[New York, USA – 10:27 AM, 27th of October, 1928]
There was something almost nauseating about how willing men were to bend over backwards when you had enough money. That was the thought going through my head as J. P. Morgan Jr shook my hand rather vigorously and led me into his office.
He was a serious-looking man, considerably more reserved than the caricature of a banker I had built up in my head before meeting him. Then again, I had done business with him often enough by this point that the novelty had worn off. Money tended to make introductions remarkably easy. It also helped that I had, quite unintentionally, become one of the more lucrative clients the firm had.
Morgan gestured toward a chair and settled behind his desk. "What brings you in today? We weren't expecting you until tomorrow."
"I figured I might as well break the news to you now," I said solemnly, sitting down. "And I genuinely am sorry about this."
His expression changed slightly. "That sounds ominous."
"It is." I replied curtly, leaning back as I folded my hands across my lap. "I've been looking at the fundamentals of the American economy, and I want to change the way we're handling my American investments."
Morgan didn't interrupt, so I continued, "I want the existing portfolio liquidated."
There was a pause before he repeated, "Liquidated?"
"Gradually, of course. I'm not asking you to dump everything onto the market tomorrow morning and cause a panic. I want the positions unwound without unnecessarily advertising what we're doing." I answered.
Morgan's fingers came together on the desk. "May I ask why?"
"Because I think the market has become detached from reality." That statement got a slightly longer pause.
"You're aware," he said carefully, "that you've made an extraordinary amount of money precisely because of the strength of the American market."
My answer was but a nod.
He studied me for several seconds before speaking. "You understand that if you're wrong, the opportunity cost could be enormous."
"Oh, absolutely," I replied emphatically.
"You could lose a considerable amount of potential wealth…" Morgan leaned back slightly. "Why though?"
"Because if you thought you saw a chance to more than triple your fortune, wouldn't you take it? Especially since most of my important assets won't even be at risk." At my statement he didn't look amused.
I continued before he could object. "Most of my wealth isn't actually going anywhere. The factories, properties, patents, companies and other long-term holdings remain exactly where they are. I'm not liquidating my life. I'm liquidating my exposure to the American stock market."
Morgan nodded slowly at my remark before asking. "And what do you intend to do with the money?"
"First, I want the existing leveraged positions closed." I answered.
His eyes narrowed slightly. "How much leverage?"
"Roughly three to one on some of the positions."
"And you're intending to repay that before liquidation?"
"Exactly. While I understand the market is still going to go up, I don't want to be sitting on a pile of apparently valuable shares while simultaneously owing someone else money against them in the event the market faces a downturn. Sell the assets and clear the leverage. I only want to keep about half of my liquid assets over here. "
He nodded once. "And how much capital are you intending to retain in the United States?"
"Approximately forty million dollars for what I'm planning next." I replied.
Morgan's expression changed again. "You intend to speculate with the money you're taking out?"
I reached into my coat and placed the prepared figures on his desk and waited a moment as he perused them before I began explaining what I wanted: "I'm going to keep ten million on speculation of the continued boom and roughly thirty million dollars toward positions that profit if the American market falls. I know you are already considering shorting a few overvalued companies, so I want your people to identify the companies and sectors where valuations are most detached from underlying fundamentals, then construct the appropriate positions."
"Short selling or put options?" he asked, sounding genuinely curious.
I replied, "Whichever would be more prudent."
Morgan glanced at the figures before looking out the window for a second, contemplating the math. "And if the available options are insufficient?"
"Negotiate them with other financial houses. We're not taking out individual options; the scale should be large enough that they are willing to make bespoke arrangements."
The times of speculative microseconds trades and mass production calls were still decades away; stocks were still traded by hand, and options were limited and mostly negotiated on the fly.
He looked up at me as if to say something but stopped himself.
"I know you don't have a magic button labelled 'bet against America,'" I said. "I'm asking you to construct the closest approximation that the market will permit."
Morgan tapped one finger against the paper. "Thirty million dollars is a considerable amount of capital."
"I know," I said, nodding.
He then said in an even more sceptical tone. "And you understand that if the market continues upward, you could lose a very substantial portion of it."
"There is another consideration," he said. "The firms taking the other side of these transactions may want assurances that you can meet your obligations."
"I have the cash," I answered.
"Cash can disappear rather quickly when markets move violently." He retorted.
I then gave him the solution: "Then use the Chinese bond."
That made him stop. "The Chinese bond?"
"Yes. The fifty-million-pound government bond."
Morgan stared at me for a moment before I spoke.
"I am not selling it," I clarified. "I'm not even particularly interested in touching it. I want it available as collateral."
"You believe a Chinese government bond is sufficiently liquid for this purpose?" He said sceptically.
"Not at its face value. But the bond is worth roughly fifty million pounds on paper, and I understand that a bank would probably only advance something like thirty-five million against it, but that is by far more than enough breathing room."
He seemed to consider that.
"In the event of a catastrophic market movement," I continued, "if something completely ridiculous happens overnight and the market somehow doubles or moves violently against my positions, you can use the bond as backup collateral. I don't expect that to happen. Frankly, I'd be rather impressed if the market managed to become that stupid."
Morgan looked at the figures again before speaking, "So your intention is to use thirty million dollars of liquid capital for the downside positions while maintaining the Chinese bond as emergency collateral."
"Exactly," I said.
He then asked, "And you're confident you won't need it?"
"No," I replied confidently.
That earned me a look.
"I'm confident I probably won't need it," I corrected. "There's a difference."
Morgan nodded slowly. "There is."
"I want enough liquidity that a temporary disaster doesn't force us to unwind perfectly good positions at precisely the wrong moment. The bond gives us that room."
"And the forty million you're transferring to London?"
"Separate from all of this. That's going back into my British reserves. I want more of my immediately accessible wealth outside the United States."
Morgan was silent for a few moments.
"You really are serious about this."
"Unfortunately."
He leaned back in his chair.
"Mr Sullivan, you do realise that if we execute this strategy and the market continues climbing, your portfolio will not just significantly underperform what it otherwise might have," he stated.
"I do," I replied, somewhat amused now.
He seemed somewhat desperate now. "And if the market climbs substantially, your downside positions could become extremely expensive to maintain."
I simply didn't answer him for a few seconds as I looked at him confidently before he sighed and said under his breathe, "Very well."
I smiled slightly.
"But", he continued, raising a finger, "I want our people to review the exact structure before anything is executed. I am not going to allow thirty million dollars to be thrown into speculative positions simply because you have developed a sudden dislike of optimism."
I nodded toward the papers. "And there's one more thing."
Morgan looked almost apprehensive now, so I continued, "If you don't think this is profitable for the firm under our current arrangement, change the arrangement."
"Our current arrangement?" He seemed confused for a moment.
I then replied, "The five per cent of profits."
Morgan's expression became thoughtful before he said. "You've made a considerable amount of money under that arrangement."
"You've made a considerable amount of money under it too." I replied, to which he nodded before I continued, "But if I'm deliberately reducing the size of the portfolio and moving a large portion of the capital elsewhere, I understand that five per cent of profits may no longer compensate you for the resources you're putting into managing my affairs."
Morgan nodded before suggesting, "We could move to a conventional fee structure."
"Then do that," I said.
He seemed genuinely curious again. "You're not opposed?"
"Why would I be?" I replied.
He then answered, "It would almost certainly cost you more in most circumstances."
"Then charge me a fair rate," I stated.
Morgan gave me a faint smile and said. "That is refreshing."
"No, it isn't," I said flatly. "I'm just insane. Everyone keeps calling me that, so I've embraced it."
For the first time since I'd entered the room, Morgan laughed.
"Very well, Mr Sullivan." He then stood and extended his hand. "We'll see what we can do."
I shook it.
That sentence had cost me approximately thirty million dollars to arrange; another forty million was about to cross the Atlantic, and I'd just handed one of the most powerful banking houses in the world a hundred-million-pound government bond as an emergency safety net.
A part of me was mildly concerned the butterfly effect would change the time the crash happened; let's hope not.