Chapter 12: Chapter 12
tom Barton opened his eyes. It took him a couple of seconds to take in the
surroundings. He reached out and felt Sophie's warm body by his side; a
wonderful start to the day in Cannes. That morning they planned to drive
from the luxurious Carlton Hotel to Monaco where they would join Sergei Tarasov
on his yacht. The oligarch had flown in to join his yacht in the principality, where
his tennis star and fashion designer girlfriend was presenting her latest collection of
sportswear.
Barton’s leitmotiv was the MIPIM conference, which brought together the
world’s international property professionals. It had seemed like a good occasion to
T
test the weakening pulse of the market, though the idea of joining a flock of
advisers, bankers and their retinues did not really excite Barton’s enthusiasm.
The sombre mood at the annual event had not dampened neither Barton’s nor
Sophie’s happy mood. For the professionals it was another story; what should have
been a fun-packed gathering, filled with bonhomie and back slapping, turned out to
be a very depressing affair. The bubble had burst; restaurants were empty and even
the coveted Cannes beach-front hotels announced vacancies. There were fewer
extravagant high spirited parties and even fewer luxury yachts at what in recent
years had become the most looked forward to international property event of the
year.
The aftershocks of the economic crisis continued to send tremors through the
financial world. The previous evening the news media announced the Bombay
Stock Exchange had been rocked a billion-dollar fraud. It did not surprise Barton in
the least. A Western educated MBA graduate, one of India’s new breed of golden
boys, was forced to admit cooking his firm’s books. The firm, Satyam; Sanskrit for
truth, had ratcheted up losses of over one billion dollars, a gigantic sum by Indian
standards, dragging the Bombay stock exchange down by a huge seven percent in a
single trading session. Satyam’s founder had falsified the company’s balance
sheets by declaring fictitious assets and non-existent cash reserves.
Fraud, which had become rampant in the Wild West of global finance, had
tarnished the glow of India’s much vaunted economy, forcing the worms out of its
rickety woodwork. Only a year before international media had eulogised the
success of the Mittals and Tatas, two of the sub-continents extraordinarily rich
industrial families. All that had changed; the rich were now keeping a low profile
as India’s future began to look uncertain as tensions rose following the
destabilizing terrorist attack on the Taj Hotel.
Once again Barton grimly congratulated himself on getting out when he did,
though there was a pang of guilt when he wondered how those he had left behind
in London were faring. Market demand for mortgages had fallen a massive sixty
percent, house prices by more than twenty five and over a million home owners
discovered the meaning of negative equity.
If the much talked about green shoots were not weeds, it would be a long time
before the good times returned, if ever. Those who had lost their jobs and were
struggling to pay their monthly mortgages payments would have a long wait before
they could benefit from the harvest, if there was one.
The jobless were a new kind of poor, who, encouraged by Tony Blair and the
mirage of Cool Britannia, had embarked on a foolhardy binge of borrowing and
spending in the years prior to the credit crunch; it was they who would pay the
price. They were the victims of more than a decade of New Labour’s easy money
policies that had encouraged lending, invented new forms of credit and reduced
interest rates to levels not seen in half a century.
Blair & Company had been the advocates of the flawed system, which was to
blame for Britain’s greatest post-war economic crisis, and would certainly pay the
44
price for their unreserved support of the neo-liberal economy they had spawned.
Together Blair and Brown carried the responsibility, though Blair had adroitly left
his cohort holding the baby before the effects of his defective governance were
exposed. Brown, cursed by a fuming electorate, was left to carry the can. The
luckless Prime Minister was castigated by the very same media that had so long
pandered to City bankers and property developers, encouraging Britons to heed the
reckless exhortations of their leaders, to get rich regardless of the risks.
It was mid-morning when Barton, driving a rented Mercedes coupé, headed
eastwards along the winding corniche in the direction of Monaco. It was Sunday
and the traffic was light allowing them to pause and admire the spectacular views
of the Mediterranean coast. Everything was perfect, it was spring-like, warm and
not a cloud on the horizon, as Sophie chatted excitedly about their invitation to
meet the famous oligarch. An hour later they drove into the small rich Principality
where they were expected aboard the Cleopatra, Tarasov’s legendary yacht,
anchored off the quai des Etats-Unis, for lunch and cocktails in the company of the
oligarch’s influential friends.
They parked the car on the quai and headed towards the yacht. Sophie looked
stunning, in a white off the shoulder dress, her blonde hair adorning her lightly
tanned shoulders. Barton marvelled at how she managed to keep her form,
something due to her genes, he thought. She was naturally slim and there was of
course her French mother’s tradition of healthy eating; a light breakfast, a wellbalanced lunch and dinner with no snacks in between.
They were warmly welcomed aboard by Tarasov in person, who gallantly greeted
Sophie with a baise-main and complimented her on her beauty. They then joined a
very relaxed Steve Howard sipping Champagne on the forward deck to admire the
magnificent view of the Principality and its royal palace perched on the hill facing
the harbour.
Few would have thought they were in the middle of one of the most serious
economic crisis since the end of WWII. Champagne flowed and caviar was
spooned from large crystal bowls, served by impeccably uniformed waiters.
Tarasov was optimistic; as far as he was concerned it was the moment to make a
killing, though not all present, many believing the worse was still to come, would
have agreed with him.
Barton was not surprised to see Michael Fitzwilliams who greeted him warmly.
‘Tom, nice to see you, how’s Dominica?
‘Fine, I taking a little time to visit France with Sophie,’ he said introducing her to
the admiring banker in French.
‘I didn’t know you could speak French Tom.’
‘It’s far from perfect, but I’m making progress thanks to Sophie.’
‘So I gather you’re French,’ said Fitzwilliams turning to Sophie.
‘Half French, the other half is English.’
‘Ah, that’s an interesting combination.’
45
‘My father is English, an architect in London.’
‘Perhaps I’ve met him?’
‘Emerson and partners.’
‘Ah yes, they designed the Dubai Bank building.’
‘Yes, that’s right, Michael Emerson is my father.’
Fitzwilliams noted that Barton was close to Howard and was appreciated by
Tarasov, men of a different metal to many of those he knew in the conventional
banking world. They had the kind of qualities that could serve the plan that was
slowly taking form in his mind.
The next morning back in Cannes, Barton left Sophie to do a little tourism whilst
he headed off for the closing day of the MIPIM conference. After half listening to a
sobering debate, Barton found himself talking to a voluble Harvard professor of
economics, apparently an acquaintance of Steve Howard’s.
‘Is the worse of the sub-prime crisis over? Maybe. But there’s a lot of other
problems out there.’
‘Like what?’
‘Well for one Alt-A mortgages,’ said the professor lecturing to his attentive
listeners.
‘Alt-A mortgages?’
‘Alternative A-paper, it’s a US mortgage, riskier than A-paper, that’s to say
prime, but not as risky as sub-prime.
‘Tell us the bad news professor,’ Barton asked wondering if he wanted to hear it.
‘Call me Ed. This kind of mortgage required less documentation than a full
mortgage, so they were riskier. Home buyers didn’t need proof of income or have a
good credit record. Basically they’re adjustable-rate mortgages’
‘Sounds like sub-prime to me.’
‘Not quite. If an applicant couldn’t prove his income, or had a high debt-income
ratio, it was easier for him to obtain an Alt-A mortgage than a conventional
mortgage.’
‘Because less documentation was required.’
‘Right.’
‘I see, it still sound like a sub-prime to me.’
‘Not so, we’d call these near-prime or mid-prime, most Atl-As are held by middle
class home owners.’
‘So it means they could declare higher than real incomes to qualify for a bigger
loan.’
‘Exactly, and which they may not have been able to afford.’
‘So what’s happening?’
‘Well there’s a serious risk of massive default because unemployment is
beginning to hit the middle classes. The sub-prime crisis was caused by higher
interest rates, but its rising unemployment that’s threatening Atl-A mortgage
holders.’
46
‘What’s the scale?’
‘Six hundred billion ― the same as sub-prime.’
‘Christ how do we get out,’ Barton said with a laugh.
‘In the past Alt-A losses were around one percent, but this figure has shot up to
twenty percent now.’
‘Jesus,’ murmured one of his listeners.
‘You said it.’
Barton thought back to Tarasov’s optimism and wondered if he had got it all
wrong.
‘That means all those banks are going to have another round of losses.’
‘And this time around there’s no more money in the kitty to bail them out.’
‘Right again.’
‘So we’d better buy gold!’
The idea of buying gold was not lost on Barton and he made a mental note to call
his ETF bullion manager.
Bryant was one of the leading US economists, an eccentric thought Barton, real
or feigned, judging by his mop of white hair and the rather worn tweed jacket. The
professor waved his hands to emphasise his point; dangerous considering he held
an almost full glass of Champagne in one and a half eaten smoked salmon
sandwich in the other.
‘So what do the banks do?’
‘They’d lay people off, less jobs. A vicious circle that has to be broken by
government help or something else.’
‘Something else?’
‘Traditionally exports.’
‘That’s a bit difficult considering almost every other country is in about the same
position.’
‘Correct. So since exports can’t be boosted, the only solution is government
intervention, or in simply terms bailouts.’
‘And where do they get the money for bailouts?’
‘They can tax you for it, borrow it, or print it!’
‘So they’ll borrow or print all those billions they’ve already promised.’
‘Dead right,’ he said smiling broadly pleased that his new pupil had got the
lesson. ‘In current jargon this is called quantitive easing, that is pouring money into
a cash-strapped banking system.’
‘Won’t that be a long term problem?’
‘You bet! A huge raft of debt!
Barton was not overly impressed by the American, economists of his sort had
proven themselves to be very wrong in the recent past and were now overstating
the situation, already bad, in their about turn.