Friday, September 9, 2011

Balancing the Book

Balancing the Book
Bobby Derie

Jim stood out in the hall, holding the box with his laptop and few personal possessions from his desk, and waited for his turn to be fired. Inside, Old Man Detwiller was talking to someone. They made a pair: Detwiller carried his years well, hair silver-white, clean and immaculate, in a bespoke suit with real gold ornaments at cuff, wrist, and collar; his opposite weathered and shrunken with age, his suit hanging off him like the half-molted skin of a reptile, a single blue gem stuck in his left ear. Jim couldn’t hear what they were saying, but could parse it. Money talk of some sort, of course, but it didn’t sound good.

“How much are we over?” Detwiller asked.

“Five million, if the Greeks don’t get us.” the lizard answered.

“Can we change the spread?”

“There’s twenty-five million quid in already, Harry.” Jim had never heard anyone call the Old Man by his first name. “You change the spread, at the very least it’s a pull-out, and then the punters’ll be dicey, and that’ll kill it. No, we can’t change the spread.”

“Then you had better find the five million, Martin.”

“Might could, if I had a bit of help.”

“Right. James! Get in here.”

Jim slipped into Old Man Detwiller’s office like a schoolboy sent to the head office. He stood half a head taller than the shrunken old man, and broader at the shoulders than Detwiller, but both of them had age and authority on him. The lizard barely glanced in Jim’s direction.

“James here has a penchant for gambling, which has gotten him into a bit of financial difficulty.” Detwiller explained. “We were willing to overlook it until it began to affect his work.”

“Is that so then?” the lizard said, turning now to get a better look at Jim. The old man appraised him like an untried racehorse. “How’s that, then? What’d he do?”

“He operated a betting pool among the younger members of the firm, on whether a certain weekly index would rise or fall. Unfortunately, he lost too much at the racetrack last week, when a falling index unexpectedly rallied. He had to come to me for an advance on his pay to cover it.”

The lizard snorted. “Amateur mistake. Good lesson to be learned, if it doesn’t happen twice.” The lizard appeared to consider, and it dawned on Jim that he might not be fired. “Alright, I’ll take him. We’ve got a week left. We can maybe do four million in a week, between the two of us, if he works fast. I still think we should have some insurance, though.”

“I don’t want to over-leverage ourselves. I’ll authorize half a million cash for losses—anything beyond that, and it’s your commission and your paycheck.”

“Right you are, Harry.” The lizard bobbed his head and moved to leave, motioning Jim to follow. They descended through a spiraling back stairwell, until the modern fa├žade gave way to brick and mortar covered with gritty white paint, wires and pipes bolted along the walls to a small wooden door marked by a sign: DERIVATIVES. The lizard waved a card at it, and some internal mechanism cachunked; the door opened to reveal a small, tidy two-room office that might have been originally been a janitorial storage unit. The lizard seated himself behind a desk older than Jim was, and waved a hand at a red velvet chair that looked like a refugee from a Chinese whore house.

“James, was it?”

“Jim, sir.”

“Marty. Call me Marty. Welcome to Derivatives, Jim. We operate a little different from how you expect, and we’ve got a hard deadline or its our asses and Harry’ll be driving the lawnmower. So: tell me what you know about derivatives.”

Jim set his crap down at his feet and cleared his throat.

“Basically, a contract to buy a certain commodity at a certain time at a certain price. If you’re lucky, you buy a lot of something at below market value, then can turn it around and make a good return. If you’re not lucky, you’ve agreed to buy something for more than it’s currently worth, and make a loss. The name comes because the value of the contract is derived from that of the commodity.”

“Good enough. The thing to remember is that a derivative is a kind of bet, see? And you know bets, or so Harry said upstairs. The thing about gambling is, if you want to guarantee making money on a bet, you have to run the game. So what we do down here is make books.”

Marty reached down and picked up a ledger from somewhere Jim couldn’t see, and laid it out before him: neat piles of numbers ran down both sides of the page, in blue and green ink.

“Now, this is an old-school book. Nowadays I’ve got me spreadsheets, but it’s the same thing. This book was for gold, then offered people to buy in, here.” A crooked nail-bitten finger indicated the column in blue ink. “And we had people that wanted to short gold, here.” The finger crawled across the page to the column in green ink. Jim’s forehead crinkled.

“So we were betting for the price of gold to rise and fall at the same time?”

“No son. The punters are doing the betting. What we’re doing is taking the vigorish—a commission on the monies at stake. No matter which way the price goes, we get our cut. But d’you notice something about this book? Study it hard for a moment.”

Jim ran his eyes over the columns of figures, then compared the totals.

“You’ve got as many customers wanting to buy gold as want to short sale gold.”

“Almost son. The profit and loss would be the same. See, let’s say that the price of gold is £400 an ounce.” The lizard dragged out a piece of scratch paper with a crude drawing of a penis on it and wrote ‘£400.’

“Now, for the short sellers we borrow the gold and sell it for them at that price, and the derivatives agree to buy it at that price. Then, when the term comes up, we buy for the short sellers and the derivatives, take our cut, and pass along the money. However much the derivatives make, the short sellers lose, and vicey-versa. It doesn’t matter to us if the price of gold goes up or down. We’ll buy and sell what we’re committed to, and use the punter’s money to do it.”

The lizard scratched out a few more numbers and showed them to Jim:

£390                                        £400                                        £410
+£10/-£10                                0/0                                           -£10/+£10

“See? The short sellers are on the left, and the derivatives are on the right. Both are buying originally at £400, and selling at the market price. If gold goes down, the shorters make money and the derivatives lose; if gold goes up, the derivatives make money and the shorters lose—but they all lose the same amount of money. So we don’t have to cover anyone, we just need to make the books balanced and they’ll cover themselves. Either way, we get our vigorish—the commission for the transactions.”

The lizard leaned back and stared at the ceiling. “Well, that’s the simple form of it, anyway. Something like this, our firm buys the gold, and then we’re buying and selling it from ourselves at market prices on behalf of the customer…the punters never see the gold, see, they just look at the prices and the money that comes into their account, and we take care of all the details. They never see any of that, most of ‘em aren’t even interested.”

“So that conversation you were having with Mr. Detwiller…” Jim said, and the Lizard dropped his eyes down to the desk and glowered.

“Aye. I made a book—barrel of oil prices—but everybody thinks the price is going up. We’ve got fifteen million quid that wants to buy, and only ten million quid worth of short-sellers. We need to balance the book, or the firm is on the line to pay out if things go the wrong way.”

Jim sat quiet for a few minutes. The lizard looked down again at the book. “I used to know a few angels that trusted my judgment, but none of ‘em will put up the whole five million, not without a hedge. Insurance or summat.”

“You don’t need insurance…” Jim said slowly “…you need to find someone else that’s doing short sales on oil and buy the contracts off them.”

The lizard pricked up his bushy eyebrows.

“Look, it’s like the bookies down at the track. If they can’t get enough marks to bet on either side of a dog, they’ll buy bets off of the other bookies. We don’t need to go fishing in a dry lake for someone who thinks oil prices are going to drop—we need to find someone with a bunch of short-sale contracts who thinks oil is going to go up. We buy up the difference and then your book is balanced.” Jim finished.

The lizard cracked a smile, revealing very small, even teeth.

“Oh son. You’ll go far in this business. Let’s make some calls.”


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