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I
had lost half a million dollars in slightly less than half an hour and
the coffee machine didn't work. This was turning into a bad day. Half
a million dollars is a lot of money. And I needed a cup of coffee badly.
The day had started off well enough. A quiet Tuesday in
July, at the investment management firm of De Jong & Co. Hamilton
McKenzie, my boss, was out. I yawned as I reread the Financial Times's
tedious descriptions of yesterday's non-events. The dealing desks around
me were more than half empty; people were either away on business or
on holiday. Phones and papers lay scattered across abandoned desktops.
Chaos at rest. The office felt like a library, not a trading room.
I looked out of the widow. The tall grey buildings of the
City of London pointed silently upwards out of the listless heat of
the streets below. I noticed a kestrel gliding around the upper reaches
of the Mercantile Union Insurance building a hundred yards to the west.
The great financial centre slumbered on. It was difficult to believe
anything was happening out there.
A solitary light flashed on the telephone board in front
of me. I picked up the phone. `Yes?'
`Paul? It's Cash. It's coming. We're doing it.'
I recognised the broad New York accent of Cash Callaghan,
the `top producer' at Bloomfield Weiss, a large American investment
bank. The urgency in his voice pulled me up in my chair.
`What's coming? What are you doing?'
`We're bringing the new Sweden in ten minutes. Do you want
the terms?'
`Yes please.'
`OK. It's five hundred million dollars, with a coupon of
9 1/4%. Maturity is ten years. It is offered at 99. The yield is 9.41%.
Got that?'
`Got it.'
The Swedes were borrowing $500 million through the means
of a eurobond issue. They were using Bloomfield Weiss as underwriter.
It was Bloomfield Weiss's job to sell the bonds to investors; the term
`euro' meant that it would be sold to investors all over the world.
It was my job to decide whether to buy it.
`9.41% is a good yield,' Cash went on. `Ten year Italy yields
9.38% and no one thinks Italy is as good as Sweden. Canada is a better
comparison, and that's yielding 9.25%. It's a no-brainer. This one's
going to the moon, know what I'm saying? Shall I put you down for ten
million?'
Cash's enthusiasm to make a sale was extreme at the best
of times. When he had $500 million of bonds to sell it knew no bounds.
He had a point though. I tapped some buttons on my calculator. If the
yield on the new bonds did fall to the level of Canada at 9.25%, that
would mean the price would move up from 99 to 100. A nice profit for
any investor quick enough to buy bonds at the initial offer price. Of
course if the issue was a failure, Bloomfield Weiss would have to lower
the price until the yield was high enough to attract buyers.
`Hold on. I've got to think about this one.'
`OK. But be quick. And you should know we have already placed
three hundred million in Tokyo.' The phone went dead as Cash rushed
on to his next call.
I had very little time to gather information and make a
decision. I punched out the number of David Barratt, a salesman at Harrison
Brothers. I repeated what I had heard from Cash and asked David what
he thought of the deal.
`I don't like it. It sounds good value, but remember how
badly the World Bank issue that was launched two weeks ago did? No one's
buying eurobonds at the moment. I don't think any of my clients in the
UK will touch it.' David's clear unhurried tones carried the weight
of experience and a sound analytical mind. He had built up a loyal following
of customers by being right most of the time.
`That's very useful. Thanks,' I said and hung up.
Another light flashed. It was Claire Duhamel, a persuasive
French woman who sold bonds for Banque de Lausanne et Geneve, known
as BLG.
`Hallo Paul, how is it with you? Are you ready to buy some
bonds from me today?' Her low throaty accent was carefully designed
to demand the attention of even the hardest hearted customer.
That morning I had no time for Claire's line of flirtatious
chat. Although she did her best to hide it, she had excellent judgement,
and I needed her opinion quickly. `What do you think of the new Sweden?'
`Boff! A dog. A howling dog. I hate the market at this moment.
So do my customers. So do my traders. In fact, if you want any, I am
sure they will be offering bonds very cheaply.'
She meant that her traders disliked the issue so much that
they would try and sell bonds as soon as the issue was launched, in
the hope that they might buy them back cheaper later.
Bloomfield Weiss claim that most of the deal has been placed
in Tokyo already.'
Claire's reply was tinged with anger. `I'll believe that when I see
it. Careful Paul. A lot of people have lost a lot of money believing
Cash Callaghan.'
For the next few minutes the board in front of me flashed
constantly as salesmen called in to discuss the deal. None of them liked
it.
I needed to think. I asked Karen, our assistant, to put off all the
incoming calls. I liked the deal. It was true that the market was very
quiet. It was also true that the World Bank issue of two weeks ago had
fared poorly. However there had been no new issues since then and I
had the feeling that investors did have cash waiting for the right bond
issue. And this could be the right one. The yield was certainly attractive.
Most intriguing was the Japanese angle. If Cash was right
and they really had already sold $300 million of a $500 million issue
in Japan, then the deal would go very well. But should I trust Cash?
Wasn't he just taking me for a sucker; a 28 year old with only six months
experience in the bond market? What would Hamilton do if he were here?
I looked around me. I supposed I should really discuss it with Jeff
Richards. He was Hamilton's deputy and responsible for the strategic
view the firm took on currencies and interest rates. But he liked to
do things based on thorough economic analysis. Trading a new issue was
not his cup of tea at all. I looked over to his desk. He was tapping
figures from a booklet of statistics into his computer. Best to leave
him out of it.
Apart
from Karen, the only other person who was in the office was Debbie Chater.
Until recently she had been involved in the administration of the funds
managed by the firm. She had only moved on to a trading desk in the
last two months, and had even less experience than me. But she was sharp,
and I often discussed ideas with her. She sat at the desk next to me,
and had been watching what was going on with interest.
I looked at her vaguely, searching for a decision.
`I don't know what the problem is, but suicide isn't the
answer,' she said. `You look like you are about to jump out of a window.'
Her broad face split into a grin.
I smiled back. `Just thinking,' I said. I briefly explained
what Cash had said about the new Sweden and the lack of enthusiasm from
his competitors for the deal.
Debbie listened closely. After a moment's thought she said,
`Well if Cash likes it, I wouldn't touch it with the proverbial barge
pole.' She tossed me a copy of the Mail. `If you really want to gamble
our clients' money away, why don't you do it on something safe like
the 4.30 at Kempton Park?'
I threw the paper in the bin. `Seriously, I think there might be something
in this.'
`Seriously, if Cash is involved, drop it,' she said.
`If Hamilton were here, I am sure he would get involved,'
I said. `Well ask him. He should be back at his hotel by now.'
She was right. He had spent the day in Tokyo talking to some of the
institutions whose money our firm managed. He should have finished his
meetings by now.
I turned to Karen, `Get hold of Hamilton. He's at the Imperial I think.
Hurry up.'
I still had a couple of minutes. It only took Karen one of them to track
Hamilton down at his hotel.
`Hallo, Hamilton. I'm sorry to disturb your evening,' I
said.
`Not at all. I was just catching up with some reading. I
don't know why I bother. This so called "research" is all drivel. What's
going on?'
I outlined the deal and repeated the negative comments of
David, Claire and the others. I then told him what Cash had said about
the Japanese.
After a few seconds' pause, I heard Hamilton's soft, calm
voice with its mild Scottish intonation. Like a good malt whisky it
soothed my nerves. `Very interesting. We might have something to do
here Paul, laddie. I spoke to a couple of the life insurance companies
this morning. They both said that they were worried about the stock
market in America and have been selling shares heavily. They have several
hundred million dollars to put into the bond market, but have been waiting
for a big new issue so that they can buy the size they want. You know
how the Japanese are; if two of them think like this, then there are
probably another half dozen with the same idea.'
`So maybe Cash was telling the truth?'
`Extraordinary as it may seem, that might be the case.'
`So shall I buy ten million?'
`No.'
`No?' I didn't understand. From what Hamilton had said it
looked as though this deal was going to work.
`Buy a hundred.'
`A hundred million dollars? Are you sure? It seems an awful
lot of money to invest in a deal that nobody likes. In fact it seems
an awful lot of money to invest in any deal. I'm sure we don't have
that much cash available.'
`Well then sell some other bonds. Look Paul. Just once in a while we
get the chance to make some real money. This is it. Buy a hundred.'
`Right. Will you be at the hotel for the rest of the evening?'
`Yes, but I've got some work to do, so don't disturb me
unless you really have to.' With that, Hamilton hung up.
Buying $100 million was a big risk. A huge risk. If we got it wrong
our losses would ruin our performance for the whole year. It would be
very difficult to explain this to the institutions that entrusted us
with their money. On the other hand, if the Japanese really had bought
$300 million, and we bought $100 million, that would only leave $100
million for the rest of the world. Hamilton had a reputation for occasionally
taking large calculated risks, and getting them right.
A light flashed. It was Cash.
`We are launching it now. What do you think buddy? Do you
want ten? I feel lucky on this one. Let's make some dough here!'
I felt my throat tighten as I said slowly and deliberately, `I'll take
a hundred.'
Even Cash was silenced by that one. I could just hear a whispered `Wow!'
He put me on hold for five seconds.
`We can't do a hundred at 99. We can sell you fifty at 99
but we will have to do the second fifty at 99.20.'
I was damned if I was going to let them get away with that.
`Look. You know and I know that the rest of the market hates
this deal. I just happen to like it, but only at a price of 99. It's
a hundred at 99 or none at all.'
`Paul, you don't understand the way these things work. If
you want to buy that many bonds, you've got to pay up for them.'
Cash's wheedling voice was irritating me.
`A hundred at 99 or you have a dog on your hands.'
A pause. Then `OK you're done. We sell you one hundred million
dollars of the new Sweden at a price of 99.'
My hand shook as I put down the phone. This was by far the biggest position
I had run in my life. Betting a hundred million dollars against the
opinion of the rest of the market made me more than a little nervous.
My mind conjured up the awful possibilities. What if we had got it all
wrong? What if we were to lose hundreds of thousands of dollars in the
next few minutes? How would we explain it to Mr De Jong? How would we
explain it to the institutions who trusted us with their money?
This
wouldn't do. I had to banish all the what-ifs from my mind. I had to
transform my brain from an emotional jumble of wild conjectures, to
a totally reliable calculating machine. I had to relax. I noticed that
my knuckles were white as they clutched the handset of my telephone.
I forced my fingers to loosen their grip.
The lines were all flashing. I picked one up. It was Claire.
`What did I tell you. A howling dog. Did you buy any.'
`We did buy some, actually, yes.'
`Oh no,' she sounded sympathetic. `You really must be careful
of that Cash. But, if you want any more you know where to come. We are
offering them at 98.90'
`No thanks. Bye'
So BLG was already offering bonds below the initial offering price of
99. But Claire had mentioned that they would try to sell short bonds
they didn't have in the hope of buying them back later. No wonder their
offer was low.
I picked up another line.
`Hi Paul, David. Have you bought any of these new Swedens?'
`A few.'
`Well this thing is falling out of bed. We are bidding 98.75
and offering bonds at 98.80. None of my customers like it.'
Oh God. This was all going horribly wrong. The price was falling fast.
At a bid price of 98.75, I was down $250,000. Should I take my loss?
I remembered an old maxim, `Cut your losses and let your profits roll.'
Then I remembered another. `If you have a view, stick with it.' Great
help. Think, Paul, think.
Another line flashed. Claire again. `This doesn't look good I'm afraid.
We are now bidding 98.50. There are sellers of bonds everywhere. This
bond is only going to go down. Do you want to do anything?'
98.50! My losses were now half a million dollars. A voice inside me
screamed `Sell!' Fortunately I managed to answer in a quiet, hoarse
voice, `No, nothing right now thank you.'
I called Bloomfield Weiss. Cash answered.
`What's going wrong with this deal? I thought you had placed
most of it?' I asked, just winning the struggle to keep my voice below
a shout.
`Relax Paul. We sold the three hundred million into Japan.
We sold you a hundred million. We sold an American fifty million. And
we just bought about fifty million from the other dealers. That makes
five hundred million. There are no other bonds around.'
I could have screamed at him. I could have shouted foul abuse at the
telephone. But I didn't. I just murmured good-bye.
I felt cheated, betrayed. Worst of all I felt stupid. Anyone
can read a market wrong. Only a fool would trust a hundred million dollars
to Cash Callaghan. He hadn't even admitted his lie when the collapse
of the bonds had shown it up for what it was. I tried to call Hamilton
in Tokyo, but couldn't reach him. I left Karen to keep trying whilst
I tried to work out the best way to limit the damage of this mess.
During all this I had been totally absorbed in the world at the other
end of the telephone. For the first time I looked up to see Debbie watching
me. She had been following everything. The smile that always seemed
a second away from her lips, was nowhere to be seen. Her face was concerned.
`What was that you said about jumping out of a window?'
I said, struggling to keep my voice steady.
She forced a brief smile and then the worried look reappeared.
`Any ideas?' I asked.
Debbie frowned for a moment. It was wrong of me to ask her.
There was no magic solution to this problem, and I couldn't shift the
burden of responsibility for such an enormous cock-up on to her. But
as she paused, I found myself daring to hope that she would point out
a simple solution that I had overlooked.
`You could sell,' she said.
I could sell. And lose half a million dollars. And maybe
my job. Or I could do nothing and risk losing more.
I developed a sudden craving for a cup of coffee to help
me think, or to at least occupy my hands with something. I stood up
and walked over to the corner of the trading room where a machine dispensed
`real' filtered coffee. It tasted worse than instant, but was strong
on caffeine. I pressed a button and pulled a lever. Nothing. I banged
the machine with the side of my hand. Still nothing. I kicked the base
of the machine hard, and deriving some satisfaction from the small dent
that appeared, stalked back to my desk.
Think! If Cash had lied, which seemed most likely, then there would
be a lot of unsold bonds for sale, and the price would not move up for
a while. But at a price of 98.5 the bonds now yielded 9.49%, which was
more than any other eurobond of similar quality. In time they would
trade back up in price. If Cash had lied, I shouldn't sell, but should
hang on. With patience I should be able to recoup my losses and maybe
even make a profit.
What if Cash had not lied? What if all the other dealers
were wrong? What if Bloomfield Weiss really had sold $300 million of
the issue into Japan? Then, once the other dealers had realised their
mistake, they would be forced to cover their shorts, in other words
buy back the bonds they had sold short earlier. The price would scream
upwards. There would be a fortune to be made for anyone brave enough
to buy more bonds now.
The more I thought about it, the more possible it seemed that Cash was
telling the truth. I didn't trust him, but I did trust Hamilton. If
Hamilton believed the Japanese would buy an attractive new issue, there
was a strong probability that they had. How could I tell who was right?
I
had an idea. It was an enormous risk, but the payoff would be big if
it worked. I had no time to check it with Hamilton. If it was going
to work I would have to act now.
I rang Cash. My heart rapped half a dozen times in the second it took
him to answer the phone.
`I'd like to buy another fifty million if the price is right.'
I was amazed at how steady my voice sounded.
Cash laughed, `Way to go, Paul! Let's make some money here!
Hang on.'
That didn't tell me anything. More sales meant more commission
for the salesman. Cash, at least, would be making money. The real test
would be when Cash came back with a price. If there were still millions
of the bonds to sell, then he would be right back with a cheap offer.
In that case I would have a fight on my hands to wriggle out of my purchase.
If they really had sold the whole issue then there would be lots of
excuses and a higher offer.
I hung on for what was probably only a minute, but seemed
like ten. Finally Cash came back on the other end of the phone.
`I'm sorry about this. I'm afraid we can only manage ten
million, and then only at a price of 99.'
I could tell from Cash's voice he was expecting protests
from me for offering fewer bonds than I wanted at a price half a point
above his competitors' offer. He didn't get any. I wasn't angry. Here
was an opportunity and I was going to make the most of it.
`OK, I'll take ten at 99.'
I had to move fast. Next call was to Claire.
`Are you are still anxious to sell the new Sweden?' I asked.
`Oh, but yes of course,' she purred. `I can get you some at 98.50.'
`Fine. I'll buy twenty.'
After two more phone calls I had managed to buy another
$15 million at 98.60. That took my total holding to $145 million. I
sat back and waited. I still felt tense, but this was the tension of
the hunter, not the hunted.
It didn't take long. Within two minutes the lights began
to flash with dealers bidding for bonds. Their bids rose from 98.60
to 98.75 to 98.90. Then David Barratt called.
`I'd like to buy twenty million of those Swedens at 99.10,'
he said.
`That's a very high price for a bond with such limited prospects,'
I teased him, unable to keep the euphoria out of my voice.
`It's a funny thing,' he said. `The price fell as I thought
it would. Then someone somewhere bought some bonds. Since then the dealers
have been scrambling to cover their shorts, but haven't been able to
find bonds anywhere. So they have driven the price up. The really funny
thing is that a couple of my English clients who have been sitting on
their hands for a month have just taken it into their heads to buy.
They think the bond has value, and the rapid run up in price makes them
afraid they might miss a move up in the whole market.'
I sold David $20 million and unloaded a further $75 million
over the rest of the day. Claire had been especially imploring. BLG
had lost a lot on that one. I decided to keep $50 million on the basis
that it could move up further over the next week or two, and sold some
other bonds to raise cash for the purchase. I totted up my profits.
I had realised nearly $400,000 profit over the day, and had unrealised
profits of $300,000 on the remaining $50 million.
I slumped back in my chair. I felt drained. It was as if
I had been physically beaten up. The tension, the adrenaline, the sweat
of the last few hours had left me limp. But I had got it right. In a
big way. No matter what Hamilton might say, he couldn't deny that. For
the first time in my life, I knew what it felt like to take on the market
and win. And it felt good. I had shown myself that I could be a good
trader, as good as the best. I hoped I had shown Hamilton too.
`Come on smug features,' Debbie interrupted. `If you have
any more afternoons of successful spivving, let me know. I am sure the
second hand car business would give anything for one as talented as
yourself. In the mean time, why don't you buy me a drink.'
`How come I always get to buy the drinks? Don't they pay
you a salary here?' I said putting on my jacket.
I had a thought. `Just a moment, I have got to make one
more phone call.'
I dialled the Imperial Hotel. When I asked for Hamilton McKenzie the
operator told me he had left a message specifically asking not to be
disturbed. I marvelled at the man's coolness. So much at stake, and
he had deliberately taken steps to avoid hearing about the outcome.
He had enough confidence in me to let me handle it by myself. As usual,
he had been right.
With my smug look intact, I switched off the machines and followed Debbie
to the lifts, leaving Jeff still engrossed in his statistics.
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