Red notice

15. And we all fall down

I hated myself for all that had gone wrong, but remarkably many of my clients didn’t. They had much bigger problems. Because domestic Russian government bonds had yielded more than 30 percent before the crisis, and most people viewed bonds as less risky than stocks, the average investor in my fund had five times as much invested in the Russian bond market as in the Hermitage Fund. Before things went off the rails, the bond returns were so enticing that many investors used leverage to buy even more. While my clients understood that in the worst case their investment in Hermitage could go down to zero, never did they think that their Russian bond portfolios could drop to nothing. Yet this is exactly what happened to many of them.

One of the biggest casualties was Beny Steinmetz, the Israeli diamond magnate who’d set me up with Edmond. As a result of his bond losses, he had to divest his interests in the Hermitage Fund and the company. Losing Beny as a partner was unfortunate, but, thankfully, Edmond was still in the picture.

Or so I thought.

In May 1999, as I was on a weekend trip to London, I picked up the Financial Times and read that Edmond Safra had sold Republic National Bank to HSBC, one of Britain’s largest banks. Like Beny, Edmond’s bank had also bet heavily on Russian bonds and lost. In an earlier phase of his life, Edmond, who had been through more market cycles than I could count, would have ridden this out, but over the previous few years he had become sick with Parkinson’s disease. In the time that we were partners, I could see a steady deterioration in his condition, to the point that it was difficult even to have a conversation with him. For some reason Edmond hadn’t drawn up a succession plan, so if he bowed out, there was nobody to take over. Because of this, he was forced to sell the bank as quickly as he could and HSBC stepped in to conclude a deal.

Edmond’s departure hit me hard. He was one of the world’s most brilliant financiers — and he was no longer involved in my business.

My personal life was also disintegrating. Things with Sabrina had gone from bad to worse since my flight from the Villa d’Este. The separation, the stress, and the distance weighed heavily on our relationship. Every time I returned to London for the weekend, we would fight. We were clearly heading toward divorce, though I tried to do everything I could to stop it. I suggested we go for counseling. We went to three different therapists, but none of them gelled for us. I tried extending my trips home to three- and four-day weekends, but she was more annoyed by my presence than pleased by it.

In spite of all this, she still planned a family break for us in August 1999. Sabrina chose a resort in Greece called the Elounda Beach Hotel. She was excited about staying there and, from the moment we arrived, was incredibly happy and nice to me. She was even sweet. This caught me off guard. I got no cold looks or arguments about work or Russia or my clients, and on the second night we even got a babysitter and left David behind to go to a local taverna. Over dinner I told her a little about Russia, and she went on and on about how wonderful David was, and for those few hours I thought, This isn’t so bad. It’s like how it used to be. I nearly asked her if anything had happened to make her demeanor change so drastically, but I decided to just go with it. I even remember her laughing at some stupid joke I made over dessert.

The following day was more of the same. We spent the whole day at the beach, playing in the sand and ordering lunch right to our chairs. As the sun set that evening with the three of us returning to the hotel room early to get David into bed, I thought that maybe, for some unknown reason, Sabrina had turned a corner and everything would work out.

After David fell asleep, I went into the bathroom to wash off the day’s sunscreen and sand. When I was finished, I went to the sink, ran the hot water, and began to shave. Sabrina, who’d freshened up while I was telling David a bedtime story, was in the bedroom reading a magazine. It was the picture of a perfect family vacation.

As I was finishing up, sliding the razor up the length of my neck, Sabrina appeared in the doorway. «Bill, we have to talk».

I lowered the razor into the sink to rinse it, watching her in the mirror. «Sure. What is it?»

Calmly she said, «I no longer want to be married to you».

The razor slipped out of my hand and I fumbled to pick it up. I turned off the water, grabbed a towel, and turned to her. «What?»

«I no longer want to be married to you. I just can’t do it anymore».

«But we seem to be having such a good time», I said feebly.

«We were — we are. I’ve been nice because, well, I’ve made up my mind. I don’t see the point in being angry any longer». She gave me a weak smile, turned, and went back to the bed, leaving me alone with my thoughts.

I was devastated, but also relieved. We’d reached a stalemate. I didn’t want to live a «normal life with a normal job» in London as she wished, and she wanted nothing to do with the crazy life I lived in Moscow. We didn’t have a partnership by any objective measure, and staying together because I didn’t want the marriage to fail was the wrong reason to stay together. In a way, I was oddly thankful that she had the guts to end it when I didn’t.

We finished the rest of our Greek vacation and, in spite of the cloud hanging over our marriage, continued to enjoy each other’s company and the company of our little boy. It was as if we were suddenly free to be friends again instead of estranged spouses who could barely stand each other. When the vacation was over, we went to the airport and, before parting to go to separate gates, Sabrina said, «Bill, I know this was my fault. I’m really sorry».

«It’s all right», I said, thinking that while it was gracious of her to say that, I knew that I shared at least an equal portion of the blame.

«We’re good people, Bill. You’re a good father and I think I’m a good mother. It just wasn’t meant to be».

«I know».

She kissed me on the cheek, said good-bye, and walked away, pushing David in his stroller. As I watched them leave, the feeling of loss that I was so familiar with overcame me. Once again, I had that visceral and empty feeling in my stomach, but this time it was worse. Losing love was a lot harder than losing money.

I returned to Russia. As autumn set in, Moscow felt as cold and lonely as anywhere I’d ever been. The one consolation was that in spite of the gigantic losses, my firm managed to stay up and running. Strangely, in the hedge fund business, if you’re down 30 percent or 40 percent your clients will withdraw all their money and you’ll be shut down in no time. However, when you’re down 90 percent, as the Hermitage Fund was in 1999, most clients said to themselves, «What the hell. Might as well hold on and ride it out to see if it recovers». In spite of my disastrous performance, the fund still had $100 million under management after the crash. This generated enough fees to pay the rent and a small staff and to keep the operation running.

Except that there was literally nothing to do. From the height of the market to early 1999, trading volumes had declined 99 percent from $100 million a day to $1 million a day, and most of the fund’s positions had become so illiquid that they couldn’t be sold even if I’d wanted to sell. It was also impossible to arrange any meetings with existing or prospective clients. The people who had been so eager to invite me to their yachts didn’t even have fifteen minutes for a cup of tea in their offices.

The most difficult part of the day was at 6:00 p.m., when business wrapped up and I made my way home. I lived in an expensively refurbished apartment not far from the Kremlin. It was fitted with a Poggenpohl kitchen and had a Jacuzzi and sauna in the bathroom. It could have been a great home, but it lacked a woman’s touch and I kept almost no personal belongings there. It was a cold, sterile, and uninviting place, which just added to my isolation.

Each day bled into the next, but on December 3, after spending another day watching a moribund market, the phone rang. It was Sandy Koifman, Edmond’s right-hand man. Sandy had quit Republic after HSBC took over, but we had stayed in touch. Normally his voice was deep and assertive, but as he greeted me he sounded totally different.

«Bill, I have some very bad news to share with you».

It seemed as if bad news was all I got lately. «What is it?»

«Edmond is dead». The last word was clearly hard for him to say and I could hear that Sandy — the ex — Israeli fighter pilot — was fighting back tears.

«What?»

«He’s dead, Bill».

«H-how?»

«He died in a fire in his apartment in Monaco yesterday».

«A fire? What do you mean a fire?»

«The news is still sketchy», Sandy said, pulling himself together. «The police aren’t releasing any details and Lily» — Edmond’s wife — «is in a state of shock. From what we understand, one of his night nurses — a man — staged a false home invasion, started a fire, and Edmond and another of his nurses died of smoke inhalation in a safe room».

I was speechless. Sandy was too.

«My God, Sandy», I finally said. «This is such terrible news… I’m so sorry. So, so sorry».

«Thanks, Bill. I’ll be in touch when we know more. I just wanted you to hear it from me».

I hung up the phone carefully and quietly. This felt like the last straw. I’d already accepted that I’d lost Edmond as a partner, but he had been more than a partner. Edmond Safra had become my mentor and role model.

And now he was gone.