The answer was synthetic CDOs. Through the use of credit derivatives, these could imitate the operations of conventional collateralised debt obligations without requiring us to make public what we were doing. Synthetic CDOs were a favourite weapon in Lionel’s armoury, and he had refined them to an exquisite degree. He became quite evangelical as we discussed the intimate details of how it should be done, the array of subordinated and senior mezzanine tranches, the choice of first-loss investor, the ramp-ups and replenishments in the collateral pool. All very exciting, the more so for being clandestine and potentially dangerous.
There was a snag. It was referred to as a moral hazard problem, a term we liked, I think, because it made us sound like philosophers or priests, rather than loan sharks. The moral hazard problem lay in the fact that, since our dealings were not public and transparent, the CDO investors onto whom we were passing some of the Sunderland loans would only know as much about the risk involved as we were prepared to tell them. The riskier they thought the loan, the more they would charge us for it and the more our profit on the whole deal would be eroded, so there was a temptation for us to massage the information a little. Of course, if things went wrong and our secondary lenders suspected us of hiding the true risk, then BBK’s name would stink. To Lionel, this, like all moral problems, was just another risk management issue. It was clearly important that the board of BBK in general, and Sir George Henderson-the director charged with oversight of the RMU-in particular, be shielded from some of the trickier details so that, if worst came to worst, they could honestly deny all knowledge of any moral hedging. This, of course, is a risk management technique perfected by our political leaders in recent years.
For a while things went very well in Venezuela, so much so that BBK offered Sunderland further and larger loans, quietly offsetting them with more synthetic CDOs. Then one spring day, four years after I had answered that fateful email from Gary McCall urging me to come to London, things went abruptly wrong in Venezuela. It was a political rather than an engineering problem, but its financial consequences were just as devastating. Sunderland Petchem, massively overstretched, collapsed, and BBK was faced with huge unpaid debts, which it promptly passed on to a cascading series of CDO investors. As the Sunderland story became public, its history painstakingly revealed by investigative reporters, the investors became more and more belligerent and the BBK Board increasingly defensive. There were whispers of legal action, fraud and criminal charges.
Once again, Lionel recognised this as a risk management problem, the logic of which he explained to Gary and myself over a rather tense lunch at an excellent little restaurant overlooking the river. The bank was wounded, Lionel explained, and surgery would have to be performed before gangrene set in. There were really only two options. Option one entailed the removal of the whole RMU, including its board supervisor. Criminal charges would be brought against Lionel, Gary and myself, and very possibly Sir George. There would be a nasty public trial in which, to demonstrate the bank’s innocence and resolve, our names would be dragged through the mud before we were given exemplary prison terms. Option two was the discreet route. It would be quietly explained to the secondary lenders that the bank would cover their losses after the discovery that two of its staff (reckless antipodean colonials, naturally) had bypassed internal controls and procedures.
The board was in a bloodthirsty mood, Lionel explained, and currently favoured option one. But he had carried out a very detailed worst-case scenario analysis calculating all the possible eventualities of both courses of action, and he was confident that cooler heads could persuade board members to go for option two. That, of course, would depend on Gary and myself making a full confession of sole responsibility for the debacle, making token reparations to the bank (basically everything we owned), signing a binding confidentiality agreement, and returning to the far side of the world, never to be seen again.
But what would happen to you, Lionel, we asked, and Sir George? Solemnly, and without a hint of shame, he explained the irresistible logic by which it would be necessary for the bank to demonstrate the limited nature of the breach by rewarding those who had isolated it.
We really had no choice. Within a couple of weeks Gary and I were boarding a plane at Heathrow, all risks neatly managed, moral hazards expunged.
‘So you didn’t even make any money out of it?’ Anna said.
‘That’s right. Then on the plane, just before we reached Bangkok, Gary mentioned that Lionel had been screwing my girlfriend all along. He thought I must have known.’
Anna said nothing for a while, then murmured, ‘Yes, I don’t really think you were cut out for risk management.’
In the fading light I watched small gulls hurled backwards through the air in front of us by the force of the wind.
21
About the only thing that could be said for our ledge was that it was free of centipedes, probably because it was too inhospitable even for them. Soaked through and frozen, I passed the night in a semi-comatose state in which hellish winds swept in and out of nightmares steeped in guilt.
Just before dawn I jerked awake with the certain knowledge that Anna had died during the night. I felt for her hand and it was stone cold. I thought, oh, so this is the end. I didn’t want to try to go on without her, and I was filled with the same sense of calm I’d experienced when I realised I was going to fall on Frenchmans Cap and nothing could be done. I didn’t feel afraid. I reached for the clip attaching our rope to the anchors. My fingers were clumsy with cold as I worked to release it so we would plunge down into the ocean, as Luce had surely done.
Then the corpse stirred and mumbled something about scrambled eggs. I had actually just managed to unfasten the clip, and any movement would have sent us slithering over the edge. I refastened it quickly, and we clung together as the first glimmer of light grew in the sky.
With dawn we untangled ourselves and speculated about raiding seabird nests, but the thought of a raw gull’s egg was only marginally more appealing than that of a raw gull. While I was groping around in my pack to see if there was one last cracker hiding in the lining, I came upon Luce’s chalk bag. I had a look inside, but all I found was the remains of a large black insect curled in the chalk dust. It didn’t look edible.
The important thing, Anna said, was to get back down to the southern tip of the Pyramid, where we might hope to attract the attention of a passing boat. And surely, we agreed, they would have to send out boats today. We said this forcibly, to cover up the fact that there was no reason why anyone should think to look for us out here. So when the rain died away we unhooked ourselves and stretched our aching limbs, and started abseiling and traversing down the cliffs in short, cautious stages.
In the late morning, as we reached Winklestein’s Steeple, the weather closed in again and we were forced to take shelter in the centipede cave. This time we weren’t in a mood for compromise, and swept and beat the little bastards back to the deepest recess. The weather was so foul and the visibility so limited that we could see no signs of a rescue boat out on the stormy water. Later, when the rain eased a little, we continued further down the ridge until we found a sheltered ledge free of wildlife. Then the rain began to pour down again and we tied ourselves in for our third night on the Pyramid.