the business his target was in. His financial affairs were handled through a private bank in Geneva. It placed customer service at the very top of its priorities. So when Carver called his personal manager, Timo Koenig, and asked him if he could spare an hour or so for a drink, the fact that this was a Saturday evening did not deter Koenig — openly at least — from saying yes.
‘Great, meet me at seven in the bar of the Beau Rivage,’ said Carver.
The Beau Rivage was an old-fashioned grand hotel on the banks of Lake Geneva. It had been quite a while since Carver had visited it. The last time, also, he’d had a meeting with a bank manager, and he’d been with Alix. Things hadn’t worked out too well for them that night. Carver saw no need to tell Koenig about it… let alone how much worse they’d worked out for the banker.
16
Hotel Beau Rivage, Geneva
Carver bought the drinks. A beer for himself and a martini for Koenig, a well-preserved fifty-year-old, kept trim by tennis and skiing, whose idea of casual weekend attire consisted of immaculately pressed jeans, a Ralph Lauren polo shirt, and a cotton jumper so crisp and clean that that it appeared to have only just been unwrapped from the store tissue paper. Carver had not shaved all day, and he’d seen no reason to change before he went out. He felt like a vagabond by comparison, but that didn’t bother him in the slightest. ‘What do you know about a man called Malachi Zorn?’ he asked.
‘Not a great deal,’ said Koenig. ‘I have never had any reason to do business with him. But he made his fortune shorting Lehman’s, no?’
‘You tell me. How does a guy like this work? For example, you say he shorted Lehman’s. I know that means he bet against them. But how?’
‘Mm… good martini,’ said Koenig, savouring his drink before answering the question: ‘CDSs… sorry, credit default swaps…’
‘Which are what, exactly?’ Carver asked.
‘A credit default swap is a way that an investor can make money out of someone else’s loss. You might say it is an insurance policy taken out on something you do not necessarily own.’
Less than a minute into the conversation, and already Carver felt like he’d walked into an alternative universe. ‘That sounds like me taking out insurance on your car. Why would I want to do that?’
Koenig smiled, as though what he was describing was the most normal thing on earth. ‘Well, you might decide that was a good investment if you knew that I was a terrible driver who was almost certain to crash.’
‘Or if I knew I could make you crash…’ Carver said.
Koenig clearly thought he was joking. ‘Ah, well, that would be cheating!’
‘If you say so.’
‘In any case, a default swap is just like a regular insurance policy,’ Koenig continued. ‘You buy a certain amount of cover for a fixed premium, over a given period — usually ten years — and it pays out in the event of loss. The premium is often very low. If you wanted to take out a credit default swap on a very safe, AAA-rated corporate bond, for example, it might only cost you fifteen thousand dollars a year for ten million dollars of coverage. So your downside is fixed: over the course of a decade the maximum you will ever spend is a hundred and fifty thousand dollars. But if the company collapses and its bonds become worthless, then you will make ten million dollars. Those are very good odds. And because the length of the term is so long, a default swap is very useful when you are sure that a collapse of some kind will occur at some point, but you don’t know exactly when.’
‘But what’s in it for the other guy, the one who’s selling?’ Carver asked.
‘Ah, well, he gets a guaranteed income, based purely on a promise,’ said Koenig, to whom this was clearly a perfectly reasonable proposition. ‘He does not have to spend any money of his own. He just collects your premium every year for ten years, and hopes that he never has to pay out. In most cases, he will be right. He will end up with a hundred and fifty thousand dollars for doing absolutely nothing. But sometimes, particularly in times of crisis, an unexpected, apparently impossible, failure occurs and he loses his bet. The market was certain that Lehman’s was safe, because it was too big to fail, and so it was very cheap for Monsieur Zorn to buy billions of dollars of credit default swaps. When Lehman Brothers collapsed, he collected those billions, and, of course, the banks that had sold him those swaps lost the billions they had to pay him.’
‘That wouldn’t make him too popular.’
‘Not if he did it more than once, certainly,’ Koenig agreed. ‘A bank is like a casino. The management do not mind the occasional jackpot. That encourages the other gamblers. But if someone creates a system for winning, and gets the jackpot again and again… well, then they are asked to leave the casino.’
‘Yes… and they aren’t always asked politely,’ said Carver. ‘So these swaps, are they the only way Zorn makes his money?’
‘I had no idea you were taking such an interest in finance, Sam. May I ask why you are so fascinated by Malachi Zorn in particular?’
‘His name came up in conversation.’
Koenig gave Carver the chance to say more, accepted that no further information would be forthcoming, and then smiled as he said, ‘You are very discreet. You would have made an excellent Swiss banker! OK… get me another martini and I will try to explain.’
Carver bought a second round of drinks and settled back for Koenig’s tutorial.
‘So, Zorn… Well, I imagine he’s using a great many different financial vehicles. His aim, though, will always be to leverage his money to the greatest possible extent, so that he gets the maximum possible return.’
‘The impression I got was that he bets on failure most of the time,’ Carver said.
‘In that case, another way to go is “put” options. Basically, that gives him the right to sell a quantity of a stock or a bond at a particular price, on or before a particular date. So, imagine a company that is doing well. Its shares cost ten dollars, and the price is very solid, very steady… But for some reason, Zorn thinks to himself, “These shares are overvalued, they must crash. Soon they will be worth much less.” So he buys the option to sell these shares at eight dollars. Financial institutions will sell Zorn these options, because they see no reason for this price to go down. If they are right, the price holds steady, and Zorn loses all the money he has spent buying the options. But if the share crashes — say to three dollars a share — Zorn exercises his options, sells at eight dollars, and pockets five dollars a share profit.’
‘Which the bank has to pay for?’
‘Effectively, yes.’
‘So what is Zorn paying for these options?’
‘Ah, Sam, that is a very complicated question… But it can be reduced to a pair of very simple elements: time and risk. The greater these are, the more an option costs. Imagine, for example, that you want to buy “put” options on the price of a house, betting that its value will decrease. A six-month option on a house made of straw will cost you much more than a week-long option on a house made of brick.’
‘Unless you know that the big bad wolf has a wrecking ball.’
‘Precisely… in any market, exclusive information is the most valuable commodity of all.’
Carver took a long drink of his beer, using the time to get his head around what he had just learned. ‘You know, what I really don’t get about any of this,’ he said, putting his drink back down on the table, ‘is what’s the point of it all?’
‘It’s business. It makes money. What other point does it need?’
‘But it doesn’t make money, does it?’ Carver pointed out. ‘You said it yourself. Every time there’s a winner on a trade, someone else loses the exact same amount. So nothing new is created. Oh, no… wait
… Something tells me that if a trader does a deal to sell one of those swaps, or “put” options, he puts that down as new business and he gets a slice of that business as his bonus. Am I right?’
‘Sure,’ Koenig agreed. ‘Bankers’ pay is based on a percentage of the profits they generate, so yes, in theory…’
Carver was feeling the excitement that comes when you suddenly get an insight into something new. ‘OK…
