The third and largest wave of Treasury-note sales came as a surprise to everyone, but most of all to the Federal Reserve Bank headquarters in Washington, whose staff had noted the Hong Kong and Tokyo transactions, the first with interest, the second with a small degree of alarm. The Eurodollar market had made things right, but that market was now mainly closed. These were more Asian banks, institutions that set their benchmarks not in America, but in Japan, and whose technicians had also noted the dumping and done some phoning around the region. Those calls had ended up in a single room atop an office tower, where very senior banking officials said that they'd been called in from a night's sleep to see a situation that looked quite serious to them, occasioning the second wave of sales, and that they recommended a careful, orderly, but rapid movement of position away from the dollar.
U. S. Treasury notes were the debt instruments of the United States government and also the principal retaining wall for the value of American currency. Regarded for fifty years as the safest investment on the planet, T-Bills gave both American citizens and everyone else the ability to put their capital in a commodity that represented the world's most powerful economy, protected in turn by the world's most powerful military establishment and regulated by a political system that enshrined rights and opportunities through a Constitution that all admired even though they didn't always quite understand it. Whatever the faults and failings of America— none of them mysteries to sophisticated international investors—since 1945 the United States had been the one place in all the world where money was relatively safe. There was an inherent vitality to America from which all strong things grew. Imperfect as they were, Americans were also the world's most optimistic people, still a young country by the standards of the rest of the world, with all the attributes of vigorous youth. And so, when people had wealth to protect, mixed with uncertainty on how to protect it, most often they bought U.S. Treasury notes. The return wasn't always inviting, but the security was.
But not today. Bankers worldwide saw that Hong Kong and Tokyo had bailed out hard and fast, and the excuse over the trading wires that they were moving their positions from the dollar to the yen just didn't explain it all, especially after a few phone calls were made to inquire why the move had been made. Then the word arrived that more Japanese banks were moving out their bond holdings in a careful, orderly, and rapid movement. With that, bankers throughout Asia started doing the same. The third wave of selling was close to six hundred billion dollars, almost all short-term notes with which the current U.S. administration had chosen to finance its spending deficit.
The dollar was already falling, and with the start of the third wave of selling, all in a period of less than ninety minutes, the drop grew steeper still. In Europe, traders on their way home heard their cellular phones start beeping to call them back. Something unexpected was afoot. Analysts wondered if it had anything to do with the developing sex scandal within the American government. Europeans always wondered at the American fixation with the sexual dalliances of politicians. It was foolish, puritanical, and irrational, but it was also real to the American political scene, and that made it a relevant factor in how they handled American securities. The value of three-month U.S. Treasury notes was already down 19/32 of a point-bond values were expressed in such fractions—and as a result of that the dollar had fallen four cents against the British pound, even more against the Deutschmark, and more still again against the yen.
'What the hell is going on?' one of the Fed's board members asked. The whole board, technically known as the Open Market Committee, was grouped around a single computer screen, watching the trend in a collective mood of disbelief. There was no reason for this chaos that any of them could identify. Okay, sure, there was the flap over Vice President Kealty, but he was the Vice President. The stock market had been wavering up and down for some time due to the lingering confusion over the effects of the Trade Reform Act. But what kind of evil synergy was this? The problem, they knew without discussing, was that they might never really know what was happening. Sometimes there was no real explanation. Sometimes things just happened, like a herd of cattle deciding to stampede for no reason that the drovers ever understood. When the dollar was down a full hundred basis points- meaning one percent of value-they all walked into the sanctity of their boardroom and sat down. The discussion was rapid and decisive. There was a run on the dollar. They had to stop it. Instead of the half-point rise in the Discount Rate they had planned to announce at the end of the working day, they would go to a full point. A strong minority actually proposed more than that, but agreed to the compromise. The announcement would be made immediately. The head of the Fed's public-relations department drafted a statement for the Chairman to read for whatever news cameras would answer the summons, and the statement would go out simultaneously on every wire service.
When brokers returned to their desks from lunch, what had been a fairly calm Friday was something else entirely. Every office had a news board that gave shorthand announcements of national and international events, because such things had effects on the market. The notification that the Fed had jacked up its benchmark rate by a full point shocked most trading rooms to a full fifteen or thirty seconds of silence, punctuated by not a few Holy shits.
Technical traders modeling on their computer terminals saw that the market was already reacting. A rise in the discount rate was a sure harbinger of a brief dip in the Dow, like dark clouds were of rain. This storm would not be a pleasant one.
The big houses, Merrill Lynch, Lehman Brothers, Prudential-Bache, and all the rest, were highly automated, and all were organized along similar lines. In almost every case there was a single large room with banks of computer terminals. The size of the room was invariably dictated by the configuration of the building, and the highly paid technicians were crowded in almost as densely as a Japanese corporate office, except that in the American business centers people weren't allowed to smoke. Few of the men wore their suit jackets, and most of the women wore sneakers.
They were all very bright, though their educational backgrounds might have surprised the casual visitor. Once peopled with products of the Harvard or Wharton business schools, the new crop of 'rocket scientists' were just that—largely holders of science degrees, especially mathematics and physics. MIT was the current school of choice, along with a handful of others. The reason was that the trading houses all used computers, and the computers used highly complex mathematical models both to analyze and predict what the market was doing. The models were based on painstaking historical research that covered the NYSE all the way back to when it was a place under the shade of a buttonwood tree. Teams of historians and mathematicians had plotted every move in the market. These records had been analyzed, compared with all identifiable outside factors, and given their own mathematically drawn measure of reality, and the result was a series of very precise and inhumanly intricate models for how the market had worked, did work, and would work. All of this data, however, was dedicated to the idea that dice did have a memory, a concept beloved of casino owners, but false.
You needed to be a mathematical genius, everyone said (especially the mathematical geniuses), to understand how this thing operated. The older hands kept out of the way for the most part. People who had learned business in business schools, or even people who had started as clerks and made their way up the ladder through sheer effort and savvy, had made way for the new generation—not really regretting it. The half-life of a computer jockey was eight years or so. The pace on the floor was killing, and you had to be young and stupid, in addition to being young and brilliant, to survive out there. The older hands who had worked their way up the hard way let the youngsters do the computer-driving, since they themselves had only a passing familiarization with the equipment, and took on the role of supervising, marking trends, setting corporate policy, and generally being the kindly uncle to the youngsters, who regarded the supervisory personnel as old farts to whom you ran in time of trouble.
The result was that nobody was really in charge of anything—except, perhaps, the computer models, and everyone used the same model. They came in slightly different flavors, since the consultants who had generated them had been directed by each trading house to come up with something special, and the result was prosperity for the consultants, who did essentially the same work for each customer but billed each for what they claimed was a unique product.
The result, in military terms, was an operational doctrine both identical and inflexible across the industry. Moreover, it was an operational philosophy that everyone knew and understood only in part.
The Columbus Group, one of the largest mutual-fund fleets, had its own computer models. Controlling billions of dollars, its three main funds, Nina, Pinta, and Santa Maria, were able to purchase large blocks of equities at rock-bottom prices, and by those very transactions to affect the price of individual issues. That vast market power was in turn commanded by no more than three individuals, and that trio reported to a fourth man who made all of the really important decisions. The rest of the firm's rocket scientists were paid, graded, and promoted on their ability to make recommendations to the seniors. They had no real power per se. The word of the boss was law, and
