Bursting of the bankers' bubble

Senior Business Correspondent in New York Accustomed to huge rewards and minimal interference, Wall Street’s bankers are retreating to their luxury upstate homes this weekend to ponder a greatly changed and uncertain future

THIS HAS BEEN a humbling week for the US. With markets and the economy in outright disarray, the country’s collective self-esteem has taken a serious bruising. Commerce looms large in the US psyche and the American Dream would not exist without it.

Wall Street stands as its epitome. George Washington’s statue overlooks the New York Stock Exchange there. That he was inaugurated as president at nearby Federal Hall – home to the first Congress, Supreme Court and Executive Branch offices – has deep symbolic resonance.

“Our collective confidence in our national future has been badly shaken,” said Senator Christopher Dodd, a Democrat, summing up the mood. Even those who dispute Dodd’s view acknowledge the faults that led to the crisis.

“I wouldn’t go so far as to say it’s undermined confidence in our future,” says David O’Reilly, a Dubliner who is chairman and chief executive of oil giant Chevron. “It’s been an unstable and disconcerting time, but I think ultimately the lesson learned is: we’ll work our way through this . . . If there’s one thing that needs to get fixed for the longer term, it’s that whole area of standards around lending.”

Meanwhile, life goes on. The bar car is busy but quiet on the homeward-bound shuttle train to Rye, New York, a neat, prosperous upstate town where many financial people have their homes. The train leaves from Grand Central terminal on the New Haven Line, and makes its way deep under the city towards Harlem and onward to the grassy boroughs of Westchester County.

The commuters are mostly men, of all ages, well-shaved, suited, sipping in silence from plastic cups, reading. Hardly any of them are talking.

The stock market is down after another hard day of decline in a year of sickening loss. The dollar is down, too. Newspaper headlines tell the story of the latest episode in the Great Crash of 2008. “MOVE YOUR A$$ – Dems dawdle on bailout as fears hit stox,” roars the pugnacious New York Post tabloid. “How bad will it get?” asks the lofty New Yorker.

It’s bad already, really bad. Not that you’d notice it in Rye, one of several towns on New York’s periphery to which Wall Street people retreat at night. There are plenty of Mercedes in the train station car park, and a bespoke tailor around the corner. On Purchase Street, an apt name, the shops and restaurants are invariably smart.

There are good prep schools here and a strong sense of community. A pretty mansion overlooking the coastline at Long Island Sound will set you back $11 million (€7.5 million), but not all houses are in the million-dollar bracket.

Rye is no Fifth Avenue on the Upper East Side, where the chieftains of Wall Street live in vast, luxurious apartments. But it is a nice place populated by people with good jobs and excellent prospects.

LESS EXCELLENT now, maybe. Weeks of unbridled mayhem on the markets have instilled fear into the very heart of the financial world. The restaurants are still crammed most nights. But there is anxious talk at many of the tables.

Although the US political system is now trying to rescue the banking system, people on Wall Street have been in the thick of the crisis for months.

“In periods like this you’re very vulnerable. Unless you’re politically astute and connected, you can be trashed instantly and people won’t give it a second thought,” says William Cohan, a writer who was a Wall Street banker for 18 years. Author of an award-winning history of investment bank Lazard Frères, Cohan says turmoil in the markets is extremely disruptive at a personal level for the street’s denizens.

“You’re going along working hard, doing work that’s getting you rewarded with a lot of money, an obscene amount of money, generally speaking, and then to have it all go up in smoke in a matter a days or weeks, it’s very frightening on an individual personal level,” he says. “If you’ve got a wife and kids, or whatever, to wonder about how you’re going to continue to put food on the table is very difficult.”

In the varied cultures of American life, Cohan says, the place stands resolutely apart. “Wall Street is a very insular small community in New York. It’s a very important driver of the system. But I think most people west of the Hudson and east of the East River don’t have a clue about why this is happening.

“The occasional guy lives beyond his means, then that’s a huge problem. That’s exceptional rather than the rule. Some people who get paid Wall Street compensation are smart enough not to overdo it. That doesn’t mean they don’t have a Park Avenue apartment or a nice house in the country, and a Porsche and a country club and golf club, but I think if they’re smart they haven’t overdone it.”

The turmoil consumes the city. Each day brings more news of the crisis, TV reporters breathlessly relating every aspect of decline in the same portentous tones. Not long ago, the relentless onward march of turbo-capitalism drove the narrative. Now there are chronicles of decline.

Credit has evaporated. Banks have failed, and others are going to the brink of failure before being rescued. Several big names are already gone, or have been taken over: AIG, Lehman, Fannie Mae, Freddie Mac, Bear Stearns. Goldman Sachs and Morgan Stanley, impenetrable only a few weeks ago, changed their spots overnight this week. On Thursday night, Washington Mutual collapsed. It was the biggest bank failure in US history.

Confidence is at a very low ebb. In the markets, it seems no one trusts anyone any more. Thousands of jobs are gone, with many more under threat.

“There is concern in the market-place from a jobs perspective, in the mortgage industry and in the debt business,” says an Irish investment banker who works for a big international organisation. “There has to be a follow-on from all this. There’s a lot of talent on the street right now. If you’re two years in the business, what are you going to do? People who have been around a long time are going to have a tougher time getting jobs.”

IN THE DINING ROOM of a big private members’ club, an old institution with rigorous rules of conduct and dress, all is quiet. Mobile phones are banned here, jeans too. In the post-lunch lull, the room is practically empty. But every so often an elderly gent stands up to take a closer look at the television by the bar. Henry Paulson, the treasury secretary, is live on the air again. He hasn’t been off-air for weeks.

Cometh the hour, cometh Paulson. Practically unknown outside investment banking circles before he entered government two years ago, the former chief of Goldman Sachs is like a man possessed as he struggles to bring the markets to heel. Yet there’s still no sign of safety.

Although many business insiders are still inclined, in public at least, to put a brave face on things, Paulson conceded this week that the meltdown has been “embarrassing” for the US.

“This is a humbling experience to see so much fragility in our capital markets and ask: ‘How did we ever get here?’ ” he said.

Change is afoot as a result of the crisis – and not just on Wall Street. It’s been 27 years since Ronald Reagan introduced an era of economic deregulation by declaring in his inaugural presidential address that “government is the problem”. Now, in a matter of weeks, George W Bush has reinstalled big government in the epicentre of big business.

While some critics say the rescue package represents nothing more than “socialism for the rich”, Bush maintains it’s the minimum required to avoid a “long and painful” recession.

Either way, the interventions will be a significant burden on American taxpayers for years to come. These manoeuvres are not in keeping with Bush’s own instincts and are alien to the principles of the Republican party, which favours small government in all circumstances.

Indeed, government interventions of the scale now being contemplated are regarded as far too “French” for comfort.

“I think we’re going down the road of France now; in all due respect for my French friends,” said Republican Senator Richard Shelby, an ardent opponent of the bailout plan.

In the view of one banker, the fault for the turmoil lies solely with the US government because it sets the parameters for business activity. By failing to regulate the complex products whose disastrous performance precipitated the meltdown, it simply cleared the way for Wall Street to do its thing. As a machine whose exclusive aim is to make money, he says, the street couldn’t be expected to do anything else.

If that’s a rather benevolent review of Wall Street’s role in the disaster, there are few who say the surviving institutions won’t be back to do their thing again.