Over the last three weeks I'd spent long hours on the phone handling
Matsuo Noda's new hedging in the currency markets. The play started out
modestly, but as his Eight Hundred Year funds became bloated with cash,
it grew into an avalanche of speculative positions.
His guiding principle was to keep a low profile in order not to spook
the markets, same as any good trader would do. Whenever the FOREX desk
of one market-maker bank on his list would start getting nervous, I'd
just hit the next place in line. Finally after everybody on this side
of the ocean began backing away, he went international. Zurich, in
particular, loved the action and took everything he threw in its
direction. I guess the Swiss are used to high rollers, since their
financial casino never got cold feet and invented a house limit.
Somewhere along the way I also came to realize I couldn't possibly be
the only agent in his employ; there was far too much money to move.
Also my list of contracts eventually got pared to manageable levels, so
somebody else had to be picking up the slack. It appeared that just as
I was spreading the action he'd assigned to me all over the globe, he
was spreading his own assignments worldwide. The man had to be covering
a major chunk of the world market in interest-rate futures and currency
forwards, but not a penny of it was traceable to Japan. Or to Matsuo
Noda.
How, I kept marveling, could this be happening right under the nose of
all our supposed geniuses of world finance? One thing, Noda had all his
moves down pat. My hunch was he'd started routing a lot of short
selling through Sydney and Hong Kong, and also was hitting the off-
exchange "third market," anyplace he could find somebody to take his
bets. If you remember how the dollar plunged in the mid-eighties,
you'll also recall that anybody who'd had the foresight to dump it in
advance would have been sitting pretty. Plenty of traders did, but none
of them received any particular attention, since the pond is so huge.
In cumulative totals the currency exchanges worldwide easily handle as
much as two hundred billion dollars a day. Although DNI's massive short
position clearly signaled that somebody major was anticipating a crash
of the dollar, Noda realized that all he had to do was keep moving and
nobody would put it together.
Need I add that my own little dollar hedge for Amy was peanuts compared
to what was going on now. Dai Nippon through its anonymous agents was
dumping American currency in the multi-billions worldwide, but since
Noda kept the action spread out, nobody bothered to notice the pattern.
Ditto his awesome "naked" shorting of Treasury futures. I mean, anybody
who'd troubled to assemble the numbers could have predicted somebody up
on the bridge must have sighted a reef dead ahead. I kept trying to
warn traders I knew, both on and off the exchanges, but nobody wanted
to hear downbeat speculation from some Cassandra. They were all too
busy pocketing commissions and ordering more champagne.
And then it happened. In broad daylight. I'll explain the operative
details shortly, but if you were there, that could be a little like
reviewing the theory underlying nuclear fission for somebody standing
at ground zero when the bomb hit. So first let me recollect how it felt
down in the trenches.
I was breakfasting at the dining room table downstairs that particular
Monday morning--November 7, as we all remember so vividly--when Matsuo
Noda dropped the first shoe, or maybe it's more accurate to say he
began loosening the laces. I'd just finished squeezing some orange
juice when I punched in the number of a financial update service on my
trusty cordless phone, mainly to hear the (recorded) sound of a human
voice. I'd totally forgotten the U.S. Treasury was holding its
quarterly refunding that day.
Newsbreak. Dealer banks were reporting that demand for the long bond,
the thirty-year, was extremely soft to nonexistent. Equally unnerving,
there wasn't any noticeable interest in Treasury's ten-year notes
either. The reason seemed to be that the usual heavy participation by
major Japanese investment houses (typically twenty to forty percent of
the total) had inexplicably evaporated. In fact, a rumor currently
flying across
the floor of the Chicago Board of Trade said a number of Japanese
securities houses and banks in New York had begun what appeared to be a
program to divest their current Treasury holdings massively. Since
spokespersons at Japanese outfits like Nomura and Daiwa Securities had
clammed up, refusing to deny that rumor, the usual institutional buyers
like Oppenheimer and Goldman, Sachs were holding back, nervous.
Hang on, I said to myself. Can this mean we're about to test out
Henderson's "worst case" scenario, that Japanese pullout all the
analysts say could never happen? But there's no reason. No sudden
icebergs out ahead. . . .
Noda. I said the word out loud. Noda's kicked off his play.
I almost laughed at the thought of his naivete. Was this going to be
his game? Who was he planning to fool? For once you've got a little
surprise in store, chum. Treasury may have to sweeten the pot, but
there's a lot of money in the world. The United States of America can't
be blackmailed.
Then I glanced out at the blue morning sky, empty except for a single
swooping sparrow, and had a strange premonition, one of those mystical
moments when everything sparkles with crystalline clarity. I had this
feeling I can't explain. Still in a reverie I carefully set down my
orange-juice glass, walked upstairs to the "office," and dialed one of
the computers into Reuters's Wall Street service. How were the
securities markets taking the news? It was already ten-thirty, time
enough for some initial response.
Dear God. For a second or so I just stared at the numbers in disbelief.
What was happening? Noda hadn't gone near the stock market.
I quickly switched on the TV and located CNN, which was already
carrying a special report live from the floor of the New York Stock
Exchange. There stood a badly shaken Lou Dobbs, minus his tie. Minus,
in fact, his jacket. The scene around him was pandemonium.
". . . and the Dow Jones Average . . ."--he glanced down at a monitor--".
. . has dropped six hundred and eighty points in the last twenty
minutes. . . ." At that moment somebody jostled against the cameraman,
giving us a momentary view of the ocean of paper buy-and-sell slips
littering the floor. "A hundred and ninety million shares have already
changed hands in the first half hour of trading this morning. ..."
My God, I thought, the market is in free-fall. Was Meltdown Monday in
'87 just the warm-up?
"As yet unconfirmed rumors concerning a slow foreign response to
today's Treasury auction . . ."--although he was weighing his words
carefully to give the appearance of calm, the hasty makeup on his
forehead was already beginning to bubble with perspiration-- ". . . seem
to be responsible for what most analysts are describing as an entirely
inappropriate overreaction in securities prices here this morning. ..."
What else could he say? It was as though everybody's gnawing, primal
fear had just been confirmed. There really was a hairy beast lurking in
the bedroom closet, waiting to jump out and eat us in our sleep. The
market was running to mommy: safe and soothing cash.
Next he made the tactical error of buttonholing a couple of floor
traders and specialists for comments. They didn't bother to mince
words. Their one, terrified question: Had Japan finally decided to let
the U.S. and its towering debt just twist slowly in the wind? If that
happened, U.S. capital would simply dry up, sucked in by Treasury's
massive money-sponge: interest rates would soar, murdering the U.S.
economy. The Great Depression of the nineties.
As I watched, a bulletin started running across the bottom of the
screen: bids on the new issue of thirty-year bonds had now dropped an
amount equivalent to raising their return almost two full interest
points. I zeroed in as the text continued. Worse news. The "coverage
ratio," which measures how many more bidders there are than necessary,
had plummeted from 2.7 to 1.3. And still dropping. More and more
potential buyers were running for cover.
Lou, who was now surrounded by traders in blue jackets and couldn't see
his own monitor, was assuring his viewers that experienced market
analysts were all saying the slowdown in Treasury action did not
accurately reflect worldwide demand, that deutsche marks and pounds
sterling undoubtedly were already winging westward to take advantage of
the new higher rates.
Sweating there in his melting pancake, the poor guy had no inkling the
patient was slipping into a coma just as he'd forecast full recovery.
Well, I thought, there's always prayer. Anything's possible. But . . .
as Henderson used to say, if frogs had wings, they wouldn't bump their
ass.
I got up to go downstairs and pour another cup of coffee. Coming back,
I decided to forget about the stock market for a moment and just focus
on Treasury, so I clicked on my Telerate service and scrolled through
the financial quotes.
Friends, by that time there was no, repeat no, market out there for
Treasury paper. Now that the Japanese dealers appeared to be dumping
everything, European banks had hit the sidelines, waiting to see what
transpired. Would rates continue to move up? Would Treasury be forced
to withdraw the issue? Should everybody be bailing out now before bond
prices went through the deck and demolished years of interest earnings?
Looming over it all was that standing terror of the bond markets: no
liquidity.
Back to Cable News Network. An officer from one of the dealer banks
(which bid on big chunks of Treasury paper, then retail it) had rushed
over to CNN's midtown studios and was explaining to us all it was
clearly nothing more than some minor trans-Pacific communications
snarl. The problem, obviously, was simple: Japanese securities firms
here just hadn't received authorization from their head offices in
Tokyo, where it was after business hours. A clarification would be
forthcoming any minute now.
Well, if you've ever been turned down for a mortgage and you fantasized
a day when you'd see that high-and-mighty clerk behind the desk have to
ask _you _for a loan, I hope you caught that one. This paper-shuffler
whose secretary had a secretary had agreed a week earlier to take on
three billion dollars of Treasury's new debt issues--paper he now
couldn't give away, let alone resell--and he was practically on his
knees begging America to save his bank.
What the hell was going on? My mild-mannered friend Matsuo Noda had
inadvertently (I assumed) kicked off a major financial panic.
I clicked the dial over to Financial News Network, FNN, which had
momentarily interrupted its heavy midday fare of California snake-oil-
and-options hucksters. Now a decidedly pale investment banker, this one
an unindicted employee of Drexel Burnham, was declaring it was all
merely a little "tempest in a teapot." His precise words. The Japanese
securities houses wouldn't dare pull out their funds and kill the
market, he explained. It was absurd. If they did that, their investors
would lose a fortune, since any big sell-off would automatically drive
down the value of their own massive portfolio. Ergo, Japan's funds had
no choice but to stay invested. No problem.
My friend, I thought, where have America's bankers been? Out
repossessing some widow's Chevy? As a matter of fact the Japanese
outfits here don't give a flying fig what happens to our debt market.
If you'd been doing your job, you'd know that Matsuo Noda had already
sold Treasury futures far in excess of Japan's portfolio back when
values were still high. Now he can go out and pick up all the notes and
bonds he wants, cost approximately nothing, and turn around and deliver
them at yesterday's full price. The man must feel like a riverboat
cardsharp who's lucked into a saloon full of Huck Finns on payday.
Don't you realize he's just cleaned you out, right down to the fillings
in your teeth? And now he's got his team on the bus ready to roll.
Over to CBS, a Special Report underway. It featured a stream of well-
meaning and incoherent Treasury officials, none of whom had the
slightest inkling what to say. Then Jack O'Donnell came on from the
Senate pressroom, breathing fire. The administration's "light at the
end of the deficit tunnel" had turned out to be a freight train heading
our way, just as he'd predicted. America's debt chickens were coming
home to roost. He was demanding that the Speaker call a joint session
of Congress this very day and by God do something.
Right, Jack. What? Looks like our pal Matsuo Noda is about to have the
U.S. of A. exactly where he wants us. By the balls.
I guess I must have been operating solely on instinct by then, because
a phone number popped into my head that I hadn't recalled in years. Sam
Kline, my old broker at Merrill Lynch. I hadn't talked to Sam in ages,
but his number used to come to my fingers whenever the market started
acting up. Maybe he was sort of a father figure. Truth is, I'd first
learned what little I know about the market watching that giant ticker
ML had up at one end of the office just above Sam's desk--and long gone
in this age of computers. I remembered how heavy trades--over ten
thousand shares--were marked with stars, always fun to watch.
Forget the "financial experts." They were reduced to spouting pure
gibberish. Time to check in at the real front line. Sam Kline.
Maybe I just wanted to have Sam to soothe me like in the old days, pour
some of that dreadful coffee he had in his Thermos, tug down the cuffs
of his trousers, and say not to worry, there's always tomorrow, the
disaster in my portfolio merely reflected a long-overdue and healthy
"correction" in the market. (Only years later did I finally realize
that "correction" was a special Wall Street expression meaning all the
stocks you own just tanked.)
When Sam finally got around to my call, he was barely coherent but
still trying.
"Matt, what's new?" There was turmoil and yelling behind him, as though
the office was about to go under a wrecking ball.
"You tell me."
"Well, at the moment it's something of a downside morning, but--"
"Sam," I snapped, "this is me, Matt, save the Pollyanna."
A short pause, and then he crumbled. "Matthew, want the truth? The
Monday Massacre of '87 was a rally compared to this. That crash was
just stocks. This time it's U.S. bonds, the dollar, everything. The
market's falling apart. Right this minute the trust departments at
First Boston and Morgan are dumping entire sectors like they were some
nervous greenhorn in Oshkosh. Pension fund managers I've known for
years are liquidating whole blocks 'at the market,' for whatever they
can get. One specialist downtown just told me he had to eat a hundred
thousand shares of, Christ, General Dynamics. You can't give away
Northrop. And Lockheed, forget it. . . ." Another pause. "God Almighty,
Matt, we need a market up here. How about--"
"Not now, Sam." It was like hanging up on my own father. A knife in my
heart. "Look, I'll get back to you. Best to Naomi."
Good God. I wanted to hire an airplane and skywrite a big sign over
downtown: WAIT. Trouble was, I wasn't sure myself what it was all
about.
However, there was one thing I could do. I punched in the contact
number for Dai Nippon, uptown, and told the polite little lady who
answered the phone to get Tanaka on the line this goddam minute. About
ten seconds later he was there.
"Are you guys nuts?" I yelled. "Doesn't anybody up there know what's
happening?"
"We are well aware of the situation, Mr. Walton."
"Well, then, do something, for chrissake!"
"Our securities dealers here are in contact with the appropriate
officials. Nothing is to be done without explicit instructions from
Noda-san. He has not yet been in communication."
"Well, get him in communication."
"There is no cause for alarm, Mr. Walton." He continued calmly. "Noda-
san has made sure that our dealers' exposure in Treasuries is covered
by the futures contracts DNI has acquired. Japanese investors are
sheltered from price fluctuations. Noda-san is most grateful for your--"
"Listen carefully," I said. "Fuck Noda."