Once upon a time, there was an emperor who had been thrown out of the kingdom of New Jersey and was seeking another place to rule. Corzine, for that was his name, opened his wardrobe at home one day and spotted some clothes glimmering at the back.
Years before, when the emperor had ruled the illustrious merchant house ofGoldman, he had also been forced to leave. To compensate him, the Goldman merchants had woven a suit and cloak out of what they assured him was their finest fabric. "These clothes will shield you always," said Paulson, the partner who had taken the emperor's wreath. "If implied volatility spikes in the ducat options market, put these on and all will be well."
Emperor Corzine donned the Goldman clothes and regarded himself in the mirror. His cloak looked threadbare and he thought he could spy his naked legs through the cloth. "That is impossible," he said to himself. "Goldman garments last forever, even in public service. My eyes are deceiving me."
The emperor wandered along Wall Street and saw that the passers-by were staring at him, so he told them where his clothes had come from. They immediately realised they were seeing things. They had mistaken him for a tramp heading to Occupy Wall Street's camp for breakfast, but he was clearly an aristocrat.
As he walked on, the emperor came across a small merchant house called MF Global where humble traders were selling sugar and bales of wheat. "This reminds me of the farm in the land of Illinois where I grew up," the emperor said to himself. "Perhaps I can help them to find prosperity."
The emperor had another thought. After he left the house of Goldman, he had been appointed a senator in the Columbian district, but had never become High Treasurer and been permitted to sign the green banknotes that were used throughout all realms. Other Goldman partners had achieved this office, including Paulson and a wily vizier called Rubin. He envied them.
Emperor Corzine resolved to take over this small trading house and make it a rival to Goldman. That would provoke envy among the merchants who had rejected him and the peasants of New Jersey. The peasants had stormed the emperor's palace in Trenton one day, led by a rotund baron called Christie, who spoke their language.
The emperor was ushered into the presence of MF Global's traders. The partners greeted him warmly, saying that they were in sore need of his leadership because many unusual events had occurred. "There have been fierce storms in this parish of late and a flock of black swans has swum up the East River and is hissing at us," one said.
"Fear not the black swans," the emperor assured the traders. "The weather will revert to normal and white swans will return to the Hudson. Trust me on this – I've been around the block a few times. Let me tell you of an arbitrage trade I did on the bonds of sovereigns many years ago. It took time to work but I harvested many gold coins."
Some of the traders wondered if they should heed the emperor. He was oddly attired and his beard was grey. Perhaps he is just re-living past glories, they thought to themselves. But the emperor showed them the label sewn inside his worn-out suit. "Goldman," they said admiringly. "They are the finest of weavers. We were wrong to doubt him."
Shortly afterwards, a messenger arrived from far-off lands with tales of great events. The grand emperors of France and Germany had settled an argument and lent florins to the southern kingdoms that had debased their currency. "We should load up," Emperor Corzine cried. "We must trade in size. Here," he told the treasurer. "Borrow 40 more bags of coins like this one. Wear my cloak and no one will refuse you."
Then one of the MF Global traders summoned his courage and spoke up. "My Lord, are you certain about this?" he said. "The weather is still stormy, and one of the black swans bit my leg on my way along Wall Street this morning. It left a nasty gash. These are strange and unsettling times. Can we trust our cousins from the old lands?"
The emperor thrust out his arm angrily and a sleeve appeared to fall off his suit, though the traders knew that it could not be so. "You are a mere trader and you do not hobnob with kings and queens, as I often do. An emperor's word is his bond and these bonds will fetch a nice spread in the repo market. With a bit of leverage, it's easy money."
For a time, all was well and gold coins piled up in the trading house's treasury. There were so many that it was difficult to keep track of which of the coins belonged to the traders and which to the farmers whose commodities they bought and sold. Sometimes, the coins got mixed up in the same bags.
Then one day, bad tidings were received from the Athenian empire. The northern emperors had ordained that their bankers be taken outside and given a haircut. Half of the bankers' hair had been shorn, and still the Athenian peasants wanted more. "How can this be?" the emperor said in dismay. "I warned them against democracy."
An angry crowd of farmers was gathering outside on Wall Street and, as they burst through the doors to demand their coins back, one of the farmer's children pointed at Emperor Corzine in wonder. "He has no clothes," the boy cried.
The traders turned to the emperor and realised that the child was right – he had been trading naked all along. Then they saw that he was stuffing yards of the most exquisitely shiny silk into a canvas sack. "I put this in my contract," the emperor said. "It's a golden parachute."