Ammunition for the Coming Currency Turmoil
In late August 1992, in Boston’s financial district.
The air was hot and damp, the asphalt already blazing with stored heat.
Somebody had quietly turned a valve on a fire hydrant by the curb, and water was gushing out in a bright spray while three or four children in shorts ran laughing through the stream.
From the outdoor air-conditioning units jutting out of every building, blasts of hot air spilled downward, and the heat slapped the faces of people walking the sidewalks.
The melody drifting out of an ice cream truck announced summer in America.
The heat pushed through the massive revolving doors of the major bank and flooded even the lobby.
Even with the central air-conditioning units humming from the ceiling, they were no match for the warmth gathering around the teller counters.
The waiting area in front of the windows was twice as crowded as usual.
Ordinary customers sat shoulder to shoulder on the benches, their faces tired as they glared at their numbered slips.
Half of them were waiting for loan screenings, and the other half were people who had already been rejected and were waiting to be screened again.
“No, but it was renewed without any problem until last year! How can this happen overnight...!”
“There’s nothing we can do. You’ll have to accept a higher interest rate, or else repay it.”
Another ordinary customer collapsed in defeat at the counter.
America in 1992 was in the middle of a credit crunch.
As the real-estate bubble that had surged through the late 1980s burst, countless loans turned into bad debt.
Banks had become extremely reluctant to issue new credit.
With money being loaned out and never returned in wave after wave, the threshold to the bank had never been higher.
“Next! Customer number 145!”
The teller’s shout rang out, followed by the rasping chatter of the dot-matrix printer spitting out slips.
Jason, a rookie bank employee three months into the job, loosened his necktie knot a little.
Ugh. Am I coming down with something?
The sandwich he had wolfed down at lunch still felt like a heavy lump somewhere in his stomach.
“There are so many people today.”
He had stepped into the restroom for a moment to wash his hands and was on his way back through the lobby when—
“Huh?”
Jason spotted someone in the corridor some distance away from the restroom.
Loose cotton pants, a plain white T-shirt with no logo at all, and canvas shoes worn so thin the soles were fraying apart.
A youthful-looking Asian man was striding down the hallway.
He looked exactly like a poor international student from a nearby university, so Jason hurried over and cut him off.
“Hold on a second, sir. Are you lost? The only things at the end of this corridor are the branch manager’s office and the VIP lounge.”
“Hm? And?”
“I mean, this area is restricted to staff and invited guests. For ordinary business, please take a number and wait.”
Jason spoke as politely as he could, but with an unmistakably firm tone.
Lately, there had been a surge of these troublesome young foreigners.
International students throwing tantrums because their tuition loans had been denied, or demanding to see the branch manager because their remittances back home had been blocked.
Jason assumed this Asian youth belonged to the same category.
“Now, please turn around. Go take a number from the machine over there and wait.”
He pointed toward the ticket dispenser near the entrance.
The young man gave Jason’s name tag a quick glance, then nodded without protest.
“Understood.”
He obediently walked toward the machine.
Jason let out a relieved breath and returned to his desk.
At least he understood me. Good. That last Indian student kept shouting for ages.
Before long, the young man settled into a stiff plastic chair in the corner and took a copy of Time from the magazine rack, beginning to read.
Only then did Jason stop paying attention to him and go back to sorting a stack of deposit and withdrawal slips.
About thirty minutes passed like that.
...Bang!
The heavy door deeper in the corridor flew open, and Mr. Meyer, the branch manager, burst out with his belly straining against his suit.
His face was set hard, and sweat beaded on his forehead.
The branch manager wiped the back of his neck again and again with a handkerchief as he scanned the lobby.
“Jason! Jane! Carl! Parker! Anyone! Did anybody see the front entrance!?”
At the shout, the tellers and customers all lifted their heads at once.
Branch Manager Meyer paced back and forth between the corridor and the lobby, beside himself.
The usual easygoing air was nowhere to be seen.
He gathered the staff close and continued in a low voice so the customers wouldn’t hear, but with a thick accent that made every word sound heavy.
“I have a meeting scheduled for 2:30 today, with Mister Lee! That one! The customer headquarters told us to handle personally! A man with more than ninety million dollars in collateral value! And it’s already past three!”
Jason stood up awkwardly from his seat.
“B-branch manager. Has the appointment not arrived yet?”
“That’s right! He was supposed to come at 2:30, but he hasn’t shown up! I’m worried sick something may have happened to him!”
That was when it happened.
From the corner, the Asian youth, who had been sitting in a plastic chair and turning pages in his magazine, slowly lifted his head.
He gave the crumpled paper ticket in his hand a light wave.
“I’m here.”
For a moment, silence fell over the lobby.
“......”
“......”
“......”
Branch Manager Meyer’s head turned toward him with the stiffness of a broken machine.
Then, once he confirmed the face, his eyes flew wide enough to split.
He lurched as if the strength had gone out of his legs, then hurried over and stopped in front of the young man.
“M-Mister Lee! Oh, Mr. Lee! Where have you been!?”
The moment Jason heard that, he felt his mind go hollow.
The poor international student he had just sent away to take a number was, in fact, the VIP the branch manager had been desperately searching for.
* * *
Soft classical music drifted through the branch manager’s office.
After I sat down on the leather sofa, a freshly brewed cup of coffee was placed in front of me.
Across from me sat Branch Manager Meyer, sweating profusely.
“I’m terribly sorry, sir. Our new employee had no eye for faces... I’ll have him retrained immediately.”
“It’s fine. Don’t worry about it too much. More importantly, I’d like to get straight to the point.”
Today’s business counterpart was Whale Bank.
The Harvard alumni network was the best platform for investment management and networking, but it didn’t provide loans secured against hard assets like gold bars or crude oil.
So I had built out my collateralized credit lines across commercial banks.
One each in Boston, New York, and Texas.
This Whale Bank was one of the three.
If the HAA was the shield for my connections and credit, then the commercial banks were the window through which my cash liquidity would flow.
“I’ll repay the full forty-five million dollars in loans coming due this month.”
“Huh!?”
As soon as the words left my mouth, Branch Manager Meyer’s face went the color of dirt.
That was not the sort of reaction you normally showed to someone saying they would pay you back.
“M-mister Lee! Why? Is there something wrong with our service? Why would you suddenly want to repay the loan... We can extend it as much as you like...”
“No. I just have plenty of cash flow, and there’s no reason to borrow money and pay interest when I don’t need to. I’d rather clear it all out cleanly.”
“Mister Lee, please, reconsider just once more!”
The branch manager pleaded desperately.
What a strange sight it was: the man who had lent money begging the borrower not to repay it.
But the reason for this upside-down picture was obvious.
As of 1992, American banks were suffering severe aftereffects from the credit crunch.
When the property bubble burst, countless loans turned into bad debt, and banks’ asset quality was scraping the bottom.
In that situation, my loan was no different from a golden goose to the bank.
Gold bars and crude oil.
There were hard assets secured against it, and the value of those assets was rising in real time.
The current market value of the gold bars and oil futures I had pledged as collateral was enormous.
Fifteen thousand ounces of gold at $343 an ounce. That alone came to $5.145 million.
On top of that, an oil futures position valued at $86 million.
The total collateral value exceeded $91 million.
That was 202 percent of the original $45 million loan, which meant the bank had handed out a relatively small amount of money while taking in assets of immense value as security.
By keeping my loan on its books, the bank could defend its BIS capital ratio and flaunt to shareholders that it held high-quality assets.
The BIS ratio was the figure obtained by dividing a bank’s capital by its risk-weighted assets. In simple terms, it was the indicator of how safe a bank was.
If I repaid the money and took back the gold and oil held as collateral, Whale Bank’s performance would fall off a cliff.
I shrugged.
“Well, I’ve got the feeling I’m getting fleeced a bit, with expensive goods mortgaged at a bargain and interest on top of that at six percent...”
“It’s not six percent, it’s 5.75 percent...”
“Same difference. In any case, I’ll be repaying the full amount, so please understand it that way.”
The branch manager’s face grew even paler.
“T-then I’ll lower the interest rate even further!”
I toyed lazily with my teacup, wearing a deliberately indifferent expression.
“Let’s see. Chase Manhattan contacted me. They said if I moved the collateral, they’d do 2.5 percent.”
“Two point five percent!?”
The branch manager flinched and blurted it out.
“That’s... that’s almost the same as our funding cost.”
“Exactly why I’m considering it. It’s a hassle to move, too. But from my side, there’s no real reason I have to stick with Whale Bank.”
“W-wait just a minute!”
The branch manager sprang up and ran to the telephone in the corner.
He called the credit officer at headquarters, shouted at him, begged him, and then shouted again.
“What? No? You’re saying no to a client with forty-five million dollars on the line? With more than ninety million dollars in collateral!? A 202 percent coverage ratio! Make it happen if it won’t happen, you bastard!”
From the other end of the line, I could hear someone answering back.
The branch manager hung up, then called someone else immediately.
“Deputy Manager? This is Meyer. I’ve got an urgent matter right now. Please connect me directly to the headquarters credit committee...”
Ten minutes later, he lifted his sweat-soaked face.
“Chairman! I’ve received special approval from headquarters!”
The branch manager said, thrusting the paperwork toward me.
“Annual rate, 2.3 percent. Fixed, no changes!”
2.3 percent.
I nodded.
At the time, the U.S. base rate was in the three percent range, and commercial loan rates were running between six and seven percent.
At 2.3 percent, this was an inverted-margin loan, cheaper than the bank’s own cost of funds, meaning the bank was essentially losing money to lend.
Of course, from the bank’s point of view, it was not a losing proposition.
By booking gold and crude oil, top-tier collateral, it gained a reversal effect on loan-loss provisions, a dramatic improvement in its BIS capital ratio, and the calming effect that had on customers, all of which far outweighed the interest income.
High-quality assets with solid collateral like my loan were assigned low risk weights, so they were extremely useful in raising a bank’s BIS ratio.
That was the picture I was after.
I used the bank as a free vault to store my gold and oil, then, by having the collateral value recognized, I drew out cash worth nearly 90 percent of market value at almost no cost in interest.
If I put leverage on that cash and ran with it, I could earn returns of several times, dozens of times, thousands of times, even tens of thousands of times over, and by then the borrowed principal would be pocket change.
In the end, I could secure enormous cash without selling my gold and oil for a pittance, then invest that money again and produce even more gold and oil.
The ultimate form of leverage.
It wasn’t the bank using my money. I was the one using the bank.
The branch manager wiped his forehead with a handkerchief and looked at me with pitiful eyes.
“We’ll of course waive the prepayment penalty, and we’ll increase your credit line to ninety percent of collateral value. W-would that be acceptable?”
“...You’ve gone to so much trouble on my behalf, I can’t very well refuse. I’ll extend the loan for one more year.”
“Thank you! Thank you, Mister Lee! I’ll prepare the paperwork immediately!”
Everyone else had to beg for extensions even when interest rates rose, but here the situation was the exact opposite.
The branch manager bowed over and over as though he had just been pulled back from death, then hurried out of the office.
I sat on the sofa and sank into thought.
Thanks to the increased credit limit, I’d be able to move even more cash around.
If I could borrow up to 90 percent of the collateral value, then 90 percent of $91 million meant I could draw roughly $82 million in loans.
As gold prices and oil prices rose, the money I could use would also grow in real time.
...Now then. Maybe I should shake up England with this.
What I was aiming at was the currency crisis that would hit in mid-September 1992.
What I had told Grace about earning a knighthood wasn’t entirely a joke.