Skins and Bone

Short Synopsis
In the world of finance, if you can foresee the worst-case scenario, you can
protect against it. If you can make the worst case happen, you can profit
enormously. That is the proposition behind Skins and Bone.
Background: A few years from now, after Cyberwar I, the United States has
constructed the largest, most carefully-protected database in history, the
Interagency Communication Channel. Everyone calls it the Yak. This story
takes place in the two years following the conclusion of Hack the Yak, in
which Joe Mayfield, a self-titled ordinary guy, discovered a malevolent
software lurking in the Yak, lost his artist wife, and met a brilliant Yak tracker,
Louise Napolitani (Weezy). Skins and Bone is the second novel in the series.
In Skins and Bone, Joe gets an interview with Zhou, Cadwallon and Gordon
(ZCG), an international investment bank that specializes in complex financial
risk management products. The signature product is called a Skin, a basket
of commodity futures designed to protect against political unrest related to a
commodity. As Joe is being interviewed in New York, a plot is playing out in
which the President of Zambia expires, supposedly in the throes of passion,
but in fact caused by a heart-stopping shot. With Zambia destabilized by his
untimely exit, the price of copper soars and the new African Monetary Unit
(similar to the Euro in concept) gyrates wildly. The outlier portions of ZCGs
Copper Skin are purchased into a hedge fund called Red Sock controlled by
the head of ZCGs trading desk, Ross Ackerman. Ackerman directs his lead
trader, Artyom Povreshenko (Arty Pov) to make the purchases surreptitiously
and has retained Nick Braithwaite, a South African security specialist, to
make sure the least likely political events actually occur to the benefit of the
Red Sock.
Joe is hired as an analyst by ZCG and goes through training with the
quantitative analyst who puts together the Skins. When Joe enthusiastically
explains Skins to Weezy, she thinks for about ten seconds and says, Its a
scam. No honest investment can deliver the returns Skins have been
returning and not be a scam. Joe gets angry. Are you calling me
dishonest? No. So youre calling me stupid? Weezy goes back to
Baltimore, hurt, mad and realizing that shes in love with Joe. Its like loving
someone with a drinking problem. Joes drunk on being a New York finance
guy
Back in Baltimore, Weezy uses her computational sophistication, the IACC
database (which by now protects all financial transactions) and her Internet
buddy HoHum to get very close to whats really going on close enough to

get Ackerman to commission Nick Braithwaite to eliminate Weezy and

HoHum. They succeed with HoHum but not with Weezy.
Joe is promoted, and he and Weezy are invited to a conference in Vienna.
When the conference is over, ZCG takes its employees and potential
customers on an elegant trip down the Danube to Budapest. Braithwaite
hires Armand Santucci to kill Weezy and make it look natural. Santucci
nearly pulls it off, drugging Weezy and pushing her overboard. She survives,
barely, and is taken to a hospital in Hainburg and der Donau, where Santucci
tries again but is stopped by the local cop, Herr Prohoffer.
Its now obvious that something bad is going on. Joe, his boss Eric
Frauenhorst, Henry Barber (the FBI guy from Hack the Yak) and Weezys coworker back at IACC put their heads together. The conclusion is that the
evidence of any real crime is not enough to prosecute Ackerman, nobody can
find Braithwaite, and the financial crimes will probably draw a wrist slap for
those involved.
Weezy calls on several superior hackers, all friends of the now-deceased
HoHum. What the FBI and Interpol cant do, Weezys hacker friends
accomplish quite effectively, creating dossiers that detail the
communications and actions taken and tracking down Braithwaite, who has
gone to ground in South Africa.
Ackermans wife Emily, whom he has used as trustee for RedSock, distributes
the trusts without Ackermans knowledge.
Weezy's hacker friends provide enough information to put Arty in jail for a
short time and Ackerman for a considerably longer time. Ackerman returns
to New York from Europe to find both the RedSock money and Emily gone.
Charged with much more than a few trading irregularities, he contacts
Braithwaite, threatening him with exposure and demanding help to disappear
with the relatively modest sum of $6,000,000 hes stashed. Braithwaite
agrees to help Ackerman, and does so in a complex maneuver that leaves
Ackerman under water, financially and physically. The hackers track Nick
Braithwaite to Lesotho. When he attacks a police officer, he is shot and
killed.
Joe and Weezy end up in the same place they were at the end of Hack the
Yak, Panacea, Florida on the Wakulla River.
Technical background on Skins:
There is a theme common to Skins and Bone and Hack the Yak: big scams
are usually very simple cake covered with appealing frosting. (See, e.g.,
mortgage derivatives, Madoff Ponzi scheme, Enron.)

The plot of Skins turns on a risk product called Political Exposure Assurance
Units. Wall Streets penchant for naming products to generate clever
acronyms seemed to have failed here until someone notices that PEAU is
Skin in French, and the product becomes a SKIN. The Skin is a bet on the
financial exposure that would result from political unrest, most often in the
developing world (which by a few years from now is most of Africa, some of
the Middle East and parts of South America).
At first, a Skin was a basket of commodity and currency futures constructed
for specific situations faced by large clients. For a big player, ZCG can put
together a ladder of puts and calls covering copper and the AMU, perhaps
related commodities and shares of other companies in the same business.
Pretty straightforward, and ZCG would reap moderate fees.
Then the quants got involved, bringing to bear stochastic calculus, collars,
iron butterflies, fences, strangles and other exotic derivative approaches.
Ever more variables were added, and as complexity grew, fees increased and
their size became less visible.
As Skins profits rose, ZCG sought ways to expand the Skins market. It didnt
take too long to figure out that the original hedging strategy could appeal to
smaller companies if they could buy just a slice of a larger pie. After all,
political risk in, e.g., Zambia is pretty much the same for each company. So
the quants went to work and sliced Skins into tranches representing different
levels of risk preference, similar in concept to the collateralized debt
obligations that during the US real estate bubble had tranches ranging from
AAA to industrial waste.' Once sliced, a Skin tranche moved from a complex
but traditional hedge to an investment opportunity and it could be diced
into bite-sized morsels for individual investors. You really didnt need to be
hedging a risk to buy in. People had been betting on political outcomes for
centuries, but ZCG painted scenarios that allowed investors to translate their
own world views into investment decisions with great apparent precision,
enhancing the appeal of Skins.
If the whole Skin looks like a triangle, the broad bottom tranches give some
political risk protection at relatively low cost, with the scenarios getting less
and less likely but more expensive as the tranches stack on top of each
other. The midrange protects against the current pessimistic outlook of the
august body of opinion leaders, academics, former high-level diplomats that
ZCG pays to write the scenarios for each area. The top tranches of the
triangle protect against the low-probability outliers that have huge financial
consequences. As one banker said in disgust, You cant price em high
because nobody really believes the scenario will happen, and you cant price
em low because if it does, youre screwed.

So those top tranches, which the traders referred to disparagingly as

industrial waste, were a problem. After several unsuccessful attempts to
lay off the risk to counter-parties, ZCG decided that the top portions were the
cost of doing business. Wont happen anyway, as the head of trading, Ross
Ackerman, was wont to say. But if you could make the worst case happen,
you would profit enormously. Thus did Ross Ackerman found RedSock LLC,
begin purchasing the outlier tranches and hire Nick Braithwaite to make sure
start the very unlikely would happen.