Market Epicurean


The Month I Could Never Forget: A Not-So Happy Anniversary – PART NINE

Pipe

This 777 Was A Crash not a Landing

I woke up in New York City Monday morning, Sept. 29, dreading what was to come.  By now it had been two calendar weeks since Lehman Brothers had declared bankruptcy, yet those two weeks felt like two calendar years – not just for the markets and news calendars, but for me personally.  Because my own firm at the time, Morgan Stanley, had apparently calmed their own waters by selling a large portion of themselves to Japanese bank, Mitsubishi, and re-organizing as a bank holding company, the anxiety around my own firm’s viability had subsided (though it would be violently re-provoked the first weekend of October, when that Mitsubishi deal was allegedly falling apart; by Monday morning the deal closed and deep breaths were taken).

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But on this Monday morning, September 29, I knew several things: I was meeting with some very nervous and scared clients that day, the House of Representatives was voting on the TARP bill that day – the resolution the Fed and Treasury Department had put before Congress to attempt to stabilize markets – and that dominoes had not stopped falling yet.  As part 7 and 8 of this series highlighted, we were still absorbing Washington Mutual and then Wachovia just days before, and I was not getting used to a daily wake-up thought of, “which gigantic U.S. financial institution is going to go out of business today?”

It was a high anxiety period, to say the least, but at the same time, it was my job.  I was glued to my various electronic devices because I was determined to communicate with clients early and often as their anxieties warranted.  I met with a Manhattan client of mine at 8:00 am for breakfast this somber Monday morning at the power breakfast Loews Regency venue at Park Avenue and 61st Street.  I do not recall what my client ordered, but I do recall what I ordered – scrambled eggs, bacon, and a side of fruit.  I recall that, because when the server came to clear our dishes, my plate was still completely full – with scrambled eggs, bacon, and a side of fruit.  Not a bite of breakfast was eaten (by either of us).  The emotional wear and tear was becoming a factor physically.

It is important to contextualize something for you in the midst of this series which has obviously been focused on the headline drama of financial firm failures and large M&A transactions.  While markets were dealing with major events like the Lehman bankruptcy and the AIG bailout and the corporate rescues of troubled firms like Merrill Lynch, Morgan Stanley, and Wachovia, it isn’t like the rest of the world had shut down.  Other market-relevant news was still coming – news of the “normal variety” – and it, too, was atrociously bad news at each and every step.  News of Washington Mutual being shut down by the FDIC was not exactly interrupted with a report of industrial production growth or decent jobs data.  The market was absorbing all sorts of extraordinarily bad news, intermittently announced between all sorts of regular bad news.  Commodity prices – tanking.  Manufacturing – collapsing.  Jobs data – no one could predict high enough losses.  Auto sales – worse than expected. Consumer confidence – please.  You get the idea.  The bad news was broken up with other categories of bad news.

I believe it was noon that day that I met with another client for lunch at a patio outside of 30 Rock that we had met at several times over the years (Morrell’s Wine Bar & Café).  We had some specific matters to discuss relevant to this client’s situation, but of course, the conversation was overwhelmed by the state of markets and state of affairs.  At 1:00 or so when we ordered our lunch we both looked at our blackberries to see the market down 400 points.  I put mine down and looked at my other phone:  CNBC alert after CNBC alert that the House may not have the votes to pass the TARP bill.  I made a couple calls and nibbled on a few pieces of cheese we had ordered on the cheese platter (which would become the entire sum of my food consumption for the day).

“Do you need to go trade this drop?” he asked me.

“Anyone stepping in today to buy or sell is going to get their faces ripped off,” I replied.

In the middle of a market panic, selling exacerbates the problem and indicates a foolish understanding of market mechanics.  But panic-buying can be equally reckless.  A sober and judicious time to re-evaluate asset allocations would come (for me it would come Wednesday, October 1 in the Admirals Club at LaGuardia Airport wherein four hours I re-allocated one hundred client accounts myself – this was before I had two full-time traders working for me!).

At 2:30 pm the market was down over 500 points.  At 3:00 the market was down over 600 points.  At 3:30 pm the market was down over 700 points.  And by the 4:00 pm close, the market would be down 777 points, the all-time record drop on a points basis for the DJIA (obviously the percentage drop was worse on Black Monday in 1987).  But this percentage drop was not laughing matter either – down 7% on the day, and within a month that had already had plenty of 3, 4, and 5% drops.  The VIX (fear index) spiked up 33% – to an all-time high of 46.72 (for context, it sits around 11 or 12 most of the time today).  And how did “international diversification” help equity investors?  The UK market was down 15%, and Brazil was down 10%.  (“Correlations go to 1.0 when you need diversification most”)

The market would rally back on Tuesday when the Senate passed TARP and it became clear that the House would be re-voting.  But let me make something very clear for everyone: For all the good and bad that can be said about TARP, the idea that it ever calmed stock markets is insane.  The TARP bill failed on September 29, and the market tanked 777 points.  True enough.  But on October 3, the House re-voted and passed the bill (there is nothing like an 800-point drop in the Dow to scare the blank out of elected officials).  The market opened on October 3 at 10,483.  It went as high as 10,800 that day around hopes for TARP passage.  Well, TARP passed, and the market closed that day at … 10,325 – almost 500 points off its intra-day high.  We would open Monday, October 6, with TARP now the law of the land and $700 billion to be injected into the country’s financial system, at 10,300.  A week later we were at 8,500 on the Dow.  History does not seem to recall that the market dropped almost 2,000 points – a stunning 20% more – after TARP passed.

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The reasons are actually not that complicated.  TARP had been presented as a mechanism to “buy toxic assets off of the balance sheets of our financial institutions.”  Within days of its passage, it became obvious that they had a change of heart – they were going to directly inject equity into these companies and take a stake in them – a sort of quasi-nationalization that pummeled their stock prices further.  At this point, markets had absolutely no confidence about anything, and presumptions for worst case scenarios were prudent and commonplace.  Fears were rising that even the TARP bill itself had under-estimated the financial hole embedded in banking balance sheets.  Some of these fears actually did come to fruition – even after the TARP intervention, Citi would end up needing over $200 billion of additional “government backstop” in November.  Bank of America would aggressively look to abandon their disastrous acquisition of Merrill Lynch, only to be told it was in the “national interest” for them to complete it.  There were zigs and zags throughout the fall, but no level of market normalcy was achieved in October of 2008 – just continued declines.

Our concluding contribution to this series will highlight when and why the markets did finally begin their stabilization and restoration.

On this September 29, 2008, Monday afternoon, things soon turned into early evening.  A city with 4 million people working in it each and every day felt like an absolute ghost town.  My night time meeting canceled on me (a money manager who would soon lose his job).  I walked up and down the streets of midtown, just listening to the sounds of uncertainty that one could feel in the air. I sat down at the bar at Ben Benson’s steakhouse at 52nd Street between 6th and 7th Avenues.  I hadn’t eaten any real food all day, and I had a few hundred emails to respond to and clear out.  I nibbled at my steak a bit (even in the midst of global market panics, a medium-rare ribeye is hard to turn down).  The mood in this bustling, landmark steakhouse was catatonic.  I literally sat there wondering if Lehman’s bankruptcy had hurt their business (the 745 Seventh Avenue headquarters of Lehman were just around the corner).

Ben Benson’s would close their doors a year later.  There was no TARP package for midtown steakhouses.

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