The Samurai Strategy Part 28

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 a.s.signed to me all over the globe, he was spreading his own a.s.signments 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 j.a.pan. 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. .h.i.tting 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 c.u.mulative totals the currency exchanges worldwide easily handle as much as two hundred billion dollars a day. Although DNI's ma.s.sive short position clearly signaled that somebody major was antic.i.p.ating a crash of the dollar, Noda realized that all he had to do was keep moving and n.o.body 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, n.o.body bothered to notice the pattern.

Ditto his awesome "naked" shorting of Treasury futures. I mean, anybody who'd troubled to a.s.semble 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 n.o.body wanted to hear downbeat speculation from some Ca.s.sandra. 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 partic.i.p.ation by major j.a.panese 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 j.a.panese securities houses and banks in New York had begun what appeared to be a program to divest their current Treasury holdings ma.s.sively. Since spokespersons at j.a.panese outfits like Nomura and Daiwa Securities had clammed up, refusing to deny that rumor, the usual inst.i.tutional 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 j.a.panese pullout all the a.n.a.lysts 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 gla.s.s, 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 G.o.d. 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 G.o.d, 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 a.n.a.lysts 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 b.u.t.tonholing a couple of floor traders and specialists for comments. They didn't bother to mince words. Their one, terrified question: Had j.a.pan 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 ma.s.sive 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 a.s.suring his viewers that experienced market a.n.a.lysts 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 b.u.mp their a.s.s.

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 j.a.panese 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: j.a.panese 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 h.e.l.l was going on? My mild-mannered friend Matsuo Noda had inadvertently (I a.s.sumed) 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 j.a.panese 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 ma.s.sive portfolio. Ergo, j.a.pan'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 j.a.panese 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 j.a.pan'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 G.o.d 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 b.a.l.l.s.

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 Ma.s.sacre 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. "G.o.d 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 G.o.d. 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 G.o.ddam 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."