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Financing The 90's

Special Report


It's a fascinating spectacle. The people and institutions whose unrelenting use of debt fueled the Excessive Eighties are suddenly quiescent, even contrite. Once-mighty real estate barons are quietly filing into bankruptcy court. Even the Street's top names are on the defensive. When Salomon Brothers Inc. fessed up to manipulating government note auctions, it was a sign of the times that Chief Executive Warren E. Buffett broke with Wall Street's tradition of genteel defiance by making an elaborate, formal apology.

Call it what you will. Perhaps what we are entering is an Era of Atonement, in which we all must suffer for the reckless lending practices that were endemic during the 1980s. Surely, taxpayers will be rending their 1040s for years to come, as they foot the bill--to the tune of $500 billion--for the incompetence and mendacity of savings and loan executives and the neglect of state and federal regulators. Easier to grasp than that huge sum is the sting of unemployment visited upon legions of refugees from financial-services firms and leveraged buyouts. And the cruel consequences of the credit crunch can be found everywhere.

Yet those harsh realities are molding a new, and ultimately firmer, financial terrain, as mapped out in the pages that follow. "Deleveraging" is in, though only the healthiest companies have been able to latch onto the resurgent stock market (page 114). Fortunes are being made by a melange of investors, lawyers, and restructuring specialists who are riding the surge in corporate reorganizations (page 124). But for the survivors in the financial-services industry, caution is the byword. With economic growth expected to be slow for years to come, banks and insurers are not likely to once again fall like ninepins before the charms of regional real estate barons such as Atlanta's John Calvin Portman Jr. (page 116). With bank purse strings drawn taut, many buyers have been unable to snap up depressed properties. That may be just as well, because the real estate doldrums may have a few years to run.

Empty office towers are but the most visible signs of the challenge that is facing the world of finance. As the financial-services industry shrinks still further, the layoffs that have already plagued Wall Street will spread through banks and insurance companies (page 118). Investors, who have already seen "safe" income vehicles such as annuities turn sour, may face years of picayune yields (page 122).

Meanwhile, regulators are engaged in the most extensive reevaluation of the financial-services industry since the 1930s (page 128). Now, they will have to find a perhaps-elusive happy medium between two extremes: bearing down so hard that the credit crunch continues, or reverting to the anything-goes posture of the Reagan years that created the mess in the first place.

Look closely at the process of retrenchment and reorganization that is unfolding. Yes, the pain is real. But financial companies are not engaged in self-immolation. Rather, they are in a healthy process of regeneration. The system that will emerge will be leaner and stronger, better able to take advantage of the innovations of the 1980s while less prone to repeat the era's abuses.

Indeed, the first firms to feel the bite of the new era--Wall Street brokerages--are beginning to emerge from their ordeal. Their payrolls long since pared, securities firms are on the rebound. Profits are up sharply, balance sheets are being strengthened, initial public offerings are coming back, and some firms are even hiring. It's a far cry from the rip-roaring '80s, of course. And in light of the aftermath, what else is there to say but "amen"?Gary Weiss in New York

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