9.28.08

Falling off the money-go-round

Dublin. Sunday, September 28, 2008  

By Niall Stanage in New York

In the wake of the collapse of Lehman Brothers and the bailout of AIG, the mood is tense among the capitalist classes on Wall Street as they wait to see which dominoes fall next.

It’s a Friday afternoon in Manhattan and the closing bell of the New York Stock Exchange has just rung, bringing to an end one of the most tumultuous weeks in Wall Street’s history. The previous days have seen Lehman Brothers file for bankruptcy protection, insurance giant AIG saved from collapse only by a massive federal bailout, and two trading sessions in which the Dow Jones Index dropped by more than 400 points.

Today has brought some respite. But you would never guess it from the faces of the traders dashing out of the exchange to catch trains to New York’s more affluent suburbs. They are harried and exhausted.

The traders must run the gauntlet of the media as they leave. A German television crew and a reporter from the French newspaper Le Monde are among those joining The Sunday Business Post in the search for comment.

Most of the traders are unforthcoming. Some walk past with their heads down, like celebrities caught stumbling from a nightclub by the paparazzi. Others explain apologetically that they have been ordered not to speak to the press on pain of losing their jobs. ‘‘Our bosses are scared that someone will say something really dumb,” says one thirty-something male, hastening away. One man eventually deigns to speak. He is Dan Ryan, a trader of Irish-American heritage. Ryan’s friends peel off at the sight of my notebook.

Despite the rally of the past hours, which has erased some of the losses sustained earlier in the week, Ryan believes - correctly, as it turns out - that any positive sentiments are likely to be short-lived.

‘‘Times are still bad,” he says. ‘‘When news comes out, there’s a knee-jerk reaction. The market goes up 300 points, but eventually it’s going to sell off again.” He sums things up with a statement both gloomy and grandiose. ‘‘There’s nothing good in the world,” he says.

An outsider who is out of earshot of such apocalyptic pronouncements and who ignores the brief flurry of activity that accompanies the end of the trading week could be forgiven for wondering what all the hysteria is about. There are few signs on Wall Street itself that the world’s most powerful nation could be facing its biggest crisis since the Great Depression.

Small knots of tourists wander around as usual, contorting themselves as they try to find an angle from which they can squeeze the enormous Stars and Stripes that adorns the front of the exchange into their souvenir photographs. Office workers perch on ground-level window-sills, smoking cigarettes and discussing plans for the weekend.

The only distressing sight to be seen has nothing to do with the intricacies of the financial world. A middle-aged woman, her hair lank, clothing bedraggled and mind troubled, keeps entering and exiting a nearby Starbucks. She eyes passers-by with suspicion and mutters about kidnappings.

Here in lower Manhattan, there are an enormous number of businesses, from bars to bakeries and courier services to coffee shops, that are dependent upon the financial industry for their existence. But if they are feeling any pinch from the market turmoil, they aren’t telling. Some, in fact, proclaim that the anxious mood is having unexpected benefits.

Vince Alessi is a managing partner at Bobby Van’s, an upmarket steakhouse within sight of the exchange. ‘‘The bar has actually been busier than normal,” he says. ‘‘We sold more champagne last week than during any other period this year. People want to be good to themselves.”

Alessi adds that he has even noticed a trend in the orders coming into his kitchen. ‘‘They want comfort food,” he says of his clientele. ‘‘In the restaurant, they want their good steaks; in the grill, they want meat loaf and mashed potatoes.”

Conversation in his establishment, however, is dominated by the discomfort being felt at every lurch of the Dow Jones index. The market turmoil is ‘‘the only thing people are talking about’’, Alessi says. ‘‘It’s pushed the presidential debates out. No one is talking much about sports. It’s all about this,” he says.

Alessi is relieved that there has been no downturn in his trade yet. But he wonders what will happen if the panic continues. For the time being, he says, the steakhouse is benefiting from people feeling the need to wine and dine clients with even greater vigour than before, in order to keep their business.

But the holiday season is looming and he worries that he will be facing cancelled parties and a depressed atmosphere. One person in a very different line of work takes a more optimistic view. Reverend Basiru Gbadamosi strides back and forth just across from the stock market’s entrance.

He attracts more than his fair share of quizzical looks, a true manic street preacher hollering about the need to find the Lord.

To the pastor, Mammon’s difficulty is Christianity’s opportunity. ‘‘All kinds of people hear the message here and they have a choice to receive it or reject it,” he says. ‘‘But we thank God that many more are receiving it now. We pray it’s not only because things are not going well. We pray people will be continuously seeking God more.”

The temple of capitalism seems an odd place to preach the Gospel, I suggest. ‘‘Here, everything is about money,” he says, half concurring. ‘‘They would lie for money, they would cheat for money, they would kill for money. I am not saying money is evil, but it is what people are willing to do for money. If people would accept God, they can have money, they can have peace, they can have happiness plus eternal life!”

The minister emphasises again that ‘‘there is nothing wrong with money’’, before returning to his proselytising. On this point at least, he evidently practices what he preaches. Having given him my business card, I receive an e-mail two days later detailing the merits of the work he is involved in - and asking for a donation.

The entrepreneurial spirit of his chosen locale seems to be rubbing off too. His missive includes the promise that a donation would be ‘‘a good investment and it will bring [a] harvest of blessings into your life’’.

A few hundred yards from where the reverend seeks converts, a man whose face is as leathery as his jacket is selling small American flags from a cart. He engages a woman dressed in the affluent uniform of the corporate world in conversation. She evidently knows him, and she lingers to chat.

As she leaves, I approach the man. For unspecified reasons, he will give only his first name, which is Frankie. He is well known on the street. Perhaps his vigorous positivity makes him a popular fixture.

‘‘Everything is perfect, everything is gonna go up, the government is gonna guarantee all the bad loans,” he says insistently. ‘‘It’s gonna happen. It’s gotta happen. Everything is perfect. Buy the warehouse! Buy the building! Everything is perfect!” That kind of sentiment is in short supply - especially among those who inspire more confidence than Frankie that they know what they are talking about.

Liz Claman anchors three hours of live television news every day on the Fox Business Network. The schedule would be demanding even in ordinary circumstances, but in recent weeks it has become almost feverish. Claman takes pride in the relatively new channel’s successes. Although it was only launched last year, it has, she emphasises, been ‘‘breaking stories left and right’’, including the authorities’ recent temporary ban on ‘‘short-selling’’, the technical term for betting that a stock’s value will fall rather than rise.

Claman has been covering business news for a decade - she was previously a mainstay of Fox Business’s main rival CNBC - and she insists that the brew of anxiety, speculation and raw fear is stronger than anything she has previously experienced. ‘‘I have never, ever seen it like this before,” she says. ‘‘And it is partly because the news flow is coming from so many directions so quickly.”

To lose concentration for even a few moments would be to risk missing a pivotal development, Claman says. She now has to remind herself to bring her glasses on set with her, so she can comb through the plentiful e-mails she receives from her sources while on air.

Claman is experienced enough to know that such a febrile atmosphere can lead reporters up blind alleys and past the point of no return if they do not maintain a sense of perspective about the information they receive. ‘‘It’s not like we go: ‘There’s a rumour, let’s put it out there.’ We want to get the information out to our viewers, but we want to deliver it in a calm manner. I call this the no-hysteria zone.”

Her caution is well justified. Earlier this month, United Airlines’ stock plummeted after a report referring to the company’s bankruptcy was carried by the Bloomberg wire service. The airline did not have any intention of declaring itself bankrupt. The story in question was six years old and had been circulated in error. Bloomberg, Google and two newspapers continue to quarrel over who was to blame for the foul-up.

For Claman, such episodes only further illustrate how the market is losing its collective cool. ‘‘I don’t think things are moving on basic fundamentals,” she says. ‘‘People are not having an intelligent discussion on the value of things. They are just in the middle of all this emotion.”

Three days after our interview, Claman will hear that point echoed by one of her own interviewees: Senator Hillary Clinton, who appears live on Claman’s show from outside the stock exchange, having just emerged from a meeting with New York Federal Reserve president Timothy Geithner.

‘‘We live right now in a world that is fraught with psychological feelings that may or may not be reality-based,” Clinton tells Claman. ‘‘We need to stabilise it . . .Everybody needs to take a deep breath. Let’s just calm down here.”

Lowering the emotional pitch of the financial community might be easier said than done just now. Jamie Cawley, who was brought up in Dublin but has spent most of his career in the US, is the chief executive and chief financial officer of IDX Capital, a firm that brokers the sale of credit derivatives.

‘‘There is definitely nervousness out there,” Cawley says. ‘‘This is the first Monday in a while where there hasn’t been some kind of major catastrophe. I think last week in particular, the speed at which things went lurching from one crisis to another created an awful lot of panic and fear.”

The recent disintegration of long-established names such as Bear Stearns and Lehman Brothers has left many on Wall Street disorientated, struggling to get their heads around both the gravity of the overall situation and the job losses that have hit friends and erstwhile colleagues.

Cian Cotter, a native of Co Cork, is a director of Insight Venture Partners, a venture capital firm. While his company is, he says, ‘‘pretty closeted from any direct impact’’ of the crisis, he is as stunned as everyone else by the seriousness of the malaise afflicting the American economy.

‘‘When you see Alan Greenspan on television talking about this as a once-in-a-100years event, it hits home that we are in a very uncertain state. When you see the US government buying one of the biggest mortgage companies in the world, it’s almost surreal,” Cotter says, in reference to the de facto nationalisation of Fannie Mae and Freddie Mac.

‘‘We deal with a lot of investment banks and a lot of the people I know from there are no longer in their jobs. I was even looking at whether I should be separating money I have in a current account over several banks [in case they go bankrupt].When you think that is the case in 2008 in the United States, it’s almost unbelievable.”

Adjectives such as these - unbelievable, unprecedented, surreal - are heard widely at the moment. In Irish terms, one might even suggest that the American economy has entered a Gubu phase. No one seems to know what happens next, whether the colossal rescue package put forth by President George W Bush will work or whether there are more earthquakes to come.

Although Jamie Cawley is not as bearish as some, he acknowledges that the US markets have been experiencing a perfect storm in terms of the nationalisation of Fannie and Freddie, the loss of Lehman and the bailout of AIG’’.

Cawley’s niche is not suffering especially harshly, but no one gets away scot-free when the problems are so widespread. ‘‘We started the year with 15 customers,” he says. ‘‘Now with the loss of independence by Merrill and the loss of Lehman and Bear we are down to 12.To lose a customer is never a good thing, but one moves on.”

Cawley is among those who are guardedly optimistic that there may be stabilisation and a turning point just around the corner. ‘‘We did come to the edge of the precipice. We looked into the abyss on Thursday. But people now know what needs to happen.

‘‘One of the worries had been that the Fed seemed to be making inconsistent calls: ‘We’ll save Bear but we won’t save Lehman’, and that kind of thing. Now people are hopeful. They see the Fed coming in on a more strategic basis rather than in an ad hoc way as it was before.”

Despite Cawley’s hopefulness, however, even he seems to worry that the underlying causes of the crisis have not been neutralised, much less eradicated. ‘‘We have yet to arrest the fundamental two issues that got us to where we are, and that is the double-impact of leverage on balance sheets and the weakness in the housing market,” he says.

‘‘You can’t have a situation where you have managers not knowing what they’re actually investing in . If they’d known what they were getting involved in, we wouldn’t be where we are today.”

It is precisely that opacity that concerns even some of the most experienced people on Wall Street. Dan Flynn of Alaron Tradingh as been in the industry since 1981.He vividly recalls the crash of 1987, but believes that there might be even darker days ahead.

‘‘This will make 87 look like a walk in the park,” he says. ‘‘I am normally an optimist, but I have a hunch this might only be the tip of the iceberg.”

Liz Claman was not yet a business reporter in 1987. But she has a clear memory of the turn-of-the-century dotcom crash. She fears the current situation is much worse. She notes that, whereas the dotcom disaster was largely contained to the tech industry, the financial crisis seems to be causing bleeding in far-flung sectors.

‘‘When Lehman Brothers happened, you had Constellation Energy, an energy company, having to have its stock halted,” she says with near-incredulity. ‘‘So you have the collapse of an investment bank that is then affecting an energy company. And does that then destabilise other things?”

Cian Cotter makes a parallel point about the interconnectedness of today’s market: ‘‘Nobody wants to lend money, and when that happens, the lack of confidence becomes a self-fulfilling prophesy because everything goes down. Then you have banks having to sell their own assets, and because they are all trying to sell them simultaneously, even the value of the assets goes down.

‘‘Hank Greenberg, the guy who was head of AIG and then got out, was on television the other night and he was saying about the company: ‘It’s not a broken business, it’s a short-term liquidity problem’,’’ Cotter continues.

‘‘Now, if you don’t have the money to survive another 24 hours, that sounds pretty insolvent tome. But on the other hand, I got what he was saying: the company underneath had a good business, and if they could have got through the immediate problems they would have been fine. But they didn’t have any money and nobody was willing to lend them any.”

Liz Claman is among those struck by how dissonant the spate of federal bailouts and rescue packages seems from the normal models of American capitalism.

‘‘The beauty of America was that there was an ethos that allowed people to fail. Now, they are running around, and they are trying to put pillows down wherever they think people are going to fall. But it is still rock-hard below those pillows.”

Claman says that all the talk of federal rescues can obscure the fact that it is American taxpayers who will ultimately be stuck with the bill. ‘‘It’s you and I who are actually bailing them out,” she says.

Yet Claman believes a huge rescue plan might indeed have been necessary. And, in making that argument, she gives voice to a common fear: that those who hold the reins of power are either themselves riding blind in relation to the real magnitude of the crisis, or they know something the rest of us do not.

‘‘I don’t know what they know,” she says. ‘‘They may have got some information and insight that we have not got. That’s what really interests me: what do they know that convinced them this was necessary?”

Where does the American economy go from here? No one seems inclined to make firm predictions. Cotter notes that ‘‘crises like this always take paths that you do not expect: it is possible that on Monday all the markets will be back on some kind of normal footing’’.

Cotter’s best guess is that the US is facing ‘‘two to three quarters of a very rough, stumbling economy’’ that will probably go into negative growth ‘‘while the system unclogs itself’’.

He argues that the chances of a Great Depression-style implosion remain small, but says the prospect can’t be dismissed as utterly implausible.

Claman exudes more faith. ‘‘We always come through the vicissitudes,” she insists. But her optimism goes hand in hand with doubts. For all the efforts to stabilise the markets, no one knows when the next unravelling might begin. ‘‘You can put cement over a rotting problem,” she says. ‘‘But that doesn’t solve the problem.”

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