Betting on Separation

With emotional dervishes spinning inside every bank, brokerage house, hedge fund, and trading pit, the market began acting in a way that can only be described as hormonal. One week before the referendum, the stock market and Canadian dollar plunged in a way that suggested reality had finally sunk in. The next day, unaccountably, absurdly, with polls putting the Yes side as much as 2 percent ahead, the dollar started climbing again. On Friday, October 27, the day after Brian sat sipping champagne with a $60-million albatross around his neck, the heads of the treasury desks at Canada’s six big banks made a historic decision. They agreed to close the $30-billion-a-day domestic foreign-exchange market, effectively bringing trading on the Canadian dollar to a halt until the referendum. “It was unprecedented, a truly remarkable move that to my knowledge had not been taken before,” says financial analyst Andrew Pyle. For a short interlude, there would be respite from a market whose volatility, with no logic and no trend, could become a siren song.

The following Monday, on the day of the referendum, traders who had placed their bets before the market shut down would have no choice but to be in the trenches, with a 50-percent chance of defeat. The general consensus today is that if the Yes side had triumphed, there would have been a staggering selloff of Canadian currency and bonds, as speculators who had positioned themselves for a No tried to divest their holdings. This would then have triggered a more general stampede.

On the night of the referendum, agitated and wondering what new career he might pursue, Brian D’Costa had only one strategy in mind in the event of a Yes win. “There’s millions and millions and millions of dollars worth of bonds I have to sell, and I ‘m trying to sell while a lot of other people [are] thinking the same thing.”

The prospect of a fire sale on the Canadian dollar had placed the federal department of finance in a delicate position in the run-up to the referendum. Sixty-five percent of Canada’s massive debts were due within a year, and the country was financing $9 billion in debt each week. A high-level official in the department now admits that he and his colleagues feared the country would be bankrupt by Christmas. No one would want to lend Canada money or buy Canadian bonds, least of all the once generous speculators who would by then have moved on to place their bets elsewhere. But the government could not be seen preparing for speculative flight by stockpiling currency. It would look bad politically and might scare off bond purchasers.

The finance department was particularly frustrated because it had learned that Quebec Premier Jacques Parizeau and his team were carefully and secretively planning for just such a crisis. Under his now-notorious Plan O (for obligation, French for “bond”), in the event of a Yes vote and subsequent speculative flight, Parizeau would tap into a $17-billion pool, much of it pension funds controlled by the Caisse de dépôt et placement du Québec. “Il y en a qui profitent de la peur de certains,” he warned. If frightened speculators sold off Quebec bonds, his government would buy them up, cheap and in large enough quantities to restore investor confidence, and make a profit at the same time.

On October 30, the ups and downs of the previous weeks were compressed into two short hours as the votes were counted. In the end, traders like Brian D’Costa got the outcome they had bet on, but it is doubtful that this translated into take-home bonuses. “It would have been pretty hard to make money on a No,” says Ted Carmichael, chief economist at J.P. Morgan. The dollar’s roller-coaster ride would have made it difficult for most traders to break even. Rumours about referendum losses still abound—“bucketloads,” as one trader suggested. No one is telling, except for D’Costa, who thinks he lost $3 million, “the most money I’ve lost in one day and I still felt good about it.”

The next day, he went to work and discovered that none of his colleagues wanted to talk about the harrowing experience they had just been through. It was a surreal moment. But he quickly realized that he too was ready to get back to business as usual. “It didn’t take long,” he says, “to go from fear right back into greed.”