Cover your six o’clock, as the chopper pilots said. Or, in the language of the marketplace, cover your ass.
Jessica Frazetta knew that there were two natural forces that could sneak up on her and wreck the Mississippi Valley, and her career along with it.
The first was flood. The second was earthquake.
Flood and the Corps of Engineers were old acquaintances. The Corps had been fighting the river since well before Colonel of Engineers Robert E. Lee, in the 1850s, had been sent to Missouri to prevent the Mississippi from crabbing sideways into Illinois and stranding St. Louis inland, a mission he had performed with his usual efficiency.
Practically all of the Corps’ efforts in the Mississippi went into controlling the water and keeping river navigation safe. It was to secure these goals that all the levees had been built, the dams, the locks, the revetments, the spillways. For these reasons the Corps had planted lights and buoys, dredged the harbors, charted the depths, pulled snags by the thousands from the bed of the river.
But the second, far more dangerous threat was that of earthquake. Jessica knew that an earthquake of sufficient force could undo hundreds of years of the Corps’ efforts in an instant. The levees, the revetments, the dams, the spillways ... all gone at once.
The Mississippi Valley’s last big earthquakes had occurred from 1811-12, when there were less than three thousand people of European descent living west of the Mississippi.
The world of those three thousand, and the thousands more Indians who lived in the area, was torn asunder by three major earthquakes and thousands of aftershocks. The first of the quakes had been estimated as 8.7 on the Richter scale, the second-largest quake in all human history. Fifty thousand square miles were devastated, and millions more suffered damage. Fissures tore open every single acre of farmland. The Mississippi ran backward for a day. Islands vanished, while other islands were formed. Dry land submerged, and the bottoms of lakes and rivers rose dry into the sunlight. The Missouri town of New Madrid, where the quakes had been centered, had been destroyed, and the Mississippi rolled over the remains. The quakes were so powerful that they smashed crockery in Boston, caused panicked people to run into the streets in Charleston, rang church bells in Baltimore, and woke Thomas Jefferson from sleep at Monticello.
The New Madrid fault had remained active through much of the nineteenth century, providing the country an occasional jolt, but it had fallen quiet during the twentieth. And it was during the twentieth century, when memories of the quake had faded, that the Corps built most of its structures in the Mississippi Valley.
In the years since the New Madrid quakes of 1811-12, millions of people moved into the danger zone. Major cities, like St. Louis and Memphis, were built close to the fault, supported by a complex infrastructure of bridges, dams, reservoirs, power stations, highways, and airstrips, few of which had been built with earthquake in mind. Industries flourished: factories, chemical plants, and refineries had been built on the yielding soil of the Mississippi Delta. Billions of dollars in commerce moved up and down the river every year. Millions of acres of farmland, fertile as any in the world, stretched from the rivers, protected by man-made levees.
It had only been in recent decades, when geologists began to study the mid-continental faults, that the true scope of the danger was known. The New Madrid fault, and other faults beneath the Mississippi, were still seismically active, although the vast majority of its quakes were so small as to be undetectable by humans. To judge by historical precedent, a much larger and more destructive earthquake was inevitable.
If the faults should snap again, Jessica knew, millions of lives, and billions of dollars in property, were in jeopardy. The Corps had been striving to reengineer its public works so as to make them resistant to earthquake damage, but the procedure was far from complete.
In her briefcase, Jessica had the Corps’ earthquake plan, released in February 1998, as well as reports concerning the regular inspections of Corps facilities and reports relating to the floods in Iowa. The floodwaters would inevitably channel into the Mississippi from Iowa, and would inevitably test Corps structures farther south as they progressed to the Gulf.
Jessica looked at the stack of papers, at the heavy report.
The earthquake, she thought, was in the indefinite future. The floods were now.
She put the earthquake plan back in her case.
She would deal with it when she had the time.
*
“I’ve got a proposition for you, Vince,” Charlie said, “and— I warn you—I am talking risk here.”
Vincent Dearborne steepled his fingertips and looked at him with a little frown. His eyes, however, were not frowning, not frowning at all ... Charlie could see a glimmer of interest, and the little lines around the eyes were smiling. Vincent Dearborne, Charlie knew, had been hoping that this moment would come.
“Tennessee Planters and Trust,” Dearborne said in his cultured Southern voice, “is, generally speaking, risk-averse.”
“I know, Vince,” said Charlie, and smiled with his white, dazzling, even, capped teeth. “But you’re not averse to taking a little flyer now and again. When I told you about those straddles two years ago, you backed my play.”
“Yes. And I wondered if doubling the bet was sound. But...” The glimmer in Dearborne’s eyes increased in candlepower. “You made us twenty-four million dollars.”
“Twenty-four million dollars in three days,” Charlie reminded.
“And almost gave me an ulcer.”
Charlie laughed. “You can’t fool me, guvnor. You can’t get an ulcer in three days.”
Dearborne grinned and tilted his noble graying head quizzically, the way he always did when Charlie let his East London origins show. It was as if he were amused and puzzled both at the same time. Here was this strange Englishman who talked like a movie character, and who could make tens of millions in a matter of days, and who amounted to ... what?
It was as if Dearborne couldn’t figure Charlie Johns out. Charlie came from ... some other place.
Whereas Dearborne’s place in the world was not only clear, it was on display. His office was a monument to mahogany and soft brown leather, subdued lighting and brass accents. Golf trophies stood on display in the corner— golf was a safe sport. Certificates and awards were ranked elsewhere on the walls. Chamber of Commerce, Lions, United Way— safe organizations. There were pictures of ancestors on the walls: judges, legislators, bankers. Safe ancestors. His pretty wife, displayed in photographs, wasn’t too pretty, and his well-scrubbed children, pink-cheeked in school uniforms, looked— well— risk-averse.
Tennessee Planters & Trust was a safe place to put your money, and Dearborne was a safe director for a bank to employ. That was the message sent by the office decor, by the Memphis skyline visible through the office windows, by the ten-story Planters Trust building of white Tennessee fieldstone, even by a bright turquoise pattern in Dearborne’s tie, which was laid to rest next to another, more tranquil shade of blue, like a moment’s bright, shining thought being smothered beneath a reflex of conformity.
But Charlie, who prided himself on his discernment, knew that Vincent Dearborne was not quite as sound as his calculated environs made him out to be. A little over three years ago, when Charlie was working in New York for Citicorp and Tennessee Planters Securities flew him out for a secret weekend meeting with the directors, Dearborne had taken Charlie not to the office but to the country club, and made him part of a foursome with two of the other directors.
It had been Dearborne who suggested the wager, “to make it interesting.”
Charlie was hopeless at golf. He’d always thought it a sport for wankers, and he’d never really learned to play; but he knew this was a test, so he flailed his clubs with a will until at last the horrible afternoon was over and he could relax in the clubhouse with Boodles and tonic.
And he could whip out his pen and write Dearborne a check for four hundred and thirty-two dollars, and hand it over with a smile.
Dearborne’s eyes had gleamed, then. Just as they were gleaming now.
The conclusion that Charlie had drawn was that Dearborne liked a fling, but was only happy with a sure thing. Before Charlie’s arrival on the scene, Dearborne’s idea of a fling had been to spread some money on the Cotton Exchange.
Charlie played golf with Dearborne on a regular basis now. And regularly wrote him checks afterward. He considered it a form of investment.
An investment that he hoped was about to pay off.
“Since those straddles,” Charlie said, “you know I’ve played it safe, no flyers. Too many conflicting signals, mate. Too much vega in the market, right?”
“Vega.” Dearborne repeated, the gleam in his eyes fading, going a little abstract. “You mean volatility.”
“Almost. Vega is the impact of changes in volatility,” Charlie said. Too much jargon only confused the man. “I’ve made a nice profit for you, but it was nickel-and-diming, a little bit here, a little bit there. I wasn’t taking any flyers— I was, as you say, risk-averse.”
Dearborne nodded.
“I was waiting for a clear signal.” Charlie grinned, twisted the diamond ring on his finger. “This morning, just as the markets opened, Carpe Diem gave me the signal.”
“Ah.” The gleam returned to Dearborne’s eyes. “Your new program,” he said.
The convoluted business of trading options required a lot of calculations, and traders depended on sophisticated computer programs to mash the numbers and spew out the complex answers they needed to make their trades. The programs had names like Iron Butterfly and Jellyroll, and they could assemble raw data at lightning speed and configure awesomely complex combinations of options.
Carpe Diem was of the next generation of trading programs. A trading whiz Charlie knew from his days at Citi had slipped Charlie a beta test version of the program. His program was ahead of the market. And he planned for his purchasing to be ahead as well.
“What’s Carpe Diem telling us?” Dearborne asked.
“The economy’s going to tilt into recession,” Charlie said.
“People have predicted that for years.”
“Everyone knew it would happen sooner or later,” Charlie said. “The question is when. Carpe Diem says it’s going to happen now. And because this last boom has lasted so long, I think the recession’s going to be a big one.”
He raised a stub-fingered hand and ticked off the points on his fingers. “Unemployment is down and wages are up, which means a season of inflation unless the Fed acts to cool the economy. Consumer price rises were only point-one percent in April, but that comes off a big rise over the holidays. The visible trade deficit went up over the holiday season, like always, but it hasn’t dropped much in the months since.”
“The Dow is up,” Dearborne offered.
Charlie flashed his grin again. “Those blokes are always the last to know,” he said. “Here’s the two factors that Carpe Diem thought were significant.”
He ticked off numbers on his fingers again. “There’s a debt bomb about to go off in Europe. Public debt is out of control in the old East Bloc— well, that’s normal— and it’s normal for Belgium and Italy, too. But in Germany? Public debt is over sixty-five percent of GDP. Britain’s at over fifty percent. And even the Dutch, for God’s sake, have been on a spending spree.” Charlie dropped his hands, leaned forward, gave Dearborne a look from his baby blues. “It can’t last, and when the European economy slows, the effects are going to be worldwide.”
“Secondly,” Charlie said, “Carpe Diem noticed a lot of action on certain commodities—copper and other strategic minerals, because China is sucking up titanic amounts of raw materials as they modernize. And there’s a lot of volatility on foodstuffs, because those floods in Iowa are making people nervous. But what Carpe Diem is really interested in is this weird speculative trend on certain fringy areas of the commodities market. Coffee— why speculate in coffee when there’s stable supply and demand? Also natural gas, foodstuffs, certain petroleum products. Which means the money is moving out of the market’s center, as it were, possibly because people are getting uneasy about it.”
Dearborne looked worried. “You’re not suggesting that we speculate in these commodities ourselves, are you?”
“No way, guv,” Charlie said.
He knew Dearborne liked it when he called him “guv.”
“If I studied the way those commodities were moving,” Charlie said, “I reckon I could make you some money, but it wouldn’t be worth the aggravation. Those trades are powered by insecurity and ignorance, which means that you can’t predict them, and if you can’t predict what’s going to happen, that’s not investment, that’s gambling.” Charlie flashed his brilliant capped teeth again. “That’s why we’ve got tools like Carpe Diem— to help reduce the risk.”
Dearborne was reassured. “Does Carpe Diem have any other points to make?”
“The Chinese have the world’s largest supply of foreign currency reserves, but they’re going to have to sell in order to pay for their economic expansion. So will the Taiwanese, because their economies are linked to the Chinese. I expect that the Japanese will begin to sell as well, to finance the amount of debt they’ve acquired as a result of the bailouts they’ve indulged in.”
“Dollar down.” Dearborne nodded, absorbing this lesson.
“Which would normally be good for exports, except that due to the other problems I’ve mentioned, the world won’t be able to afford so very many of our exports in the next few years.”
Leather creaked as Dearborne leaned back in his chair. The gleam in his eyes burned with a new intensity. “So what are you planning to do?”
“I’m positioned nicely in T-bonds, which I expect to rise soon and make us a packet. But that’s the short run.”
“Long-term?”
“Well.” Charlie grinned. “There’s that risk I was telling you about.”
“Ahh,” Dearborne said.
“Once the rest of the world catches up to Carpe Diem— and that won’t be long, perhaps even hours— I expect the markets are going to take a tumble. Which is fine as far as we’re concerned— we can make some nice profits right then. But the best course, the way interest rates are running right now, is to sell the market short, and not lose our nerve.”
Dearborne looked thoughtful. If he was sure the market was going to fall, it would be cheaper to let Charlie, right now, sell a fistful of short positions that reflected that belief.
Dearborne’s face turned sulky as a new factor entered his thoughts. “Vega,” he said, remembering the jargon for once.
“Vega’s the fly in the ointment, all right,” Charlie said. “When the market starts to slide, volatility’s going to go up. Which will mean an increased chance for profit, but it also means the administrators at the various exchanges are going to get nervous and start calling on us to meet our margins.”
Margin calls were the bane of the trader’s life, particularly if he traded on the Mercantile Exchange in Chicago, which had a system called SPAN that continually calculated margins and could call for margins right in the middle of the trading day, meaning that the trader would have to find money for the margin call right then, instead of having overnight to make the arrangements.
“How many short futures are we talking about?”
“Well, guv ...” Charlie took a deep, theatrical breath. “For the plan that Carpe Diem and I suspect will maximize our profit, we’ll need a fund of between forty and fifty million.”
Involuntarily, and without Charlie’s theatricality, Dearborne echoed Charlie’s intake of breath. “Jesus God,” he said.
Charlie threw up his hands. “Understand that there are ways of making this less risky,” he said. “Every time the market moves, I’m going to be hedging our position. Every minute, practically. And in a volatile market, I’m going to be able to make a lot of short trades that should keep our cash flow positive.”
“Jesus God,” Dearborne said again. He gave a glance at his bowling trophies, as if for reassurance. “What if the Fed acts?” he said. “What if the Federal Reserve decides to lower interest rates?”
“I don’t think it’ll happen,” Charlie said. “The chairman’s too bloody conservative. But just in case, I’ll hedge by shorting Eurodollar puts. If the Fed cuts interest rates, then Eurodollars will rise and I’ll make a packet when the puts fall in price.”
“Mmm,” Dearborne said as he steepled his fingertips and sought communion with his trophies.
“Vince,” Charlie said as he leaned forward and sought Dearborne’s uneasy eyes with his own eyes of brilliant blue. “I’ve been a good lad these two years— I’ve been risk-averse— haven’t yet steered you wrong.”
“True,” Dearborne admitted. But the acquisitive glimmer in his eyes was dull, uncertain.
“You know what Carpe Diem means in Latin, Vince?” Charlie asked. “Seize the Day. This day must be seized, and soon. Because if we seize it now, I can give you profits that would make those twenty-four millions look like your kids’ milk money.”
Dearborne bit his lip, fiddled with something on his desk. Looked anywhere but at Charlie. Move, you bastard! Charlie thought. You think I spent all those hours playing golf just for the fun of it?
Slowly, a calculating gleam returned to Dearborne’s gaze.
“Well,” he said, “I’ll make some calls.”