The Marketmaker

11

The battle started at seven fifteen on Wednesday morning. We started it. Or rather Ricardo did.

The battlefield was my Argentine Discount bond issue.

These bonds had been born out of Argentina’s Brady plan, named after the US Treasury Secretary, Nicholas Brady, who had sponsored the original idea. During the early 1990s, the banks who had lent billions to Latin America agreed to swap their defaulted loans for bonds, which could then be traded. These became known as Brady bonds. In the next few years most of the major Latin American countries had undergone a Brady plan, leaving over a hundred billion dollars of Brady bonds outstanding. Needless to say, Dekker had a lot of fun trading them. The Argentine Discounts, or ‘Argy discos’ as they were known, were one of the three classes of bonds created out of the Argentine Brady plan in 1992.

After the usual round of comments from everyone, Ricardo told us his idea. ‘As you guys all know, Argentina has been cheap for a while, and it’s getting cheaper. There’s no good reason for it. Cavallo’s peso plan is working and their banking crisis is under control. We’re not going to see another Mexico meltdown down there.’ He was referring to the crisis that had hit Mexico after the disastrous devaluation of its currency in December 1994.

‘The discos are cheap. We know that the Shiloh Fund has been offloading a ton of them into the market. So that’s where we’ll move. Pedro and I have picked up two hundred million so far, but that’s just a start.’

I caught my breath. Two hundred million! Ricardo hadn’t been exaggerating when he had told me he had bought a lot of bonds. I couldn’t help feeling a little proud. Of all the bonds in all the world, Ricardo had picked mine to do a number on. I listened in anticipation.

‘Now, the Discounts are the smallest of the three Argentine issues with just over four billion dollars outstanding. That’s still quite a lot of bonds, but we think that up to three billion is locked away by people who won’t sell at these prices, mostly because they’d have to book a loss. So if we pick up four or five hundred million we should really move the market. Get these bonds trading where they should be.’

There was a chuckle from the assembled group. ‘I like it,’ said Dave.

‘Do we cut in our customers yet?’ asked Jamie.

‘Not quite yet,’ said Ricardo. ‘We’ll edge up our bids on the discos today to see what we can pick up. But don’t encourage your accounts to sell unless they really have to. You don’t want to look fools tomorrow. Any other questions?’

Nothing.

‘Anything else?’

Carlos Ubeda, the head of Capital Markets, spoke up. ‘Yes, one thing, Ricardo. We need to bid for the Mexican deal tomorrow. Two billion dollars, five years.’ Carlos meant that Mexico wanted to borrow two billion dollars from the markets through a bond issue, and they had asked us to quote them a price at which we would lead it.

‘Two billion! I thought they only wanted one. That’s huge. Why so much?’

‘They’ve got a lot of debt to repay this year. And you know the Mexicans. They like to show the world that they can do bigger deals than anybody else.’

‘This is hardly the time for it. What price do you think will get it?’

‘I think we might need to go inside ten per cent.’

Ricardo winced. ‘That’s tight.’

‘The competition’s tough.’

‘OK, everyone. Ask your customers what they’re hearing about Mexico. See if we can find out what price the competition are talking. But make sure that they know we think it should be at least ten per cent.’

The meeting broke up. I followed Jamie to his desk.

He grinned at me, his eyes twinkling, and rubbed his hands. ‘We’re going to have some fun today.’

He picked up the phone to his old regulars. He was calm as if this was just any other day, but the calls were crisper than usual. Less chat.

He ran through our prices with Chris Frewer of Colonial and Imperial, a London-based fund manager.

‘Heard anything about a new deal for Mexico?’ Jamie asked.

‘Yeah. Bloomfield Weiss say they might be bringing a big one.’ Frewer was English, and he sounded the same age as Jamie and me.

‘Oh, yes? Any price talk?’

‘A touch over ten per cent. Are you involved?’

‘Are we involved?’ Jamie snorted. ‘Of course we are. I’ll let you know when I hear more.’

‘Hold on! Before you go, did you say sixty-eight and a half bid for the Argy discos?’

‘That’s right.’

‘Is that good for ten?’

‘Good for ten, good for fifty,’ Jamie said. He dropped his voice to a whisper. ‘But if I were you I wouldn’t rush into anything this morning.’

‘Oh, yes?’ A note of interest had entered Frewer’s voice. He wasn’t stupid. ‘And why not?’

‘Well, I could give you a lot of economic bullshit, but I don’t want to waste your time. Let’s just say they’re going up.’

Frewer thought for a moment. ‘OK. I’ll hold off and watch.’

‘Sound decision. But, Chris?’

‘Yes?’

‘You won’t go off and buy any yet, will you?’

Frewer laughed. ‘Of course not. Keep me posted.’

As Jamie put the phone down, I asked him something that had been bothering me. ‘Are we being fair?’

‘What do you mean?’

‘Building up a position in a bond issue before recommending it to our customers.’

Jamie smiled. ‘We’re not trading British Telecom on the London Stock Exchange. You’re on the wild and woolly shores of the emerging markets here. This is the law of the frontier. That’s exactly how guys like us make money.’

‘Ah.’

The sandwich man came round, and I grabbed a bacon and avocado on ciabatta. I fetched us both a cup of coffee. But we didn’t stop dialling and talking. Then, at about one, I heard the familiar hand-clap. I looked up. Ricardo was standing in the middle of the square of desks, making a T sign with his hands. Time out. The hubbub swiftly died down as all the phones went on hold. Everyone turned to watch him.

‘OK, compañeros, we’ve got three hundred and forty million of the discos at an average price of sixty-eight and a half. It’s time to go public. Tell your most favoured accounts first. Charlotte will release a research report in an hour’s time. Any bonds Pedro gets from now on he’ll use to fill customer orders. We want to cut our friends in. By now we should have hoovered up all the bonds dumped by the Shiloh Fund. From now on we’ll be taking the Street short, so the price should start to move.’

The group stirred in anticipation.

‘Now, anything on Mexico?’ Ricardo asked.

‘They’re talking a smidgen over ten per cent,’ said Jamie.

‘And who’s in the market?’

‘Bloomfield Weiss, apparently. They say they’re confident they’ll get the deal.’

Ricardo frowned. ‘Well, keep your ears to the ground. And don’t let anyone even dream of a yield of less than ten per cent.’

The meeting broke up and Jamie went straight on to his favoured customers. Chris Frewer chuckled and bought twenty million. By this time New York, Miami and all the South American cities were in. Andrea Geller at a small New York hedge fund bought another twenty. And Alejo bought fifty.

Alejo was Jamie’s biggest account. He was a serious punter. He worked out of Miami, but he ran the money of one of Mexico’s wealthiest families. Needless to say the deals were booked through one of the Dekker Trust numbered accounts. Jamie had apparently cultivated Alejo as a client during his previous job at Gurney Kroheim, and had taken him with him to Dekker.

Alejo’s fifty was done at a price of sixty-eight and a half.

‘I thought you said the price would go up,’ I said to Jamie.

‘Don’t worry,’ he said. ‘Give it time. This is good. We’ve got our people in at a good price.’

I looked round the room. It was buzzing. People were buzzing, phones were buzzing, bonds were buzzing. It was intoxicating. The Dekker machine was in action and it seemed unstoppable.

But it turned out Dekker’s wasn’t the only machine in action that day.

‘I’m sixty-eight offered in the discos!’

It was Pedro. We turned to look at him. He was talking rapidly to Ricardo, who was frowning.

‘What’s going on?’ Dave shouted.

‘I don’t know!’ said Pedro, running his hands over his close-cropped hair. ‘I’m getting hit with bonds from all directions!’ He grabbed a phone. I watched as he hunched over it, and slammed it down.

‘Hey, Pedro! Where do you offer ten discos?’

Pedro rubbed his chin. ‘Sixty-seven and a half!’

The price tumbled. Pedro kept lowering his price, and he kept being sold bonds. We could see the green figures on the screen in front of us winking. Sixty-seven and a half. Sixty-seven. Sixty-six and a half.

‘Jesus!’ whistled Jamie. ‘We’ve got to own five hundred million by now.’

Five hundred million! And a two-point loss. I did the sums. ‘That’s ten million we’re down.’

Jamie nodded grimly.

Ricardo strolled over. He leaned down next to Jamie. ‘I don’t know what’s going on here. Kent has spoken to the Shiloh Fund, and they’re definitely cleaned out. Someone is selling a lot of these bonds. We need to find out who.’

‘I’ll see what I can do,’ said Jamie. He thought a moment and then called Frewer at Colonial and Imperial.

Chris Frewer was angry. ‘What’s going on? I wanted to sell some bonds this morning, and somehow I seem to have ended up with twenty million more than I started with, and the price is off two points. I hope I haven’t made a mistake here.’

‘Relax. Ricardo’s on to it, I promise. But look, do me a favour.’

‘Fat chance,’ said Frewer. ‘I want out of Argentina.’

‘You will be out. In a couple of days. I just need to work out what’s going on.’

‘You should bloody well know what’s going on!’

‘Chris. Trust me. Ring Bloomfield Weiss, and ask them what they think of the discos. Say you’re considering buying some.’

There was silence as Frewer thought about it. Jamie clung tight to the receiver and winced. ‘OK, OK,’ Frewer said, finally. ‘I’ll be back.’

‘I hope this one doesn’t blow up in our faces,’ said Jamie. He sat still, staring at the phone, not touching it. Nothing was more important than Frewer’s call. We waited for five minutes. It seemed like an hour. Then the direct line to Imperial and Colonial flashed and Jamie pounced. ‘Yes?’

‘Bloomfield Weiss hate it. They told me they’ve got some bullshit computer model that shows that the discos yield half a per cent less than they seem to. The guy’s faxing it over now.’

‘You couldn’t fax me a copy when you get it, could you?’ Jamie asked.

‘All right,’ said Frewer. ‘But what am I going to do with my discos?’

Jamie winked at me. ‘Well, they’re two points cheaper. Why not buy some more? Off Bloomfield Weiss.’

‘Are you sure about this?’ Frewer asked.

‘Course I’m sure. As I said, Ricardo’s on the case.’

So Frewer trotted off to buy twenty million more bonds from Bloomfield Weiss.

But first he sent through his fax. I was waiting by the machine, and took it over to Jamie. It was written by a Ph.D. and used all kinds of arcane mathematical language to prove that the method that everyone was using to calculate the yield on Argentine Discounts was all wrong. I didn’t understand a Greek letter of it. But I did understand that Bloomfield Weiss were trying to screw us.

‘This is all crap!’ Jamie said.

‘Do you understand it?’

‘Of course not. That’s the whole point. Let’s show it to Ricardo,’ Jamie said.

We crossed the square to Ricardo’s desk. He was on the phone, but when he saw the look on Jamie’s face, and the way he was holding the fax, he put it down. Pedro, too, hung up. Pedro’s short dark hair was plastered to his forehead. He was not having a good day.

‘What have you got?’ Ricardo asked.

Jamie handed him the fax.

‘Carajo!’ Ricardo muttered, and handed it on to Pedro. Then to me. ‘Can you give a copy of this to Charlotte? We need one of her people to come up with a response. The quants out there will want some numbers to get into.’

I nodded, but hovered. I wanted to hear what Ricardo was going to do. He let me stay.

‘OK, so Bloomfield Weiss are doing their best to screw us,’ he went on. ‘They’re flooding the market with bonds, and bad-mouthing the deal to try to get their customers to sell. They want to hurt us. And they have ten times our capital to do it with. Where are the discos trading now, Pedro?’

‘Sixty-six and a half to sixty-seven.’

‘And we’ve got what, eight hundred and fifty million?’

‘Eight hundred and fifty-six.’

This was turning into a gigantic struggle. We were buying hundreds of millions of dollars of bonds and Bloomfield Weiss were selling even more. The price was going down. That meant there were more sellers than buyers. It meant Bloomfield Weiss were winning.

And Bloomfield Weiss had more fire-power than us. With ten times our capital they could afford to carry a much bigger position than we could. We couldn’t afford to buy discos for ever. Bloomfield Weiss could afford to sell them.

Now, for the first time, Ricardo looked worried. He was frowning deeply, and I noticed his wedding ring flying from finger to finger of his left hand. He called together some of the other traders, and told them what was happening. ‘We can’t let them win this one,’ he said. ‘It’s much too public. The world can see what’s going on here. That’s why Bloomfield Weiss sent out this note. They want everyone to know that this is a struggle between us and them. Those bonds have to go up.’

‘Can’t we just keep buying?’ asked Dave.

Ricardo shook his head. ‘We’re way over our limits already. We can hide some of it in Dekker Trust, but we can’t carry a bigger position for any length of time. If we buy more, we have to know it will work.’

Jamie had explained to me that the regulators placed limits on the maximum size of any bond position. Dekker had developed all sorts of ways round these limits, but apparently Ricardo was only willing to go so far.

‘This doesn’t make sense,’ said Dave. ‘It’s a four-billion-dollar issue, and we know three billion is locked away with accounts who will never sell. That leaves a billion, and we’ve got most of that. So where are Bloomfield Weiss getting their bonds?’

‘They have to be selling short,’ said Pedro. ‘I would have known if they’d been sitting on that many bonds.’

‘So they’re borrowing them,’ said Ricardo. ‘From whom, I wonder.’

There was silence. Bloomfield Weiss had flooded the market with bonds, bonds they didn’t own. Pedro thought they must have done this by selling short, which meant borrowing bonds from a friendly holder to sell. Of course, when this friendly holder wanted his bonds back, Bloomfield Weiss would have to buy them out of the market. Bloomfield Weiss’s bet was that by then the price would have fallen so that they could make a large profit. And by that time, they might have forced Dekker out of the market, too.

It wasn’t just fifteen to twenty million dollars at stake here, although that was important enough. It was the future of Dekker Ward in Latin America.

My brain raced. Over the previous couple of days I had read some back copies of the trade press from 1992 when Argentina had negotiated its Brady plan. I had particularly focused on the genesis of the Discounts.

‘It might be US Commerce Bank.’ My voice was hoarse, almost a squeak.

They all turned to me. They were listening.

I cleared my throat. ‘US Commerce Bank. They were the biggest holders of Argentine bank debt in 1992. During the Brady plan negotiations, they insisted on swapping all their bank debt for Discounts, which they preferred to the other classes of bonds for some accounting reason. They may still have them.’

There was silence. Ricardo was watching me closely.

‘Hey, Carlos! Over here!’ Carlos Ubeda stuck his head up from his desk, and hurried over. ‘US Commerce have been trying to break into our market for a while now, haven’t they?’

‘Yes. But they have no credibility. They were only in two deals last year.’

‘So how would they respond to co-lead-managing the biggest deal of the year?’

‘I think they’d jump at it.’

‘I hope you’re right,’ said Ricardo grimly, and he picked up the phone.

I rushed off to make a copy of the Bloomfield Weiss fax for Charlotte. She was sure it was crap and she said she had a pet nuclear physicist who would be able to prove it. I went back to the square, to find everyone subdued, waiting. Frewer and Alejo called back, asking what was going on. Jamie stalled them charmingly. Pedro was getting hit with more and more bonds. The rest of us were lying as low as we could.

It took Ricardo several phone calls. Pedro was holding his price at sixty-six, but he was hurting.

Then, at about six o’clock, Ricardo put down his phone and clapped his hands. The room fell silent, as all phones went on hold.

‘It turns out Nick was right. US Commerce Bank have seven hundred million dollars of Argentine Discounts, all of which they’ve been happy to lend to Bloomfield Weiss. Until today, that is. In an hour, Bloomfield Weiss will receive a demand to deliver seven hundred million dollars of discos back to US Commerce by twelve o’clock tomorrow. And there’s only one place they can get them. Here.’

You could feel the glee around the room.

Dekker Ward bought bonds long into the night.

Seven fifteen the next morning. I had slept little and I suspected few of the others had. But we all felt fresh, and ready to work. We gathered round Ricardo.

‘OK, compañeros, we’re up to a billion two,’ he said. You could hear the collective intake of breath. This was big, even by Dekker’s standards. ‘The bonds are still sticking at sixty-seven. Bloomfield Weiss have been happy to sell us all we can buy, until just before the market closed last night in New York. Then they suddenly went quiet. We’ll see what happens this morning.’

There were grins all round

‘Now what about this Mexican deal?’

‘The price talk seems to be ten and a quarter per cent,’ said Miguel. ‘And Bloomfield Weiss sound confident.’

‘Well, we need to win this one,’ said Ricardo.

Charlotte coughed slightly.

Ricardo held up his hand. ‘Don’t worry, Charlotte. I know Mexico’s looking a little precarious right now. And this isn’t the time I would choose to sell two billion dollars of their debt. But we’re splitting the deal with US Commerce, which reduces our exposure. And today might just be the day we finish off Bloomfield Weiss in Latin America for good. So we go in at nine and three-quarters and we win the deal. OK?’

I saw Jamie wince. He would have to sell this Mexican deal. Even I realized it would be difficult at that yield. He half opened his mouth and then closed it.

‘Good.’ Ricardo rubbed his hands. ‘Now, let’s make some money.’

There was a lot of noise and activity in the room that day. But only two phone calls mattered. The first came through for Ricardo at eleven thirty. It was Bloomfield Weiss’s head trader. It was rare for head traders to talk to each other like this, but he had no choice. He wanted to know where Dekker would offer seven hundred million dollars of the Argentine Discounts.

The room knew instantaneously what was happening. We were all quiet, all watching Ricardo.

‘Seventy-two.’

A pause.

Then Ricardo put down the headset. ‘Seven hundred million Argentine Discounts sold at seventy-two!’

A huge cheer met his announcement. In that second, thirty-five million dollars flowed into Dekker Ward’s profit and loss account.

The second call was much later, about seven o’clock London time. Dekker Ward and US Commerce Bank had been awarded the mandate to sell two billion dollars of five-year United Mexican States eurobonds at a yield of nine and three-quarters per cent. The issue was to be launched the following Wednesday.

The Marketmaker had shut Bloomfield Weiss out of his domain. And we had a lot of bonds to sell.