Michael Ridpath - Free To Trade

1994

I had lost half a million dollars in slightly less than half an hour and the coffee machine didn't work. This was turning into a bad day. Half a million dollars is a lot of money. And I needed a cup of coffee badly.

The day had started off well enough. A quiet Tuesday in July, at the investment management firm of De Jong & Co. Hamilton McKenzie, my boss, was out. I yawned as I reread the Financial Times's tedious descriptions of yesterday's non-events. The dealing desks around me were more than half empty; people were away either on business or on holiday. Phones and papers lay scattered across abandoned desktops. Chaos at rest. The office felt like a library, not a trading room.

I looked out of the window. The tall grey buildings of the City of London pointed silently upwards out of the listless heat of the streets below. I noticed a kestrel gliding around the upper reaches of the Mercantile Union Insurance building a hundred yards to the west. The great financial centre slumbered on. It was difficult to believe anything was happening out there.

A solitary light flashed on the telephone board in front of me. I picked up the phone. 'Yes?'

'Paul? It's Cash. It's coming. We're doing it.'

I recognised the broad New York accent of Cash Callaghan, the 'top producer' at Bloomfield Weiss, a large American investment bank. The urgency in his voice pulled me up in my chair.

'What's coming? What are you doing?'

'We're bringing the new Sweden in ten minutes. Do you want the terms?'

'Yes please.'

'OK. It's five hundred million dollars, with a coupon of 9 per cent. Maturity is ten years. It is offered at 99. The yield is 9.41. Got that?'

'Got it.'

The Swedes were borrowing $500 million through the means of a eurobond issue. They were using Bloomfield Weiss as underwriter. It was Bloomfield Weiss's job to sell the bonds to investors; the term 'euro' meant that it would be sold to investors all over the world. It was my job to decide whether to buy it.

'Nine forty-one per cent is a good yield,' Cash went on. 'Ten year Italy yields 9.38 and no one thinks Italy is as good as Sweden. Canada is a better comparison, and that's yielding 9.25. It's a no-brainer. This one's going to the moon, know what I'm saying? Shall I put you down for ten million?'

Cash's enthusiasm to make a sale was extreme at the best of times. When he had $500 million of bonds to sell, it knew no bounds. He had a point though. I tapped some buttons on my calculator. If the yield on the new bonds did fall to the level of Canada at 9.25 per cent, that would mean the price would move up from 99 to 100. A nice profit for any investor quick enough to buy bonds at the initial offer price. Of course if the issue was a failure, Bloomfield Weiss would have to lower the price until the yield was high enough to attract buyers.

'Hold on. I've got to think about this one.'

'OK. But be quick. And you should know we have already placed three hundred million in Tokyo.' The phone went dead as Cash rushed on to his next call.

I had very little time to gather information and make a decision. I punched out the number of David Barratt, a salesman at Harrison Brothers. I repeated what I had heard from Cash and asked David what he thought of the deal.

'I don't like it. It sounds good value, but remember how badly the World Bank issue that was launched two weeks ago did? No one's buying eurobonds at the moment. I don't think any of my clients in the UK will touch it.' David's clear unhurried tones carried the weight of experience and a sound analytical mind. He had built up a loyal following of customers by being right most of the time.

'That's very useful. Thanks,' I said, and hung up.

Another light flashed. It was Claire Duhamel, a persuasive French woman who sold bonds for Banque de Lausanne et Geneve, known as BLG.

'Hallo Paul, how is it with you? Are you ready to buy some bonds from me today?' Her low throaty accent was carefully designed to demand the attention of even the hardest-hearted customer.

That morning I had no time for Claire's line of flirtatious chat. Although she did her best to hide it, she had excellent judgement, and I needed her opinion quickly. 'What do you think of the new Sweden?'

'Bof! A dog. A howling dog. I hate the market at this moment. So do my customers. So do my traders. In fact, if you want any, I am sure they will be offering bonds very cheaply.'

She meant that her traders disliked the issue so much that they would try to sell bonds as soon as the issue was launched, in the hope that they might buy them back cheaper later.

'Bloomfield Weiss claim that most of the deal has been placed in Tokyo already.'

Claire's reply was tinged with anger. 'I'll believe that when I see it. Careful, Paul. A lot of people have lost a lot of money believing Cash Callaghan.'

For the next few minutes the board in front of me flashed constantly as salesmen called in to discuss the deal. None of them liked it.

I needed to think. I asked Karen, our assistant, to put off all the incoming calls. I liked the deal. It was true that the market was very quiet. It was also true that the World Bank issue of two weeks ago had fared poorly. However, there had been no new issues since then, and I had the feeling that investors did have cash waiting for the right bond issue. And this could be the right one. The yield was certainly attractive.

Most intriguing was the Japanese angle. If Cash was right and they really had already sold $300 million of a $500 million issue in Japan, then the deal would go very well. But should I trust Cash? Wasn't he just taking me for a sucker; a twenty-eight-year-old with only six months' experience in the bond market? What would Hamilton do if he were here?

I looked around me. I supposed I should really discuss it with Jeff Richards. He was Hamilton's deputy and responsible for the strategic view the firm took on currencies and interest rates. But he liked to do things based on thorough economic analysis. Trading a new issue was not his cup of tea at all. I looked over to his desk. He was tapping figures from a booklet of statistics into his computer. Best to leave him out of it.

Apart from Karen, the only other person who was in the office was Debbie Chater. Until recently she had been involved in the administration of the funds managed by the firm. She had only moved on to a trading desk in the last two months, and had even less experience than me. But she was sharp, and I often discussed ideas with her. She sat at the desk next to me, and had been watching what was going on with interest.

I looked at her vaguely, searching for a decision.

'I don't know what the problem is, but suicide isn't the answer,' she said. 'You look like you are about to jump out of a window.' Her broad face split into a grin.

I smiled back. 'Just thinking,' I said. I briefly explained what Cash had said about the new Sweden, and the lack of enthusiasm from his competitors for the deal.

Debbie listened closely. After a moment's thought she said, 'Well, if Cash likes it, I wouldn't touch it with the proverbial bargepole.' She tossed me a copy of the Mail. 'If you really want to gamble our clients' money away, why don't you do it on something safe like the four thirty at Kempton Park?'

I threw the paper in the bin. 'Seriously, I think there might be something in this.'

'Seriously, if Cash is involved, drop it,' she said.

'If Hamilton were here, I am sure he would get involved,' I said.

'Well, ask him. He should be back at his hotel by now.'