The Billion Dollar Sure Thing Read online

  What is unique about Switzerland is that they play all currencies against all other currencies. By contrast, in London, for example, the foreign exchange market is almost totally restricted to pound sterling–U.S. dollar transactions. In New York, it is the dollar’s price in terms of sterling, the German mark, the Japanese yen, and the Canadian dollar which preoccupies traders. But in Zurich, they will be juggling yen against pounds, German marks against Dutch guilders, Swiss francs against Italian lire, and work out a fair price for black-market rubles against the U.S. dollar. They will quote you a price on the Iranian rials, including the cost of picking them up in cash form in Teheran, and converting them into Swiss francs for deposit in Geneva under a number or a phony name.

  The nerve centre of these operations are the foreign exchange trading departments of the major Swiss banks, always a very large room, packed with communications equipment. The traders—up to a dozen of them—sit around an oval-shaped desk of immense proportions. Each man has two telephones at his disposal, often three. Each phone has at least six separate outside lines. Thus each trader can literally be talking to a large number of people at the same time. On telephone one, line two, he may have a customer in Hong Kong. On telephone two, line four, he may have the FX desk of the Deutsche Bank in Frankfurt. On the same telephone, line six, he may have his counterpart in the bank’s branch in London on a standby basis. On telephone three, line one, he could have a money broker in Geneva. And three or four other lines might be flashing, as incoming calls stack up. The trader plays his telephones like an electronic organ—pushing keys, pulling stops, and creating quite a bit of noise in the process as he yells, and even screams, his instructions. The cacophony is added to by the constant clattering of Telex machines which line the walls of the huge room—often a dozen machines, all banging out information on market conditions from the various financial capitals of the world, or bringing in confirmations of transactions just completed minutes ago by telephone. Girls scurry around, tearing off urgent messages and placing them in front of the trader involved, who barely glances at them during telephone calls, signs his O.K., and passes them back. It often takes him just two seconds to finalize transactions involving tens of millions of dollars.

  On the wall is a scoreboard, resembling those we are so used to from sports arenas. Prices of all major currencies, in terms of Swiss francs, are constantly being posted electronically—in line with the latest trades—thus keeping everyone in the room informed. Very quietly, in a corner, three other men pore over long sheets of paper. They post the so-called position sheets. Each trade is immediately entered, allowing the chief of the department to tell at a glance the net position of the bank. In one hour from opening, his traders might have sold $200 million and bought $210 million—leaving the bank a net position of $10 million. He tries to keep the two figures in close balance, unless of course he receives instructions to the contrary from the big guys.

  It was into just such an atmosphere that Dr. Walter Hofer walked on the morning of November 5. He was accompanied by a young lady of perhaps twenty-two or twenty-three. In spite of the hectic activity, none of this escaped anyone in the room. It was unusual enough for the chairman of the General Bank of Switzerland to appear in the foreign exchange trading room. But to see him there, with a well-built young blonde—that was an event to be cherished, every minute of it.

  Hofer walked directly to the chief trader.

  “Herr Zimmerer, I would like to introduce Miss Mary Rogers.” He spoke in English. “She is with a newspaper in Los Angeles and would like to learn a little about your operations. Miss Rogers is the daughter of my wife’s sister who, as you probably do not know, has been living in the States for the last thirty years. So please take good care of her. When you’re finished, I would appreciate it if you could bring her up to my office. I would like to have a few words with you before the morning is over.”

  “With great pleasure, sir,” replied Zimmerer, as Hofer turned and left as abruptly as he had come.

  “Now please don’t go to any great trouble on my account. I know you must be very busy,” said the petite Miss Rogers, five feet two, with blue eyes to go along with her long blonde hair and a bosom which could not be totally overlooked, even if she was the big boss’s niece.

  “No trouble at all,” mumbled Zimmerer, thinking oh my God and on a morning like this. The Swiss never have learned how to mix business with pleasure during working hours except at the highest echelons.

  “Uncle Walter insisted I come into his bank today to look around, and he thought that this might be one of the most interesting spots. I know really nothing about the foreign exchange business. But I have worked on the business section of our paper for over two years now and am not totally ignorant. My mother and I are spending a week here in Zurich. It sure is a lovely city at this time of year. Are you from here?”

  “Yes,” replied Zimmerer.

  A man suddenly shouted across the room at him. “Herr Zimmerer, the Deutsche Bank in Stuttgart wants $25 million spot at 3.40 flat.”

  “Sell ’em. Then everybody stop all trades. I want to know our exact positions to the franc in every currency within ten minutes. So hang up the phones and recheck everything.”

  If he was to see Hofer, he wanted to know exactly where the department stood, right up to the minute.

  Then another call. “Hey, Zimmerer, it’s Kellermann. He wants you right now. I’ll switch him to your phone—line five.”

  Zimmerer picked up the phone, made a few notes, and hung up.

  Turning back to Mary Rogers he said, “At the risk of oversimplifying things, why don’t I start by explaining what we’re doing here, and then give you an idea of how we do it. Would that be all right?”

  She nodded.

  “Good. I think the closest thing in your experience to our foreign exchange market here would be commodities. In Chicago they make markets for corn or wheat or soybeans, and many other similar products. There, like here, the market is split: they deal in what they call ‘actuals’ when the real product is changing hands right there and then, and they talk about ‘futures’ when a deal is made involving the delivery of the product at some time in the future—maybe in a month, three months, or even a year. Well, in foreign exchange it’s the same. We call the here and now transactions, where the product changes hands immediately in cash form, the spot market. Just think of it as where money changes hands on the spot. We call the futures market the forward market, and here also we deal for months or even years in advance of the actual closing of the transactions. But instead of agricultural products, the products in which we deal are different currencies—German marks, American dollars, Japanese yen—all of which have constantly changing prices depending upon supply and demand for them. Follow me?”

  “Yes.”

  “Fine. Now since we are in Switzerland, we usually go out from the Swiss franc. I mean, we usually price all the ‘products’ we deal in in terms of Swiss francs. Quite normal, I think.”

  Again Mary nodded.

  “Are you sure I’m not boring you?” asked Zimmerer.

  “Oh no, please go on. It’s just fascinating.”

  I’ll bet, thought Zimmerer, but plunged on anyway.

  “Right. Now let’s take the American dollar. As you just heard that fellow yell from across the room, we are buying dollars at the spot rate of 3.40 francs. This can change from minute to minute, but the ultimate range is established by the government. The ‘most’ francs you can get for a dollar, under the rules agreed to in Switzerland in spring, 1973, is 3.4535. And the ‘least’ you can get is 3.3015. That’s what we call the upper and lower intervention points.”

  “What happens if everybody is selling dollars like crazy and it goes down to 3.25?” asked Mary.

  “It can’t. The Swiss government, through the National Bank, is obligated to buy dollars for Swiss francs at the 3.3015 limit and to keep supplying the market with Swiss francs, taking out dollars, until the market trend reverse
s itself.”

  “Why?”

  “Because the world has agreed to maintain fixed exchange rates—well, almost fixed, since as you see they can vary 4.5 percent within the band agreed upon. Without fixed rates, nobody in business or banking could plan ahead in international transactions. I mean, some Swiss watchmaker might sell a million dollars worth of watches in the States. But he might first get paid in dollars after three months. If he could not be sure of approximately how many francs this would give him, when he exchanged them, he would face enormous risks. After all, he pays his workers and suppliers in francs, not dollars. Right?”

  “But in 1973 all these fixed rates were changed, weren’t they?”

  “They were. But this happens quite seldom.”

  “But it happened.”

  “Right. And the Swiss watch exporters got smashed, at least those who had not protected themselves in the forward foreign exchange market.”

  “Now I’ve heard about that,” said Mary, “but I don’t understand how you can do that.”

  “O.K. but you’ll have to follow closely,” replied Zimmerer. “Now let’s stick with that watchmaker. He knows that he’s going to be paid a million dollars in three months, so—if he’s smart—he’ll come to us and sell these dollars in advance.”

  “Can you do that?”

  “Sure. That, in fact, is what this whole business is about.”

  “You mean he’s selling something that he hasn’t even got yet?”

  “Absolutely right. It works like this. We, his bank, make an agreement with another bank—in this case, an American bank—which says in effect: We, General Bank of Switzerland, promise to deliver to you $1 million U.S. in three months. You, Chase Manhattan, promise to pay us 3.35 million francs for these dollars, upon delivery. You’ll notice that the dollar sells at a small discount on the current spot rate of 3.40 when it’s done on a three months forward basis. That’s because the market feels that it is probable that the dollar will weaken slightly in the period ahead. It’s been abnormally strong in recent weeks.”

  “So then when the Swiss watchmaker finally gets his dollars, he knows exactly how many francs he’s going to get for them.”

  “Exactly, otherwise he would take a risk, as I mentioned before.”

  “But if he did not ‘sell his dollars forward,’ as you put it, he might have gotten more francs in the end. I mean, nobody can guarantee that the dollar will weaken.”

  “Absolutely correct. If the dollar strengthened, and the spot rate went up to, say 3.45 after three months, he could sell his dollars then and get 3.45 million francs—or exactly 100,000 more than he will get by selling them ahead of time. That’s the cost of insurance.”

  “I know you won’t believe this quite, but really I now start to understand this business. It’s not so complicated, is it—I mean, not when a man like you explains it. Tell me, how did you ever get into this fascinating business?”

  “My uncle. I’ve got one, too, and he’s a friend of your uncle. He might even have known your mother, come to think of it. I’ll ask him. Anyway, I started at the General Bank about ten years ago, and after being trained in about ten different departments, I chose this one for a career. I like it very much.”

  “Can girls do this, too?”

  “Well, there’s no reason why not. But in Switzerland, you know, it’s still a little bit different than in the States.”

  “Oh, I know. My mother told me. That’s why she left.”

  “Maybe, Miss Rogers, we should try to finish our discussion on foreign exchange,” said Zimmerer, glancing at his watch.

  “But I really don’t want to keep you if you have important things to do.”

  “No, no. Now, do you have any questions?”

  “Well, just one and then I’ll leave you alone. What about all those currency speculators we always read about? I mean, they’re hardly involved in the watch business.”

  “No, Miss, they’re really just gamblers, gambling normally on a devaluation of a currency. It’s gotten to be very big business during the past five years. Lots of Americans are in it now, especially the big multinational corporations.”

  “How do they do it?”

  “I’ll explain. But then we had better go up to your uncle’s office. O.K.?”

  “O.K.”

  “Fine. Well, let’s say that I’m going to speculate on another devaluation of the dollar, and I think it’s going to happen within three months. A devaluation means that the old fixed rates—remember?—will be changed between the dollar and the Swiss franc, suddenly and overnight, and thereafter the dollar will be much cheaper in terms of Swiss francs. Right?

  “Good. So our speculator comes to us and we sell, for his account, $10 million three months forward—dollars that he does not have. Selling short is the term used for this type of operation. So again we make a contract: We, General Bank of Switzerland, promise to deliver to you, Chase Manhattan, $10 million U.S. in three months. You, Chase Manhattan, promise to pay us 33.5 million Swiss francs for these dollars, upon delivery. We make a separate little agreement with our speculator, informing him that we are doing this transaction in our name, but for his account, and at his risk. O.K., let’s say that a 15 percent devaluation of the dollar takes place. Overnight the spot exchange rate would drop to, say, 2.90 to the dollar. When the three months are up, we go into the market—the spot market—and buy the $10 million which our speculator never had in the first place. This $10 million would now, after devaluation, cost us only 29 million Swiss francs. Follow me? Good. But then, literally one or two minutes later, we would present this $10 million we just bought to Chase Manhattan for delivery on that forward contract we had made with each other three months earlier. Chase, on the conditions of that agreement, would have to pay us 33.5 million Swiss francs. Right? So our friendly speculator has just made himself 4.5 million Swiss francs. Let me repeat, he presold dollars he did not have for 33.5 million Swiss francs, but the cost of these dollars, after devaluation, was only 29 million Swiss francs. Voilà.”

  “Gee.”

  “Yeah, and the beauty of it is that if this speculator is a good customer of ours otherwise, he would not even have to put up any margain, or deposit, on this foreign exchange forward contract. At least as long as he had a couple of million in the bank or was known to us as a very solvent person.”

  “But why not?”

  “Because it’s quite obvious that a strong currency like the Swiss franc would never be devalued. It’s almost 100 percent backed by gold. Thus, it would hardly ever rise above 3.4535—the intervention point at which the Swiss government must step in. If our speculator met the worst of all possible conditions when the three months were up, he would have to cover at this rate. Then his $10 million would cost, 34.535 million francs, but he would only get 33.5 million from Chase. So he’d be out 1,035,000 francs, or about $300,000. Big clients swallow such losses without blinking an eyelash. But it is highly unlikely that such a loss would occur. What the system does is give a government guarantee to speculators, which allows him to calculate to the last penny his greatest possible loss, while on the other hand, it allows him to make enormous profits—which can be ten times larger than the maximum possible loss. That’s why speculation in foreign exchange has become such a popular sport. As one American put it to me last week, ‘It’s the best game in town.’ And that’s why we, as a bank, run very little risk when we do such transactions for our clients, even when very large numbers are involved.”

  “And you say Americans can also do this?”

  “Why not? Of course, lots of people think that it’s not very nice to speculate against your own currency, and in recent years it’s the dollar that has always been getting into trouble. But I’ve been told that American multinational corporations cleaned up about $3 billion profits on their foreign exchange contracts made prior to the last dollar devaluation in 1973. I guess a lot of people figure, correctly, that what’s good for General Motors must be good—period.”


  “Do you also speculate for the bank, Mr. Zimmerer?”

  “Well, we’re actually not supposed to talk about that. You know, then it starts that ‘gnomes of Zurich’ thing all over again. Better ask your uncle.”

  “Zimmerer!” Another interruption came from across the vast trading circle.

  “Foreign Trade Bank Moscow. On the Telex again. They’re offering to sell $50 million three months forward this time. Shall I give them a rate?”

  “No. First, I want the positions. Tell them we’ve stopped trading for an hour. They should come back then.”

  He turned back to the young lady.

  “Miss Rogers, would you mind taking a chair. I have to get some figures together for your uncle. I’ll be with you in a few minutes.”

  And he was. “Ready to go? I’d like to talk a lot longer to you, but I think your uncle is probably waiting for us.”

  “That’s all right. I think some of this stuff is getting a little too complicated for me anyway.”

  They began walking toward the door when Zimmerer took Mary’s arm. “Say, would you like to look at just one other place real quick?”

  “Sure,” she replied. “What is it?”

  “Well, it’s another part of our department—the gold bullion trading section.”

  “Oh yes, that would be just fascinating.”

  “Don’t expect to see any gold bars or anything like that.”

  They entered another room. It was not nearly as large as the foreign exchange trading centre. Only three men were at telephones and three others were obviously doing clerical work.