Carver

Prelude

East Hampton, New York: 5 June 2007

Malachi Zorn walked out of his house on Lily Pond Road and strolled across the grass to the path that led down to the beach. He was a man of medium height and slim build with tousled, dirty-blond hair, the year-round tan of a lifelong sportsman and a three-day growth of stubble that glowed golden in the bright early-summer sunshine. He wore an old Brooks Brothers button-down shirt whose pale-blue fabric had faded almost to white in places, and was frayed around the top of the collar. It hung loosely over a pair of khaki cargo shorts. His feet were bare.

He stopped for a moment and looked with disgust at the edifice rising on the plot next to his own. A hedge-fund manager had torn down the elegant, eighty-year-old house that had once stood there, and was now building a vast, white temple to tastelessness and excess. The new building dwarfed Zorn’s own traditional beach cottage, built in 1896 by a pupil of Stanford White, with its gabled roof, shingled walls and cosy veranda looking out towards the sea. His neighbour’s monstrosity summed up everything Zorn most despised about the amoral, self-enriching vulgarians who had turned Wall Street into a gigantic machine for extracting money from everyday Americans and pocketing the profit for themselves.

Fighting hard to contain the simmering rage that now threatened to ruin his day and, more importantly, distort his thinking, Zorn got moving again, relishing the warmth of the sand beneath his feet as he strolled to the water’s edge and let the incoming waves ripple and eddy around his ankles. He stood for a while, looking out to sea, hardly taking in the view but using it as a backdrop to the inner workings of his mind. Finally, he gave a single decisive nod of his head, turned on his heels and walked back up to his property.

Five minutes later, having made a cup of strong, black coffee and picked a couple of home-baked cookies from a large glass jar, Zorn was back at his personal workstation. Racked in front of him were eight flat-panel screens, arranged in two rows of four. They showed a constant stream of real-time market data and global TV and internet news coverage. A yellow legal pad lay on his desk, next to an old Harvard University coffee cup filled with freshly sharpened HH pencils. Zorn picked up a Bluetooth telephone earpiece and put it on. He looked at the only other item on his desk: a twenty-year-old picture of his parents. ‘This one’s for you,’ he murmured, and punched a speed-dial number.

When the call was answered there were no hellos or small talk, just a simple instruction. ‘I want to make a short call on Lehman’s,’ Zorn said. ‘Start with a hundred in three-month options. Be ready to write a lot more.’

‘You sure, Mal?’ asked the voice on the other end of the line, with the carefully modulated tone of surprise that a broker reserves for a client about to embark on an insane course of action. ‘Lehman’s is trading at almost eighty, and it’s only moving up. You’ve got a hundred million dollars says it’s gonna go the other way?’

‘Yes.’

‘OK. Well, it’s your money and you’ve always been right before, but…’

‘But nothing. Write the calls. And something else: what’s the premium on Lehman’s credit default swaps at the moment?’

‘Less than a basis point, couple tenths, maybe… but why do you want to know? You wanna bet that a one-hundred-and-fifty-year-old bank

…’

‘Hundred-and-fifty-seven-year-old, to be precise.’

‘Whatever… you’re saying that this great institution, the fourth biggest bank on the Street, is about to collapse?’

‘That’s right. At some point over the next year or two, that’s exactly what I’m saying. Buy ten billion bucks of Lehman’s CDSs. If people want to sell you more, buy it. Don’t stop.’

‘You’re risking millions, you know that?’

‘I’m risking a couple of tenths of one per cent of ten billion. That’s two mill a year downside, against ten billion up. That’s not a bad deal. So make it.’

‘You got it…’

‘And my name is nowhere near this. Nowhere near it at all.’

The Penthouse Executive Club, 45th St, New York City: 18 September 2008

‘How did you do it, Mal? I mean, you told me Lehman’s would crash and burn. I thought you were totally fuckin’ nuts. And then it goes and does exactly what you said it would. So how come you were right and every other son of a bitch in this business was wrong?’

Three days had passed since Lehman Brothers Bank filed for Chapter 11 bankruptcy, its share price evaporating — from a high of eighty-two dollars — to just three cents in a little over a year. After a weekend of desperate negotiations involving the heads of all the major Wall Street banks, US Treasury Secretary Hank Paulson, UK Chancellor Alistair Darling and senior executives from Bank of America (BoA) and Barclays, both of which had shown interest in buying the stricken bank, the Chief Executive Officer of Lehman’s, Richard Fuld, and his board had been forced to admit defeat. Fuld’s reputation as one of the masters of the financial universe now lay in tatters, just like the institution for which he had been responsible. He was pleading poverty, too, but his critics weren’t convinced. They pointed to the estimated half a billion dollars Fuld had received from Lehman’s between 2000 and 2007, none of which he was asked to return.

But by betting against Lehman Brothers Malachi Zorn had done even better. He had walked away with a little over $10.7 billion.

Now he looked around the table at the Penthouse Executive Club, which he was currently sharing with his broker, Donny Trimble, two of Trimble’s hottest dealers, and the three strippers they had showered with fifty-dollar bills and the promise of unlimited Cristal.

‘Because Wall Street is filled with guys like you,’ Zorn thought to himself, in answer to Trimble’s question. He was not in any way a prude, but he neither liked nor needed the business of paying for female company. Still, the club’s steaks were among the best in the city, and he did not want to deny his brokers the chance to celebrate a coup that had made them all millions, too. So he had come along for the ride and done his best to be civil.

‘You know, Don, what I find unbelievable isn’t the fact that I could see the whole damn system was bust,’ Zorn said. ‘It’s that so many other people couldn’t. I mean, three years ago the FBI was reporting that mortgage-related frauds had gone up by a factor of five. Record numbers of people were falling behind on their mortgage payments or flat-out defaulting, and there were just two things keeping the whole thing going. The first was all the suckers who thought that their house price could only go up. And the second was all the lenders who gave money to anyone, absolutely anyone, who asked for it. And even if you didn’t ask, they shoved it down your throat anyway. I mean, did you ever hear of an interest-only negative-amortizing adjustable-rate subprime mortgage?’

‘Uh, no, can’t say I did,’ said Trimble, who was evidently less interested in obscure forms of mortgage than in his companion’s fine young breasts.

‘Well, I’ll tell you then, Don. It was a mortgage that didn’t require the borrower to repay any of the capital, and if they fell behind with their payments, that was OK because the value of any missed payments just got added on to the mortgage debt. So some poor dumb bastard who probably didn’t have a job, let alone enough income to buy a home, just kept getting deeper and deeper in the hole till he said, “The hell with this,” and walked right away from the property, the mortgage, the whole damn shebang. And all he left behind was a pile of debt secured on a worthless property.’

One of the strippers, who called herself Misti, was paying her way through Columbia University Business School by giving private dances at a hundred and twenty-five bucks a time. She could make more money in one night than her more conventional waitressing girlfriends would see in a month. Now she looked at Zorn thoughtfully. If she could just keep the drunken sleazebag who had bought her company for the evening quiet for a few minutes, she might actually learn something here.

‘But what about the management of Lehman’s?’ she asked. ‘I mean, couldn’t they have done something about the situation earlier, like, before it got totally critical? And if they’d done that, wouldn’t you have lost all your premium?’

Zorn smiled, appreciating the sharp intelligence that the girl had until now kept hidden beneath her professional bimbo mask. ‘Good questions, Misti,’ he said, saying the name in a way that let her know he was well aware that both it and her persona were fake.

‘If those guys had ever been honest about their situation — starting with being honest to themselves — maybe they could have saved the business. They could have resigned their positions, allowing more responsible individuals to take over. They could have drastically controlled the risks their people were taking, and reformed their accounting practices. They could have looked for smart deals based on genuinely undervalued assets — and by the way, they’d have made and kept a lot more money that way. They could have looked for a buyer when they were still in a position to negotiate from strength. They could have done a whole lot of things, and, sure, it would have cost me a heap of dough. But you know what? They were never, ever going to do that, because they were a bunch of arrogant assholes — just like most of the guys in all the other boardrooms on the Street — and they would never, and will never, admit that they were responsible for creating this disaster.’

‘But what about BoA and Barclays? How could you have known they weren’t going to close their deals and buy Lehman’s?’

Zorn reached into his jacket, pulled out his wallet and extracted a thousand dollars. He pushed them across the table to Misti’s companion, a brash young dealer by the name of Luis Ferrone, and said, ‘Buy yourself another friend.’ Then he looked at Misti and gestured at the empty space on the banquette next to him. She was round there in a flash.

‘So,’ Zorn said, ‘you want to know about those other banks? Well, that’s a no-brainer. Those deals were never going to happen. The moment the purchasers looked at Lehman’s books it was obvious that their true assets were nowhere near as big as they claimed. Officially, Lehman Brothers had around forty billion in assets. My understanding is the true figure was closer to twenty-five. That was when Bank of America decided to buy Merrill Lynch instead. Which left Barclays. But they had a problem. Lehman’s was bust. It couldn’t keep trading or even running as a business without fresh cash, and Barclays couldn’t hand over any till the deal was signed and sealed. So come Monday morning, someone was going to have to step in with a bridging loan to cover a deal that could still fall apart. So who could do that?’

‘Uncle Sam?’ Misti suggested.

‘Funny you should say that. Dick Fuld had the same idea, till Paulson told him no way was Washington going to hand over a single taxpayer dollar to bail out his bank. Now they got personal. There was a guy at Lehman’s, George Herbert Walker, who’s a cousin of the President. Word is, they asked him to put in a call to the Oval Office. Well, if he did, Dubya didn’t take it. So then people said, “Well, gee, Barclays is a Brit bank, maybe their government’ll give us the money.” That was when the Brits pointed out that hell would freeze over before their taxpayers were going to risk billions of bucks to support a US bank. Believe me, I didn’t lose a second of sleep over that. And you know what? Nor did Barclays. Yesterday they went picking through the wreckage at Lehman’s and acquired most of its US divisions for less than two billion. I reckon they paid about ten cents on the dollar. Wish I’d seen Fuld’s face when that news came through.’

Misti gave him a warm, genuine smile: one that came from the real woman, not the stripper.

‘You sound so passionate, like this isn’t just about business. It feels much more personal.’

‘Yeah, right again. This was very, very personal.’

‘Well, you put on quite a show.’

Malachi Zorn shook his head with a wry grin. ‘No,’ he replied. ‘That wasn’t the show.’ Then he laughed again so that Misti laughed too, assuming Zorn was just kidding as he said, ‘That was just a rehearsal.’

Washington DC: 17 March 2011

Three years in, and still the repercussions of the banking crash had not even begun to be resolved. At a congressional hearing into the practice and regulation of short-selling, Malachi Zorn effortlessly ran rings around the members of the House Committee on Financial Services, who attempted to portray him as an unscrupulous profiteer. Dressed with uncharacteristic formality, Zorn made his point not with any firecracker display of wit or mockery, but by speaking with a seriousness which suggested that the politicians questioning him were guilty of an improperly frivolous, exploitative attitude to the subject, whereas he was genuinely acting in the public interest.

Zorn was asked whether there was any truth to recent rumours within the financial community that he had taken a number of very significant short positions in leading energy and oil corporations. Zorn replied that, ‘It’s my practice never to disclose any of the positions that I’ve taken while they are still active. There are many reasons for this, commercial confidentiality being the most obvious. But I’m also wary of creating self-fulfilling prophecies. I have, as you have suggested, a certain reputation in my field. I don’t want to sound unduly arrogant, but if my trades became public knowledge, it’s very possible that other traders might wish to copy them, hoping to ride my professional coat-tails, so to speak. This would have two effects. Firstly, it would create exactly the kind of downward pressure on the corporation in question that you, sir, seem so keen to avoid. And second, it would actually destroy the market. After all, someone has to buy my trade. So I can’t go short on a stock unless someone else wants to go long. I depend upon genuine and healthy differences of opinion within the market — a kind of commercial democracy, if you will — to create the margins from which I profit.

‘But I’ll say this about the general subject of the energy industry in all its forms. My personal view is that there are many members of extremist special-interest groups who’ll look at the impact of Islamist terrorism and be tempted to apply it to their own causes. In business terms, terror is a product that works. I therefore anticipate that environmental activists will seek to emulate the activities of groups like al-Qaeda by attacking specific targets related to oil, nuclear generation and power transmission — to take three examples. If by my investments I highlight the current vulnerabilities of a particular sector, I believe I’m not only doing good business, I’m doing my patriotic duty, too.’

More than one reporter present at the hearings picked up on the phrase, ‘Terror is a product that works,’ and contacted their newspaper or TV network, alerting editors to its headline potential. Sadly for them, however, one of Hollywood’s leading action heroes, a tough yet sensitive Australian much loved for his clean-living, family-loving lifestyle, crashed his Ferrari 458 Italia that afternoon in the parking lot of the Hideaway Inn, Malibu while severely intoxicated. With him in the car were a young Asian woman and a small, zip-up leather holdall in which were a number of plastic bags containing cocaine, marijuana and various illegal and prescription pills. On arrival at the Malibu/Lost Hills police station, his ‘female’ companion was discovered to be a nineteen-year-old Thai ladyboy. A recording of the star’s heated but barely coherent insistence that he had no idea of his companion’s true gender was online within the hour. The line, ‘I thought she was a Sheila!’ was a talkshow punchline around the world that night.

No one, anywhere, wanted to hear about terrorists in the subsequent news cycle.

Zorn repeated his warnings about the vulnerability of energy and oil installations in remarks made to a specialist blog aimed at hedge-fund managers and investors, and also in private conversations with a number of extremely wealthy individuals. None of his warnings, however, penetrated the public consciousness or had any immediate political or economic effect. So it seemed that for once in his life, Malachi Zorn had failed to make the impact he desired.

Friday, 24 June