CHAPTER SIX - BREWSTER
Upper Peninsula, Michigan, 15 January 2001.
Brewster was a big man, but neither his ample girth nor tall stature came anywhere near to matching the size of his ego. He had headed Constexo Energy for a decade, during which time it had grown from its base of oil and power to become a diversified energy supplier and trader, a leading player in a new and burgeoning market. Constexo had started out in pharmaceuticals as an early pioneer, before moving into oil in the sixties and taking its present name. Unlike his peers, Brewster felt no need to sit at the epicentre: everyone else could come to him. Hunting and fishing was his scene, particularly in the winter, so he had located himself well north of Milwaukee in the Upper Peninsula of Michigan.
Built in a hexagon, his lakeside "cabin" had three faces towards the lake, and on the land side two wings attached to the hexagon's sides created a v-shaped entry to the main door. Set back in the woods was a series of outbuildings containing all the essentials for lakeside living: various boats; a cabin cruiser; a Yukon off-roader; snow mobiles; dump trucks; a couple of limousines and a full scale automatic car wash. Fishing tackle and guns were kept in the cellar of the main house - you can't be too careful. Any kind of intrusion alarm was deemed superfluous - who would dare intrude on Brewster?
Sitting with Brewster was Lorenson, in all respects as weedy as Brewster was big. He had been made up to Chief Financial Officer two years ago.
"So what this guy says," Brewster was saying, "is that he'll set up limited partnerships to ship the problem out, AND, they'll cut us in on the profits. Now I don't see a conflict of interest. We've got a quarter of a billion dollar problem. This will solve it. That's good for the corporation. So we benefit too. OK, I admit we do. But look at it this way: I've already added five billion dollars of value to the shareholders this last couple of years, and that compares to less than two hundred million paid to me in stock options. We've got to get this compensation committee sorted." This last aside meant he wanted to force through yet another pay increase for himself, which the compensation committee would recommend to the board for approval to be followed by the shareholders' approval at the Annual General Meeting. It was pure coincidence that he also sat on the compensation committees of a number of his peers who were similarly under-remunerated.
Brewster had already brought Lorenson up to speed on how he had been introduced to this UK private banker by some red-headed cocktail party floozy he had met on the circuit, and Lorenson presumed, coveted, but apparently so far unsuccessfully. Lorenson's mind was working overtime. He knew that they were already more than half a billion dollars underwater, more than Brewster knew, and would have to restate their next accounts: they could not hide the losses by pushing them into the future any more, as they had done for the last five years. The problem had grown too big. They would need to put another two billion dollars of commitments on the books to redeem their positions, which in turn would kill their debt ratings by reason of over-leverage, and that meant they would have to pay their bond holders higher rates of interest, which they could not afford, not on the levels of debt they had whacked into the corporation over the last five years. Both he and Brewster were about to hit the end of the line, although Brewster clearly was not letting his ego conceive of this particular possibility. The board would go ballistic when they found out.
What Lorenson could see in this scheme was the magnitude of what they could do with these partnerships. Not only would they rescue current losses, but they could double their bets, keep the upside with them, and stick any losses to the corporation, which may or may not survive. In other words, they could monumentally rip off the corporation by making it take crazy risks that would make the Junk Bond King's fiasco look like kindergarten. So what! Jumping three steps ahead, he was thinking, and I have a good deal with the lawyers, so they can draft a memo of instruction from Brewster to me, and if they're worried about what they put in the memo, I'll tell them we'll stick it to Constexo's own internal legal counsel if it turns sour. I will simply be following orders: it's Brewster who gets locked up if it comes to it. If he's game, I'm game. Lorenson had made ten million dollars last year, and here he could see a clear half billion, if he could swing it, so he would try his damnedest.
Brewster was carrying on: "So they want us to meet with some consultant who will set up the structure. I guess they want to distance themselves. Bankers! No guts! Why do they need a consultant? I said I'm in, so long as we act now, next month is too late. So the girl pipes up, says she wants one working day with us in private and we can sign the next day. One working day. That was on Friday. Today's Sunday, so figure it out for yourself. That's why Blim's coming."
"Blim! What do we need him for?" Lorenson countered.
"Do you know about partnership structures? Creative accounting? Derivatives? What your butt looks like? We need Blim." Blim, Brewster's Mr Fixer, the chairman of the Brewster career advisory board. More importantly, the man who undertook all the less savoury behind-the-scenes tasks to keep a flamboyant chief executive like Brewster in the job and out of the state penitentiary. No one knew why he was called Blim, and no one had probably asked him, since any sane creature with a modicum of intelligence steered well clear of anywhere in range of the Blim presence, that is to say unless it was pay day for them.
What the world did not yet know was that Blim was about to enter politics. Among eminent citizens there were not a few who would find it in their best interests to assist Blim, should he ask, which he would. Generally Blim went where he wanted, when he wanted, and did not stand on ceremony. That applied today as well. There was no knock on the door, no announcement by some phoney butler. The door was flung open and there stood Blim, framed in the doorway, even as Lorenson was employing phrases well outside the scope of either the Pope's or the Catholic Church's vocabulary with specific reference to Blim. Blim had learnt to hold his pose in the doorway for two seconds, as standard procedure, to make sure everyone could take note of his presence and fix him in their mind. This was usually accompanied by a booming utterance, in this case, "What's that little troll doing here?"
"I've made him my chief financial officer, Blim, so that he can do stuff for me, like the accounts, right." Brewster replied, in jovial mood.
"Why do you want some spineless little creep, playing with himself in the accounts department?" said Blim.
"That's exactly why I want him there. Who do you want sniffing around?"
Lorenson took great satisfaction out of these exchanges. These thundering buffoons could roar away merrily at his expense, while he cleaned up and banked his stash. And all the while, they would be issuing the memos, evidencing their duplicity, which he would keep safe to leak at the appropriate moment if things turned sour.
Brewster brought Blim up to speed on the proposal. It was no accident that Blim was a fixer. Despite his brash exterior, he had an incisive mind and knew the devil lay in the detail, when it came to legal financial structures. That is why Brewster brought him in for confidential deals where he could not use the apparatus of the corporation. In fact, given a choice, Brewster would use Blim for everything, rather than his pedantic lawyers or his finicky accountants, the cumbersome tools of the big corporation.
"Blim, we're going out on the truck. Lorenson, you do whatever it is you want to do. If you're worried the maintenance man will ramrod you up the rear end, lock your bedroom door. Whatever. I want the presentation ready for tomorrow first thing. I'm flying them in to Escanaba, so they should be here by ten."
Going out on the truck meant that Brewster's massive off-road vehicle had been loaded with shotguns, rifles, beer and Bourbon. Whereas most of the locals respected the environment and the wildlife, it was not in Brewster's nature to respect dumb animals, and in his mind this category did not just inhabit the countryside, but included most of his work colleagues and business associates, or maybe they were a sub-category which he could not legally shoot.
Blim was a willing partner, more for the Bourbon than the beer or the shooting, although he did enjoy going after the geese in season. They migrated along a flight path way above the range of the normal shotgun, so you used the more powerful goose gun. He enjoyed watching the geese doing their version of freefall without the parachute after taking a hit. He had done grouse in Scotland once, but found the process a bit too industrial, as the guns were loaded and handed to him, and the birds fell out of the sky. This is golf, not hunting he had thought, luckily not voicing this unorthodox opinion either on the grouse moor or in the golf club.
At this point Lorenson knew he was free to get his material together. Whenever the other two got back, which could be any time from dusk to the early hours of the morning, they would stumble from the truck to the bar and from there to bed, or maybe not if they did not make It that far but slumped at the bar. What Lorenson did not know was that, despite appearances, Blim would be compos mentis, not that he was a good actor, he was never anything other than Blim: he was simply a born cheat.
Nathan was in the back of the truck with Zelda. In the front with the driver was Ferdie Moon, the consultant. Riding through the snow on the lakeside road towards the rendezvous, they made an unusual trio: the elegant redhead, the slim dark haired English banker, and the through and through American who looked exactly like a Cuban, with his curly dark hair and thick moustache. If it weren't for the embargo, he would probably be smoking a Havana. As it was he made do with a cheroot.
"OK, guys," she said. "We play this absolutely according to the rules. I'm chairman of the meeting; you speak when you are spoken to. This is because I am the person without a role to play here, so I can hit these guys as hard as need be without jeopardising the deal. The only time you speak out of turn is if they ask me to leave, when you tell them to piss off, and don't use any euphemisms. If they say it more than once, play it by ear, but take it in turns to tell them to piss off. OK?"
If Nathan had learnt one thing in his short partnership with Zelda, it was that she knew how to run a meeting to achieve her goals and no one else's, but this was the first time she had come up with anything like this."
"I know these guys," she said. "They think they're tough and the world owes them. The share price goes up a dollar and they're heroes, it goes down five dollars and some jerk in the paints division has screwed up, OK so they don't make paint, so it's the jerk in pharmaceuticals who doesn't know a patent from a patient. Got it? They're not expecting us yet, so we'll hit them hard before we've even disrobed, by that I mean got our coats off, Ferdie, so stop grinning."
The truck crunched to a halt on the frozen snow in front of Brewster's place. Like well-trained commandos, they exited the truck in a fluid movement and were banging the deer skull knocker on the front door. The temperature was well below freezing. Brewster opened the door himself, and Zelda pushed through past him into the hall. As Brewster started to ask how come the plane was early, Zelda threw her winter coat over a chair, interrupting him.
"Mr Brewster," she informed him, "I advised you that we needed one working day, and that is today. Our working day does not begin at ten and it does not end at five, so I cancelled your plane. Did they not advise you?" She knew they had not, because she had paid them for this minor oversight, and getting one over Brewster was an opportunity few of his employees would care to miss. "Where are we sitting? Gentlemen, let's go through," she said to Nathan and Ferdie. My holy grandmother, Ferdie thought, she's not just chairing the meeting, she's playing host in Brewster's home, before he can even say, "Hi".
In the lounge, Lorenson was at a desk in the corner looking over his notes, and suppressing a smile at this bit of one-up-manship (or even worse, one-up-womanship) over Brewster. Blim was admiring the lake, and Brewster's interrupted breakfast was lying half-eaten on the table. The introductions were made and the tension stayed. Clearly, Zelda had her reasons for this opening inverted-charm offensive, but it was not an opening move out of Nathan's standard business chess manual.
As the meeting progressed, Nathan began to twig what was going on. He had the time to watch between his own contributions to the meeting. Zelda had a very strict agenda which unfolded and developed rapidly, like a foetus in the womb. Brewster was all bluster, which was why she had controlled him at the outset. He could rule his company with an iron fist, but here, even in his own home, she had exploited the fact that he had no authority over them. He was powerless, except to the extent that she gave him the authority to make a decision, which she would not do yet. Lorenson was the man to watch, sly and in charge of the information, but he soon learnt that when he tried to withhold information Zelda seemed to know. Lorenson began to think she knew more than Brewster, and this worried him. As to Blim, he would never lose his commanding position anywhere; he was biding his time. But by lunch the agenda had passed the point of safe abortion for Brewster's team, so maybe Blim had been thwarted and would have to fight a rearguard action for them to get the best terms they could.
"I'd like to sum up before lunch," said Zelda, taking her fully established chairman role, and knowing full well that Brewster had not had time to do anything about lunch, giving another little twist to the knife. She summarised the financial position, the general outline of the deal structure, and the benefits which would accrue. "After lunch we will fill you in on the mechanism we will employ, and then we will draft heads of agreement, setting out, in particular, the ownership structure, profit entitlements and fees."
Brewster's bluff, that he had kept the personnel clear of the house for confidentiality reasons, but would now instruct them on lunch preparations, fell flat. Zelda was already at the bar suggesting they have a couple of dry martinis, while she busied herself in the kitchen. Nathan thought the suggestion was probably accepted for the relief of having her out of the room. Brewster gave voice to this as soon as she left for the kitchen, suggesting that the only safe place in the house today was in the john, and Blim countered that he wasn't sure he wanted to pull his pants down even in there, and thank his lucky stars he had relieved himself first thing this morning.
But there is little that a dry martini or two cannot fix, and soon the standard raucous tones were echoing over the ice. Brewster had taken them out onto the terrace, and Ferdie, the consultant, was reeling off a string of lurid jokes, as he competed with Brewster and Blim for airspace. This was not Nathan's style, so he moved off with Lorenson across the snow towards the lake, the elegant banker with the weedy finance man. Lorenson was clearly a very clever accountant. Nathan had been fully briefed on the proposal, but Lorenson, having had no more than a partial view from the morning session, had anticipated what was to come, and more than that, through his questions revealed insights that had not even occurred to Nathan.
After lunch Zelda re-opened the proceedings.
"Mr Brewster, I sure love these off-sites." The initial antagonism had precluded the American style use of first names during the morning session. "You can get so much done without office interference. But out here in Michigan, isn't this something! I could spend my life out here. Well, I guess I don't have that option yet. Work to do. But I tell you it is a real privilege for us to work with you three gentlemen. Men with testosterone who get down to it, take decisions, get things done. Not like those flunkies we met at, well let's just say, XYZ Oils last week. Did they understand what we were talking about? You bet they didn't. We had to tell them to remember to wipe their backsides when they came back from the john. This one guy, he turns round and goes back in, like he forgot. And then, when we get round to decision time, it's like they're saying they don't want to risk leaving any of their anatomy in my hands. So I say, let them go and do what the do in the john if that's what they want to do."
Nathan's sensibilities were beginning to take offence at Zelda's coarse metaphors, when he saw that Brewster had visibly perked up. It dawned on Nathan that Brewster and Blim were visualising whose hands they would willingly put their anatomy in this afternoon, if they were asked to take any decisions and put their sensitive anatomical parts on the line.
"So, gentlemen," she continued, "let's put our heads together, get it down on paper, reach consensus, and then, of course, we all know, that when it comes to the final decision, once it is all agreed, it is down to you, Mr Brewster, to make the choice, press the button. If we do that, I guarantee we can sign tomorrow, twelve noon. Over to you, Ferdie."
"Gentlemen," Ferdie opened, "we're gonna give you a black box."
"Blim?" Brewster questioned, looking at Blim.
"I guess he means like the oil consultants do when they value our oilfields. They don't want us to know their methods, their software, or we don't need to pay them. Once we know how they do it, we can do it ourselves. So it's like a black box that you don't know what's inside, but they put our data in one end and the value comes out of the other end."
"Exactly," said Ferdie, "and our black box is in Liechtenstein. Let me explain what it does." Ferdie looked directly at Lorenson. "Let's just say that Constexo is hiding losses of half a billion dollars in contracts which mature in the future." Lorenson did not flinch, but a chill settled on Brewster, who opened his mouth but was interrupted by Ferdie, before a sound came out.
"Mr Brewster," Ferdie said in a harsh new tone, "let us not beat around the bush. I don't care how many losses you hide. Just listen to the story of the black box."
"Carry on," Blim said. He knew there was no point in getting into a discussion about the losses. He knew that the best way out for Constexo was to make a major acquisition and use it to fix the figures, but with Constexo's debts an acquisition was no longer a realistic prospect.
Ferdie continued, "Gentlemen, what you do with this black box is that as step one you put in the half billion dollars of losses. You do this by contributing half a billion dollars of capital by way of loans and a little equity to partnerships in the black box. What do you have now, Mr Lorenson?"
"Well, I guess you now have a half billion dollars of assets, being your loans and equity," Lorenson answered, "but you've still got the losses."
"That's why we have step two," Ferdie explained. "We also put into the black box all Constexo's trading contracts associated with the losses, so Constexo no longer has the losses on those contracts. This is how the black box, with steps one and two, gives you assets and takes your losses. Oh, and it also reduces your trading exposure, because you no longer have the contracts. It's a very generous box, don't you think? I won't be exact, but let's say the contracts are worth five billion dollars, and we add a margin of cash to secure the contracts. You get net, say, four billion dollars off your balance sheet."
"So you've cleaned up our problem," Lorenson said, "but where do the black box's trading lines come from to take the contracts from Constexo, and what happens when the losses hit?"
"Step three, Mr Lorenson," Ferdie responded. "As to lines, you guarantee some, some we put in, some are secured on cash margins, and some trades are direct with you. And as to losses, well there won't be any."
"Why won't there be any losses?" Brewster cut in, as if forgetting he just wanted to deny hiding any to start with.
"You put in another half billion dollars, or more if you wish," Ferdie replied, "and we leverage on that to trade out of your position. Losses are only ever temporary in this business, as long as you have the capacity to double up your stakes and catch the market turn. In this case, you can start trading in Constexo again, because we've freed up your lines. The only critical point is the Constexo must never own a sufficient stake in any partnership in the black box to require consolidation of any partnership in its accounts."
Lorenson immediately saw the next issue: "And the profits?"
"I said the box was generous," Ferdie answered. "It splits profits between Constexo and us, and, of course, you gentlemen personally if you wish. I see no reason why you should not. The black box includes all the necessary cut-outs to legitimise this, at least according to my legal department." What Ferdie omitted to say was that his legal department consisted of him and no one else.
"And that's what, with your permission, we will move onto now," Zelda proposed. "Let's agree an equitable arrangement to suit all parties and draft heads of agreement."
As the afternoon developed, it became ever more difficult to imagine the Zelda who had entered Brewster's hall in the morning. She was all charm. Ferdie had retrieved his computer from the truck and was tapping away to incorporate ideas and information into a document that was developing before their eyes. He mentioned to Nathan in a coffee break that he had taken a quick look around outside when he got the computer. He said that there was this huge truck strewn with spent shotgun cartridges, empty beer cans and Bourbon bottles, and stacks of live ammo, and he was damned glad he had not seen that before setting their very own she-wolf onto Brewster this morning.
By five they were ready, but Zelda did not close the meeting until six, possibly in deference to her need for a full working day. The departure reflected a full days bonding: lightening, thunder, sunshine, in that order, and all against the backdrop of the Michigan snowscape and the frozen lake.
Some marathon runners cross the finishing line looking like prime candidates for the oxygen tent; others appear to have just changed and are having a quick warm up before heading for the start line. Back at the house they had rented, just forty-five minutes from Brewster's place, Zelda looked as if she were having a casual chat at a cocktail party. But for the first time, Nathan saw something vulnerable: she was looking for recognition, for admiration, the Diva expecting the right volume and duration of applause at the end of the opera.
"I think we fixed them up OK," she said. "We hit them below the belt, and while they're still doubled up, we take them past the point of no return. Then we lull them into a sense of regained control and power, but set the goal posts where we want them while they're congratulating themselves, and even Blim gets stuck in midfield when he should be a striker, failing to score. Finally, they're snapping away to swallow the carrot on the string, while we drive a truckload of carrots out of the warehouse. As they say in this country - we just made a bundle of dollars."
The guy we've got to watch is Lorenson," she continued. "Blim is out of it once they sign the contracts, and Brewster is clueless when it comes to trading and derivatives. That's why he'll probably appear on the cover of the news magazines next year as Man of the Year, the driving force behind energy trading, advisor to the Senate, advisor to Congress, advisor to the President, maybe even derivatives advisor to the First Lady and the Pentagon."
"Do I detect a degree of cynicism towards the American establishment?" asked Nathan.
"Come on," said Ferdie, "they're all good guys doing their thing. Maybe we just made a bundle, but I take my hat off to them for the corporation they've built."
"Take it off, but keep it in the cupboard in case you need it for the funeral," Zelda responded.
Nathan might have understood Zelda's mood if he had realised the magnitude of what they had just done. What Zelda knew was that they had vindicated Vermouth's grand plan on a scale beyond what Vermouth had even imagined. The only other person who would have appreciated it at this stage was Lorenson, but even he was just looking at his bit of the picture, and wrongly believed that he would outfox the others. Lorenson saw an opportunity to take down Constexo Energy and get rich in the process. Zelda was looking at the first step towards appropriating major chunks of the establishment for free. This was a corporation among the top ranks in the US, and it was her first target. There would be clones.
Nathan was still pre-occupied with aspects of the day. He was taken aback by Zelda's conduct. Until today she had been enchanting and he had taken her at face value, more than that he was drawn to her. What was this new side? He felt an anxiety build which he could not address with her, but he knew she detected his tension. What he could address was how she had seemed to know almost as much as Lorenson about the accounts and more than Brewster.
"Zelda, "he said, "you were fantastic the way you handled Lorenson. Where did you learn your financial analysis? I mean, the figures seemed to trip off your tongue."
"Nathan, you are very observant," she said. "What say you, Ferdie? It's not my analytic skills that helped today. It's my access to their central computer files, as Ferdie knows."
"You'd better close your private banking ears for the moment, Nathan, but you should know, since we are partners. We have to use what is available to us, and I have my ethical standards no less than you, and I am certainly applying higher ethical standards than the top accounting firm which has been signing off on Constexo's accounts for the last two years. If I exposed them, I would be doing a public service. They are hiding huge losses."
"So are you going to expose them? If that's the plan, why are we doing this?" Nathan questioned.
"No, I'm not planning to expose anyone. I'm not an auditor responsible to the board and the shareholders. I'm not a regulatory authority either. Right now I'm simply a private foreign citizen, here on a temporary visa, which expires in ten days. Nathan, let me make this clear for our future co-operation, both personal and business. I intend to act within both the letter and the spirit of the law. I did not hack into their system: the information simply became available to me, when I was outside the jurisdiction of the US."
"I do not plan to do business in the US, nor do I plan to do business with a US corporation, nor do I plan to trade Constexo's shares or pass information to anyone who will. What I am doing here in the US right now is simply airing with a US citizen (who happens to be a chairman) a proposition which relates solely to overseas entities and in no way relates to the US. He may choose to avail of this proposition if it is legal for him so to do (which it is). I have not suggested that his corporation should do business with these entities. If he believes otherwise (and he does), that is his assumption, not mine. If he chooses to channel business from his corporation into this structure (and he will), then that is his choice, which he may take if it is legal (which it is). If you want to run this past your compliance department (which I suggest you don't), they will agree with me, but they will wonder whatever it was inspired you to ask to start with."
"Nathan, I'm glad we are having this conversation so early in out partnership, and that Ferdie is here too, because I want to assure you that so long as we are together, may it be long, I will never become involved with anything, where I, you or any of our team is in breach of the laws of the land in which we are operating, and let me just say some lands have some crazy laws. Did you know that it is still high treason on pain of death in England to have sex out of wedlock with a member of the Royal Family?"
It was time for Zelda to take a deep breath after that speech, but it was Nathan who took the deep breath. He could not fault her logic, which could, he thought, have been incorporated into any private banking manual as standard operating procedure, neither did he want to; not after the bit at the beginning linking "future co-operation" and "personal", him and her.
"Please, Zelda," he said, "don't misunderstand me. I was just confused about the direction your argument was going in. I think you've answered the compliance point more succinctly than they would have done back at the bank, and no I don't have any designs on members of any royal family either before or after wedlock."
The other person who was confused was Ferdie. Why is he calling her Zelda, he wondered? Is he mixing his women up, or is this a reference to some kind of cartoon comic hero like Superman?"