he was almost exclusively long in a market that was falling faster than a brick. He thought of the four hundred fifty million in cash he had realized from the closure of the Fidelian trade and could almost visualize it, in his mind, draining away, like sand out of an hourglass, when the banks began calling the margins. Any minute now the calls were going to start coming in. His chief financial officer was in and out of his office a half dozen times as he tracked the positions.
And then came the second shock of the morning, another headline on a screen.
FIDELIAN BAILOUT REJECTED CLAIMS ANONYMOUS SOURCE
.
Grey got off the phone and turned up the volume.
‘… but it certainly seems that way,’ a female reporter was saying. ‘The claim was apparently made by an anonymous source on Wall Street who claims to have had access to individuals personally involved in the negotiation, Dick.’
The picture cut back to the studio anchor. ‘And when was this, Andrea?’
‘Over the weekend. Apparently a meeting took place here in New York at the Fed headquarters involving Fed officials and Wall Street’s most powerful CEOs and a conclusion was reached in the early hours this morning. Sounds like a classic Wall Street rescue operation, Dick.’
‘Which didn’t come off?’
‘Apparently not. According to this source, considerable pressure was placed on the bankers to come up with an acceptable solution and the offer that eventuated is said to have been quite generous, given the state of Fidelian’s finances. We believe there was involvement on the administration side at the very highest level. And yet despite–’
‘Andrea, sorry, I don’t mean to interrupt. When you say the very highest level, are you saying the president was involved in this?’
‘It doesn’t get any higher, Dick.’
‘But are we saying that happened? Andrea, is that what this source is telling us?’
‘We don’t have a confirmation or denial of that from the White House. But it does seem that there was significant political involvement in this and that would hardly be surprising given the timing of this event. The midterms are tomorrow and it’s impossible to imagine there won’t be a huge impact from this, Dick.’
‘We’ll look at the political ramifications later, but is there anything more you can tell us right now about the way this evolved?’
‘The package was apparently rejected by Fidelian Bank shortly before it filed for bankruptcy this morning.’
Ed Grey watched with a kind of horrified fascination. He had known there must have been a rescue effort. It was impossible to imagine the Fed hadn’t had any inkling of what was about to happen and that the administration wouldn’t have tried to rescue the situation. And yet the rescue deal had been rejected.
‘Have we had any word from Fidelian Bank about this, Andrea?’
‘No, Dick, we haven’t. CEO William Custler has been keeping a low profile today.’
‘More of an invisible profile as I understand it, Andrea.’
‘I don’t believe anyone’s had the opportunity to speak with him. We had the bankruptcy announcement from the Fidelian head of communications earlier today and that’s about all as far as I’m aware. There’s been no response from Fidelian to this latest allegation, although we certainly hope to be able to get that as soon as we can, Dick.’
‘And is the Fed telling us anything, Andrea?’
‘Not as yet, Dick.’
Grey surfed the channels. It was the same on all of them. He put the screen on mute and thought about what he had heard, watching a reporter silently mouthing his remarks. If this was to be believed, the CEO of Fidelian Bank had turned down a rescue offer in favor of filing for bankruptcy. Yet he and his board had a fiduciary duty to get the best deal for his shareholders. Grey frowned. How low was the offer if they were better off taking bankruptcy? That didn’t make sense. Surely the administration wouldn’t have allowed an offer that low to go forward. Not if they wanted to see a rescue done. Not on the day before the midterms. Every Republican candidate in the country would pay for it.
Anyway, this was a bank. An investment bank. A significant one. It couldn’t be allowed to go bust. A deal had to be done.
Something didn’t add up. Assuming the offer wasn’t insultingly low, who would have rejected it?
Suddenly Ed Grey remembered Susan Opitz’s words on the phone when they had spoken. ‘Who’s lending the stock?’ she had asked. ‘Who’s lending it, Ed?’
Grey felt a tingle down his spine. He knew who the major shareholder in Fidelian Bank was.
He called in Tony Evangelou.
‘What’s happening?’ he asked.
Evangelou shook his head. ‘If you can find me a buyer out there I’d like to know about it.’
‘Listen, I want you to get a couple of analysts on something. Take our US stocks and get them to give me a list of every one that has significant shareholdings by sovereign investment funds.’
‘That’ll probably be just about all of them.’
‘Let’s find out if it is. And how much they own. And Tony, make sure we find out which ones are owned by the Chinese.’