London was booming. Suddenly, almost unannounced the good times were back, almost six years after the fatal bank run at Northern Rock, and the collapse of Mercian Finance, another important mortgage lender. Those events were since recognised as having been the precursors of the most severe economic crisis the world had experienced since the thirties, a crisis that economists were calling The Great Recession.
Spring had arrived, flowers bloomed in London’s parks and gardens, the trees took on their fresh green mantle as the leaves burst from their buds, and as Pat Kennedy set off for a Saturday morning jog he couldn’t help remarking the girls looked particularly pretty. The past week had not been simply good, but excellent. The Footsie had gained twelve percent since the beginning of year and seventeen percent over the previous twelve months.
He rubbed his hands with pleasure and breathed in the fresh morning air of Battersea Park. Things were definitely looking up as INI prepared to move into its new London headquarters in the Gould Tower. The bank had become bigger, better, and certainly more prosperous. At the same time Pat Kennedy had seen a spectacular rise in his own earning and investments, which was not the case for many other Britons, most of whom had seen their incomes fall in real terms.
The FTSE had been boosted by buoyant European markets and the belief the crisis that had racked the eurozone was finally over. It seemed that cash rich investors who had been watching from the sidelines, waiting for a sign, had finally taken the plunge and were investing heavily into European equities.
The INI Europa Fund, a private investment fund, specialised in real estate in the UK and for certain selected assets in France, Germany and the US, had raised raised over two billion pounds for investments in commercial and residential real estate. The Gould Tower counted amongst its major investments followed by new residential developments in the City, the West End and peripheral districts of London.
However, in spite of the general optimism of the promoters, Tom Barton, manager of the Europa Fund, had seen the BTL boom and crash in the period leading up to the 2008 crash, and had not forgotten the lessons learnt. Seriously concerned by the potential glut of prime residential property, with nearly a decade’s supply of homes in the pipeline, he started to discretely withdraw plans to invest in what he saw as speculative projects.
The starting prices of the fifty thousand homes planned or under construction, situated in an area between Earl’s Court and Tower Bridge and from Regents Park to the South Bank, stood at half a million pounds for a studio flat, whilst the average appartment price stood at around one million pounds or more.
Jonathan Plimpton had urged caution, informing Barton that a mere four thousand homes in that kind of price range had been sold in the same area during the whole of 2013.
The question remained as to who would buy those properties and what would happen to prices.
Promoters seemed to ignore the risk as they fought over development land, pushing prices up and margins down. Most had planned on attracting new foreign investors from China, Hong Kong and South East Asia, as well as Russians and buyers from the former republics of the former Soviet Union. They, along with the more traditional Middle Eastern investors, sought a haven far from the dangers that stalked their respective worlds, a last resort if things went badly wrong at home.
It was perhaps why promoters had opted for a majority of two-bedroom apartments in the skyscraper towers springing up across the capital. The newcomers would not be looking at their investment in the same way as the typical UK BTL buyer would, since it was improbably they would see the kind of returns promised by the promoters’ sales agents.
Jonathan Plimpton described them as buy-to-leave investors, interested in safe deposit boxes and not returns, in the same manner as wealthy middle-class Chinese left the appartments they bought in Beijing, Canton and Shanghai unoccupied.
Come what may, the Londoners forced out of the capital’s central districts were not the kind of buyers targeted by Gutherie Plimpton and their likes: the average Londoner could not even dream of acquiring such properties, not to speak of the top end of the range products: reserved for those who could pay millions for penthouse appartments overlooking Hyde Park, or large detached homes surrounded by landscaped gardens in the St Johns Wood kind of district.
The cost of being a global city was hard on London’s grass roots population which was being progressively priced out of the market.
Amongst the INI Europa Property Fund’s different portfolios were those that attracted the interest of sovereign wealth funds seeking long-term investments in prime property developments. These included investment possibilities in developments such as London’s Hyde Park Barracks, on offer by the Ministry of Defence at not far off one billion dollars, or the Royal Albert Dock or the Ram Brewery development in Wandsworth.
Even Boris Johnson, the Mayor of London, had become a salesman, heading a trade delegation to Malaysia, Singapore and Indonesia, to promote London residential property. He insisted the schemes were targeted at the regeneration of run-down London districts that offered an attractive investment for foreign buyers.
The idea that everything was up for sale was confirmed by the presence of Malaysia’s housing minister, Datuk Rahman Dahlan, who inaugurated a Battersea Power Station residential development set around a garden aptly named Malaysia Square.
The Thames skyline was being transformed by soulless Dubaiesque architecture, which in the long term would make London indistinguishable from any one of a growing number of glass and aluminium cities spring up across the face of the planet, each country vying with the other to build the highest symbol of national pride.
*
Barton managed INI’s Europe Fund composed of different portfolios specialised in different property strategies. From an initial investment of a few million pounds its capital had grown two billion over the course of five years with assets under management exceeding five billion. The property fund had gone from strength to strength, over the remarkably propitious 2010-2014 period, returning over forty percent in five years, charging sky-high fees with an annual two percent on capital plus twenty five percent on profits. As fund manager Barton’s profit related earnings rocketed as property returned extraordinarily high gains in the world’s most global of global cities.
The fund, domiciled offshore in the Cayman Islands, as were sixty percent of other such funds, escaped control of the financial regulatory authorities and of course the inland revenue. As such it was one of the many funds that controlled a total of more than three trillion dollars in assets world wide, though its management unit, based in the UK, was subjected to regulatory controls.
The majority of the shares were owned by Barton and other individuals, including Michael Fitzwilliams, Pat Kennedy and Sergei Tarasov, the remainder by other high wealth individual investors and funds.
The risks were relatively low; mostly related to economic and property cycles, on the other hand it was not a simple matter if a shareholder or shareholders wanted for some reason to withdraw their capital, since properties owned by the fund could not be easily disposed of, unlike shares that could be bought or sold at the press of a button. To prevent being forced into a property fire sale, a gate prevented shareholders from pulling out at short notice, suspending redemptions and forcing funds shareholders to wait for properties to be disposed of in an orderly manner.
Each property was acquired by a company specifically set up by the fund for that purpose. The company received income from rents paid, which were distributed as income, and growth that came from increases in value of the properties. The fund avoided the problematic of managing the day to day functioning of properties by subcontracting this task to specialised firms.
Liam Clancy’s role was that of managing residential sector investments, that is to say units in prime property developments in London and other selected sites.
Almost all investments in Barton’s portfolio were speculative, short term, designed to capitalise on the rise of super prime property prices, which he did not see falling in view of the volatility and the volume of hot money seeking a shelter.
The fact was, Barton, as the general manager of the fund, a private investment vehicle, could do as he wished providing he informed the investors in advance of his strategy.
Tom had learnt from his long experience in property that the cycles repeated themselves, never in exactly the same fashion, but rising and falling with almost clockwork regularity. In the long term prices always rose, a simple glance at prices over the past one and a half to two centuries showed a relentless climb. There were many reasons: at the time of the Battle of Waterloo the population of the British Isles stood at five or six million, two centuries later it had increased more than ten fold and continued to grow.
However, there were short term cycles with sharp rises and falls, linked to punctual economic conditions and events. And as always homes were never built fast enough, it was not in the interest of industry to create oversupply, the same went for most other sectors of public and commercial properties. The only exception to this rule was industry, which was built for future production and future profits.
Tom Barton did not believe in end of the world crashes, on the other hand, he knew an imprudent investor could be wiped out in a flash, as had happened in 2007 to the Northern Rock and the West Mercian Finance in 2008.1
His strategy had always been to monitor the market closely, which was a full time, stressful, task and the principal reason why he had contemplated quitting the rat race, or at least search for a more satisfying life.
In the years he had got to know Fitzwilliams and his close entourage he developed solid friendships with Pat Kennedy, Sergei Tarasov, John Francis and of course Steve Howard who had pulled him out of his Bangkok impasse.
Seven years had passed since that fateful day at the end 2007, when he boarded a flight for Dubai on a voyage that was to last seven years. During which time his view of the world at large had not changed, but he had learnt to see his own life more objectively.
1. West Mercian crash see Death of a Financier written by the author published in 2009
Barton reservations about the origin of certain monies invested in the Europa Property Fund continued to worry him. The fund, based in the Cayman Islands, held a variety of properties in its portfolio, most of which were registered to a cascade of offshore companies.
The Europa fund’s earnings grew as the flow of investment capital from Russia surged with the Ukrainian confrontation and Putin’s annexation of the Crimea. Then as China’s property market cooled and a crackdown on corruption sent rich Chinese in search of a shelter, the flow continued, as investors scrambled to put their wealth beyond the reach of their authorities.
It was certain that a good proportion of the funds was derived from graft, corruption and tax evasion, making Europa a possible accomplice in the eyes of the UK National Crime Agency, which had voiced its reservations about the origin of money flowing in from Russia, China and other countries.
Barton’s greatest nightmare came in the form of the US Federal authorities, which had nailed HSBC for similar affairs. At moments he imagined himself in an orange jumpsuit, like a felon, behind the bars of a Federal prison after being extradited to the US by a complaisant British government.
The City had become a key platform in a system of money laundering through the purchase of prime London property. Assets were sequestered through a series of offshore shell companies registered as legal owners, a process that led to price inflation, stimulating speculative investment and construction. All of which was indirectly encouraged by government as a growth factor and source of tax revenues, inevitably leading to a distortion in the property market and the flight of working and middle-class Brits from their traditional boroughs in London.
Barton had observed the development of media instigated witch hunts; the investigation of historic crime had started with accusations of sexual abuse, then war crime in Northern Ireland, followed by the wars in Iraq and Afghanistan. With whistle blowers were digging for dirt they were certain to find it and Barton had no intention of hanging around waiting for the finger to point at him.
He would be a ready-made scapegoat, diverting attention from the high and mighty, that is Hainsworth and his political friends, whose incestuous links to City & Colonial, if discovered would certainly be their undoing.
To describe Pat Kennedy’s feelings, embarrassment was perhaps the word. Though Lili’s family had closed ranks it was not clear where he stood. For the first time he understood what loss of face meant, not that he hadn’t experienced loss of face before. In the past his mishaps had been economically painful, even life threatening. This time there was no threat to his economic well-being. From his home, looking out over Hong Kong Harbour, Kowloon and the hills beyond, his material future was assured. Not only was Pat a rich man in his own right, but his wife was the daughter of a rich and powerful Cantonese family, whose political connections reached out to Beijing and even the Central Committee.
Pat had been relieved of his position as Chief Executive Director of International Operations of the INI Banking Corporation and Managing Director of INI Hong Kong Ltd., effective immediately. The word ‘relieved’ troubled him; he did not feel in the slightest way relieved.
His ejection followed the sudden takeover of the bank by City & Colonial, and sudden it was. It was a decision taken without the least notice late Sunday evening, before financial markets opened in the City of London, when the British Prime Minister, presiding over an emergency Cabinet meeting, had authorised the Chancellor of the Exchequer, in coordination with the Bank of England, to approve a shotgun marriage. It was deemed necessary to prevent a disastrous collapse of the INI Banking Corporation and pre-empt the risk of another Lehman scenario.
The news was announced shortly before the opening bell of the Hong Kong Stock Exchange on the first day following the traditional Chinese New Year break. Simultaneously Pat had been informed of his unceremonious ejection. His ‘resignation’ he was told would be cushioned by a substantial pay-off and the preservation of his pension rights, conditioned by a confidentiality agreement to be drawn up by the bank’s lawyers.
On receiving the news, he was, as he later put it, gobsmacked. The call came on his personal mobile at eight in the morning, Hong Kong time, as he drank his morning coffee and admired the extraordinary view from his penthouse apartment. With a stuck-up English voice the caller pompously announced himself as James Smythe, head of HR at City & Colonial in London.
At first Pat was curious, it was nothing unusual to be called on his very private number at that hour, but at that time of the day, given the time difference, he rarely received calls from London, it was midnight in the UK. As for City & Colonial he had never spoken to anyone of any consequence from that bank and could not for the life of him imagine why their HR department would call him.
Smythe beat about the bush before casually asking if he had been informed of the changes.
“What changes?” Pat asked.
Smythe seemed embarrassed.
“The bank …”
“What bank?”
“I see.” There was a silence. “As of today INI Banking Corporation PLC is effectively under the control of City & Colonial.”
“Sorry,” said Pat as if he had not heard Smythe’s words.
“I said ...”
Pat cut in, “I heard what you said. I don’t understand what you mean.”
“This morning, that is Sunday in London, City & Colonial took control of Europa and your Chairman, Michael Fitzwilliams has resigned.”
“Look,” Pat replied angrily, “if this is some kind joke it’s not funny.”
“Mr Kennedy, I’m sorry to be the one to break the news, but this is a decision of the government in London and the Bank of England .... If you doubt my words you can check on the TV, Bloomberg.”
Pat put down the phone and looked around for the remote then zapped the TV to Bloomberg. Beneath the anchor man the Breaking News line flashed Bank of England announces City & Colonial takeover of INI Banking Corp.
“Hello, hello,” Smythe’s disembodied voice echoed into the breakfast area.
Pat stared at the screen trying to make sense of the news. Then, slowly he became aware of the voice behind him and picked up the phone.
“I sorry,” said Smythe. “Listen old chap, I’ve been instructed to ask you to stay at home for the moment. You’ll be contacted later in the day with instructions.”
“Instructions ...”
There was a click as Smythe hung up.
At that instant Lili walked in. “Something wrong?” she said looking at Pat.
He looked dazed, in a state of shock.
“What’s up Pat?”
“I think I’ve been fired.”
*
They had survived the Lehman crisis and a long succession of aftershocks shocks to emerge stronger than ever; a powerful bank with operations spanning Europe, Russia and China. Why then did things go wrong?
It was not difficult to pinpoint the precise moment in time when the bank’s Russian stratagem started to unravel. It was Friday, 21 November 2013. However, if the same question had been put to Michael Fitzwilliams, he would have pointed to the day he meet Tarasov at the 2009 All England Lawn Tennis Club Championships in Wimbledon, but that was another story.1
Going back to that fatal Friday in November 2013, the then Ukrainian President, Viktor Yanukovych, had ordered the suspension of negotiations with the EU on a trade pact.
At that precise moment in time, John Francis, personal advisor on economic matters to INI’s Chairman, Michael Fitzwilliam, had been in Moscow as the news was announced on RT television, Russia’s 24 hour English-language news channel. The Ukrainian parliament had rejected legislation concerning negotiations for an EU-Ukraine Association Agreement, abruptly ditching its plans to sign a historic pact with the European Union, preferring a deal with Moscow instead.
It sounded an alarm to all those who followed Ukrainian politics in as much as it put an end to European hopes that Ukraine would distance itself from Moscow, by joining the nations of the ex-Soviet block that had already adhered to the West.
Putin was jubilant, it was a great victory, however the majority of Ukrainians did not see it with the same enthusiasm.
As Francis stared across the square from the window of his room at the National hotel, he was overcome by a deep foreboding. The walls of the Kremlin reminded him of more sinister times, it was if he had been projected backwards to the days of the Cold War.
1. See The Plan by the author published in 2011
Two weeks earlier as Russians were about to celebrate their Orthodox Christmas, John Francis arrived in Moscow. It was not for academic reasons or some economic mission. He was there for Ekaterina Tuomanova.
As a respected economist and historian he had always been careful with his personal relationships, steering clear of starry-eyed students and young women attracted by academics of his kind. Men of his age and profession who strayed always seemed to end up in some kind of scandal that inevitably turned up on the pages of the Daily Mail or some other tabloid.
That he had stuck to the less exotic kind of women that were often found in his own somewhat cloistered world was no surprise.
Of course as a personality in the field of economic history he travelled extensively and from time to time had had sexual encounters when he felt sufficiently far from home to be able to avoid prying eyes.
That was before he met Ekaterina.
Up until the moment Michael Fitzwilliams invited him to form an ad hoc think tank to analyse economic and geopolitical events and their impact on his bank, his dealings with the financial world had been at arms length. He to a certain extent had disdained the professionals, and they in turn the theoreticians.
With Fitzwilliams and his associates, John Francis discovered another world, particularly that of the Russian oligarchy and the omnipresence of the wealth that surrounded it.
In the space of his four or five years as a highly specialised advisor to Fitzwilliams’ bank, he had become a wealthy man, that is of course in relative terms. High compensation in the world of banking was nothing new to him, he had lectured and even written learned papers on the subject, but he was not alone, even his barber could hold forth on the inequalities of the bonus system.
It was not that Francis was inadequately paid in his academic profession, on the contrary he was well paid, he was even prosperous, though never rich. But what surprised him most was the banker’s generosity. At the outset, when he saw his bank account grow his reaction was one of suspicious, however his suspicions were quickly transformed into a warm glow of satisfaction, justified, as he saw it, a form of recompense for the advice and knowledge he dispensed, and so it was.
It was the same when Sergei Tarasov in turn showered him with rewards, rewards which he initially refused, but being no ascetic and realizing that international finance was awash with money, he gave in to the call of the Siren. In his more lucid moments he feared he was being transformed into a modern day version of Marlow’s Doctor Faustus, haunted by the idea he would be called upon to justify his avarice, in one way or another, at sometime in future, distant, he hoped, or not so distant he feared. He was of course closer to Thomas Mann’s Adrian Leverkühn: Tarasov his Mephistopheles and Russia his Apocalypse.
He first met Ekaterina eighteen months earlier at the Pushkin Museum in Moscow. Tarasov together with the London auction house Christies had sponsored an exhibition of mid-Twentieth Century Contemporary Art at the museum and Francis along with Pat Kennedy and Tom Barton had been invited to the inaugural reception.
A couple of hours into the evening, after the Champagne and speeches, the reception slowly wound down. Francis, in a deep discussion on the subject of Francis Bacon with Ekaterina Tuomanova, an expert on contemporary art at the auction house, had not seen the time pass by.
“It looks like I’m keeping you,” Francis said looking at his watch.
“Not at all.”
‘Well I’d better be going, if I can find the hotel.’
‘Which one?’ she asked.
‘The National’
‘Oh. It’s not too far. I can show you the way if you like?’
A quick check informed him Kennedy and Barton had already disappeared, no doubt as Tarasov’s guests at the Metropol.
‘Why not,’ he replied accepting her invitation.
Not feeling up to yet another late vodka fuelled evening, Ekaterina’s proposal was not difficult to accept. As well as being able to show him the way home, she, in addition to being attractive and intelligent, would be pleasant company.
It was one of those pleasantly warm early summer evenings and there was no sense of hurry as they walked in the direction of the Kremlin, then following its massive red walls towards Manezhnaya ploshchad.
Ekaterina told him of her home near Kaluga, a couple of hours drive to the south of the capital, and then her student days at Moscow State University where she had graduated in fine arts.
She showed him a photo of her five year old daughter, Alina. After her husband, an army officer, had been killed by a road side bomb near Grozny, she had decided to pursue her career in the world of art, returning to Moscow State University, then V. Surikov Moscow State Academy, before joining Christies at their Moscow branch.
In Red Square Ekaterina pointed out the finer details of St Basils before turning into the vast nineteenth century GUM shopping mall for a late coffee. By the time they walked to the taxi stand outside the Kremlin’s walls it was almost one in the morning before they parted. As the taxi pulled away she waved goodbye and Francis, to his surprise, felt a sudden pang. It would be a long puzzling day before they met again as she promised they would for a concert at the Tchaikovsky Theatre.
*
It was eight in the evening Moscow time and all was quite in the city, Moscovites, like all other Russians, were in the middle of their most important religious holiday. It was Sunday, 8 January 2015, the day after the Orthodox Christmas and the first day of their New Year Week.
Ekaterina was in Kaluga, one hundred and fifty kilometres to the south of Moscow, spending Christmas with her parents and would not return to the capital until midday Monday.
His flight had arrived from London in the late afternoon and the idea of eating in the hotel restaurant alone did not inspire him. It was too early to turn in, but any idea of a refreshing walk was out of the question, outside was a thick layer of fresh snow and the temperature had fallen to minus twelve degrees centigrade.
Francis picked up the copy of the Moscow Times and served himself a whisky from the well stocked bar and settled into an armchair. His suite in the National Hotel was spacious and comfortable, he appreciated its old world style. The five star hotel was situated on the corner of ulitsa Tverskaya, opposite the Kremlin. It had been built in 1903 and had been the home to Lenin for some days at the time of the Revolution. During later Soviet times it had suffered neglect, but was since restored to its past glory and had become part of the Meridien Group.
The Moscow Times reported the continued decline of the rouble and the fall in oil prices. Fewer Russians had gone abroad for the year end holidays as the cost of buying dollars and euros had become prohibitive.
THE ‘EVIL’ EMPIRE
Vladimir Putin’s dream of a new Russian Empire was as frozen as the hard snow on Moscow’s streets. The rouble was plunging in concert with the price of oil, the lowest since the Lehman debacle. Sanctions imposed following Moscow’s seizure of the Crimea were biting and foreign goods, if they had not already disappeared from shops, were unaffordable.
The collapse of oil and the vital revenues it brought to the state, coupled with the disastrous annexation of the Crimea and the pro-Russian rebellion in East Ukraine, should have moderated Putin’s exaggerated ambitions. Unfortunately for Kiev it was not the case, the ex-KGB officer had become an autocrat, surrounded by his cronies, a tight band of oligarchs, who like their Soviet predecessors harboured little or no consideration for the common people.
Before Putin launched his campaign to recreate a Greater Russia, he should have consulted his history books and more precisely heeded the words of the Hapsburg general: Count Montecuculli, Prince of the Holy Roman Empire, who once remarked that to wage war, you first of all needed money; second, you needed money; and third you also needed money. A commodity Russia sorely lacked as it headed for a severe economic contraction.
The collapse and dismantlement of the Soviet Union resulted in its successor, the Russia Federation, inheriting three quarters of its territory and barely half of its population. The later would fall to just a mere one hundred million by 2050, according to specialists, casting a sad shadow on Moscow’s dream of past glory.
*
To understand Russia’s economy today, John Francis frequently informed his listeners, you have to understand its historical relationship to oil and gas. That Russia depended on oil was a generally accepted fact in informed circles. In 2009, the president of one of Russia’s major oil companies at the time, Lukoil, Vagit Alekperov, described his country as a major player in the sector, occupying a key position in the international energy market. Russia’s annual deliveries to the EU were equivalent to more than four hundred million tons of oil, or nearly a third of the EU’s energy consumption.
What Alekperov, or anyone else for that matter, had not foreseen was the arrival of considerable quantities oil and gas from new and hitherto unimagined sources. American shale oil production propelled the US to the top of the production league, an event not seen in decades. The consequence of overproduction was a vertiginous decline of energy prices, a disaster for economies like Russia’s, where oil revenues contributed seventy percent to the budget of the state.
Alekperov had imagined the world’s fate hinged on the Russian Fede