Chicago has always rolled with the punches. In 1916, poet Carl Sandburg celebrated the city as "hog butcher for the world, tool maker, stacker of wheat, player with railroads." Even then, Chicago was evolving into a distribution and manufacturing hub for the vast Midwest. Later, it emerged as a global financial center, whose futures exchanges were envied and emulated the world over. As brain surpassed brawn in the national and local economies, the place Sandburg extolled for ever "building, breaking, rebuilding" moved from being the City of Big Shoulders to the City of Big Ideas.
But today, even as Chicago thrives amid the national boom, it seems to be coming up short on ideas for what comes next. Other great cities can claim dynamic sectors that drive them--for Los Angeles, it's entertainment; for New York, it's securities, banks, and media; for Boston, it's high tech and mutual funds. But Chicago is still struggling to find the spark that will ignite it as a 21st century city. And worryingly, two sectors--finance and high tech--that should carry it forward are lagging badly.
Simply put, Chicago is slipping as a business capital. Its global leadership in important corners of finance, especially futures and options, is under siege by both foreign rivals and domestic upstarts. Last year, Frankfurt's Eurex took Chicago's title as the world's biggest futures exchange and continues to widen the gap. Many of Chicago's proud corporate names--such as Ameritech, Amoco, Illinois Central, Santa Fe, Marshall Field's, Continental Bank, Inland Steel, and Morton International--have been spirited off in the global merger sweepstakes, taking jobs and commercial visions along with them. And only one major bank, Bank One Corp., remains locally owned, and it is vulnerable to industry consolidation even as its recently imported top management--much of it from New York--struggles to integrate old acquisitions from around the country. Chicago, a logical base for institutions that want to span the nation, lost out years ago in the competition to create powerhouse banks because of Illinois' resistance to branch banking.
Life has hardly been kinder to the Chicago area's insurers and investment houses. Insurance giant Allstate Corp., sundered from its parent Sears, Roebuck & Co. years ago, is grappling with margin-shattering competition as it downsizes its workforce. And while some mutual-fund managers are showing some solid gains lately, far-bigger rivals in Boston, suburban Philadelphia, and Denver are building on advantages they've racked up over the past couple decades. Instead of growing independently, the biggest Chicago area fund companies--such as Van Kampen and Kemper--operate as arms of large and distant corporate parents. "Chicago is in a decline, a continued slow decline," argues George G. Kaufman, a longtime finance professor at Loyola University Chicago.
"NIGHTMARE STORIES." Chicago had a shot at being a center of the New Economy. Only six years ago, Marc Andreessen, then a student at the University of Illinois, was forced to move West to California to pursue funding for a great tech idea: code for a browser that would help transform the Internet from monochromatic text into pages of colorful information and imagery. The problem: a lack of venture capital. And so, Silicon Valley became the home of Netscape Communications Corp. and the World Wide Web, not Chicago. Laments Shaye R. Mandle, president of the Illinois Coalition, a tech booster group: "One of our nightmare stories is Netscape."
To be sure, the declines are not obvious. With its meandering river and a downtown so picturesque that it served as the backdrop for the Julia Roberts' hit movie My Best Friend's Wedding, Chicago continues to gain as one of the country's most livable urban settings. Resurgence has taken hold in the famed Loop and in trendy neighborhoods such as Lincoln Park, where well-heeled ex-suburbanites flock. The crime rate is down, and unemployment, in this city of 2.8 million, stands at just 4%, the healthiest level in decades, even though other cities have seen sharper slides in joblessness (table). Boosters cite such pluses as a surge in service-sector employment, a reasonable cost of living, rich cultural and entertainment amenities, a diverse economic base, and easy access to global transportation. "We have a whole, massive inventory of competitive advantages," crows Paul O'Connor, executive director of World Business Chicago, a public-private city promotion outfit.
Indeed, vacancy rates in downtown towers are so low that a few courageous developers are adding office and hotel space in the city's commercial core. Mayor Richard M. Daley has been laboring to improve the city's schools and housing, clearing away slums and replacing them with appealing townhouse complexes. And housing is affordable. Says Daley: "[This city] is very diversified. We're not dependent on one industry, and that's its strength." Should the tech industry, for example, slump, Chicago will be less affected than such cities as Seattle and Dallas.
But behind the bustling facade of Michigan Avenue, the city's glitziest retailing street, Greater Chicago is wrestling with some deep-seated challenges. Some local corporate icons seem mired in shopworn approaches while fleet-footed rivals make big gains. Sears, for one, has largely stuck by the cumbersome old-style department-store formula even as more nimble competitors such as Kohl's cut into its apparel business and "big-box" discounters, such as Home Depot and Best Buy, carve up its appliance business. McDonald's Corp. has slipped into slow-growth mode in a saturated fast-food market, unable to come up with a customer-winning new approach. And most dramatically, UAL Corp. has become a money-losing service nightmare, at odds with its worker-owners at United Airlines and hard-pressed to capitalize on its industry-dominating position.
As many of its vaunted corporate names are disappearing, gobbled up by more aggressive rivals, the city is losing important corporate headquarters and thousands of jobs. Since British Petroleum PLC took over Amoco in 1998, for instance, it has done away with some 1,500 jobs in Chicago and even removed the company's name from a local landmark tower. Unilever Group, which four years ago took over cosmetics maker Helene Curtis, announced on Sept. 29 that it would shutter its Chicago manufacturing plant, cutting 600 jobs as it moves production to facilities in Connecticut, Missouri, and North Carolina. Of course, in tough times, local managements may be forced into such bloodletting decisions, too, but a company's home-base usually gets special consideration. "There's a certain bias toward the headquarters hometown," says John E. Rau, former chief executive officer of LaSalle Bank, a property of ABN Amro since 1978. "That's where the decision making occurs and where the money is spent."
Beyond the clouds gathering over much of the city's older corporate ranks, Chicago has failed to keep pace in emerging high-tech areas. In addition to tech pioneer Andreessen, plenty of other big names have gone elsewhere to fulfill their dreams, too. Chicagoan Lawrence J. Ellison migrated to Silicon Valley to build Oracle Corp., now the world's No. 2 software company. Tom Siebel followed Ellison to Oracle and then founded high-flying Siebel Systems Inc., not in his old stomping grounds but in San Mateo. "You know where I go for Illinois technology seminars?" quips Michael W. Ferro Jr., CEO of Chicago's ClickCommerce Inc. "I go to San Jose."
NO DOUGH. Although Illinois ranks sixth in the number of high-tech jobs added from 1993 to 1998, it falls short in the all-important area of venture capital. The state ranks a dismal No. 22 in the growth of venture-capital investments from 1997 to 1999, the years when the tech boom took off. What's more, even though the area boasts some of the best technology schools--Illinois Institute of Technology and Northwestern University--faculty members have not shared the entrepreneurial spirit of their peers at Massachusetts Institute of Technology, Columbia University, and Stanford University, where Jim Clark, for instance, left the ivory tower to found Silicon Graphics Inc. and then help Andreessen start Netscape.
To be sure, Chicago's high-tech community is rushing to play catch-up. Some prominent faculty members at the University of Chicago and Northwestern are forging close ties with local startups. And Mayor Daley has assembled a technology advisory board that is helping fund centers to house and support budding Net outfits. Chicago is also launching a plan to lace the city with fiber-optic cable, the new highway of the Internet. Venture capitalists are even coming to the fore, with Illinois now ranking eighth in the amount of venture capital invested nationally last year. Coalition leader Mandle boasts that the initiatives will spawn a "new technology-creating machine."
Maybe so, but Chicago has been struggling to adapt new technology in another crucial area, financial services, and its slowness has already proved costly. After years of solid growth in financial-service jobs, which accounted for the highest incomes and global stature, job gains from August, 1997, to August, 2000, slid to a measly 700. Compare that with 15,300 new financial jobs in Los Angeles, 16,400 in Boston, 18,900 in New York, and 19,600 in Dallas. Indeed, as of August, the number of Chicagoans employed in finance, real estate, and insurance had actually fallen by 1,300 from the same month last year. It's no wonder that housing prices in the Chicago metropolitan area have barely crept up 4.5% in the past year, to a median $182,100, vs. 12.6% in New York, to $228,400, and an eye-popping 17.3% in Boston, to $345,000. Though cheaper housing is often a competitive advantage, it also reflects slower growth. "Chicago is more challenged than ever," says Randall S. Kroszner, an economics professor at the Graduate School of Business at the University of Chicago.
The downturn in jobs mirrors the shellacking that two of the city's famed bourses--the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange--have been taking. So far this year, the CBOT's volume is down about 10.3% from last year, and that comes after a 9.5% slide in 1999. The CBOT's biggest contract, the 30-year Treasury bond, is dwindling as the U.S. government buys back debt.
At the Merc, meanwhile, total volume dropped 11% last year, and it has gained just some of that back, rising 9.2% in the first nine months of this year. That's partly why membership at the CBOT now costs just $365,000, down precipitously from the all-time high of just three years ago, a cool $857,000. Seats at the Merc go for $748,000--a far cry from their $925,000 peak in 1994. "I'm quite frankly in something of despair about the state of the Chicago futures markets," says Todd E. Petzel, a former executive vice-president at the Merc, now a chief investment officer at the $25 billion Commonfund Asset Management Co. Even Mayor Daley, concerned about the tumult, has brought together exchange leaders to keep tabs on the health of the bourses. World Business Chicago chief O'Connor, who coordinated one mayoral session, maintains that "there are fight-for-life issues, but the leadership is not asleep at the switch."
GLORY DAYS. The reversals mark quite a turn for the Chicago exchanges. With their sharp growth in the 1980s, the CBOT and its equity-options offspring, the Chicago Board Options Exchange (CBOE), along with the Mercantile Exchange, flew high among the world's most innovative financial markets, inventing all sorts of financial derivatives. Futures on 30-day federal funds? Check out the CBOT. Futures on currencies and the Standard & Poor's 500-stock index? Go to the Merc. Listed equity options? The CBOE is the center for them. For a time in the mid-1990s, the CBOT even offered futures on catastrophes as an insurance product. "We were the primordial soup that launched the concept of trading into the future with financial instruments," says Leo Melamed, chairman emeritus of the Merc.
But the Chicago bourses are proving slow to move into the Net Age. Much as they have for 152 years, for instance, scores of hyperactive traders still shout themselves hoarse every market day in the CBOT's chaotic pits. Swapping hand signals in an arcane, time-honored sort of semaphore, the brightly jacketed traders frenetically swap contracts on everything from Treasury securities to soybeans. They do business in ways scarcely different from generations of Chicagoans before them. And it's far from clear whether changes will come soon enough. "There is great uncertainty right now," says Patrick H. Arbor, former chairman of the CBOT and a longtime soybean pit trader who has gone electronic. "We don't know exactly what the Board of Trade is going to do."
After experimenting for eight years with a little-used, mostly nighttime electronic trading system, it was not until Aug. 28 that the CBOT really jumped into trading electronically, through a joint effort with Eurex--a move that came well after exchanges in Asia, Australia, and across Europe made the change. The result: After surpassing the CBOT last year with a 68% surge in its volume, Eurex now trades more than twice the volume of the Chicago bourse, or about 2 million contracts a day. The Chicagoans saw their share of the worldwide volume in exchange-traded derivatives plunge to 30% last year, an all-time low and half of what it was just 13 years ago, according to the Risk Management Center of Chicago. "From the international perspective, the impression is that Chicago has moved too slowly," says Leslie V. Hosking, a former chief executive of the Sydney Futures Exchange Ltd. who is now running an Australian government office that promotes the country's financial markets.
COSTLY FEUDING. Ironically, many of the foreign rivals got into the business by aping Chicago. In the early 1980s, for instance, the London International Financial Futures & Options Exchange copied the so-called Chicago model down to the style of the jackets its traders wore and its now-abandoned pits. The Singapore exchange was set up with guidance from the Merc. And the Sydney Futures Exchange "unashamedly copied Chicago," says Hosking. The problem now, though, is that these exchanges moved quickly when trading shifted away from open outcry, while Chicago has been slowed by the love its several thousand old-style traders have for their pits. They cling to the pits, even as evidence mounts that they are fast growing obsolete. "It's very difficult for someone to say: `Yes, it's going to be all-floor, or yes it's going to be all-electronic,"' maintains the CBOT's interim CEO, Dennis A. Dutterer. "It's not that clear."
And yet the signs, and many of the actions of the exchange managements, point clearly toward the computer. After just a few weeks, the new electronic system at the CBOT accounts for about 12% of trades at the exchange. For its part, the Merc started dabbling in electronic trading in 1992, and it now accounts for 14% of its trading volume.
Looking Netward, the Merc is also tying up with emerging online business-to-business exchanges, such as a Sept. 17 deal with CheMatch.com Inc. to develop futures and options on specialty chemicals. At the CBOE, which has more aggressively adapted technology, some 37% of the volume moves only electronically. That has helped the CBOE keep volume growth strong, up 40% this year. Even so, seats on the CBOE now go for just $400,000, down from $735,100 in February, 1998. "The way the exchanges address the technological revolution is probably our biggest issue," says CBOE CEO William J. Brodsky, who until 1997 had run the Merc for 12 years. "Can we do enough in automating ourselves [to compete] with the newer exchanges that aren't encumbered by the politics and the traditions?"
Feuding among the exchanges is exacting a toll, too. Instead of joining forces to build efficiency, as exchanges in Amsterdam, Brussels, and Paris have done just recently to form Euronext, the Chicago bourses squabble endlessly. The CBOT and its offspring, the CBOE, even battled in court this year over the Board of Trade's plan to reorganize as a for-profit company. They're at each other's throats over whether single-stock futures--soon to be traded in London, but still illegal in the U.S.--ought to be approved by Washington, with the CBOE opposing legalization. In late August, the two exchanges, not surprisingly, killed talks aimed at merger. For its part, the Merc would rather compete with its rivals, riling critics. "Having three separate exchanges in Chicago is absolutely silly," says Robert S. Hamada, dean of the University of Chicago Graduate School of Business.
If the Chicagoans shift fully to electronic trading, that poses a problem too: It will jeopardize the jobs of several thousand runners and clerks. Worse, perhaps, the city could lose high-earning traders, who are able to work anywhere that's near a computer screen. Insiders at the exchanges counter that traders will still want to stay near one another for market news and deal making. "Chicago will continue to have a critical mass of traders," insists Merc Chief Executive James J. McNulty. "They may not sit in the same place, they may not stand in the same place, but Chicago will continue to be one of those centers of commerce in the New Economy."
Still, it's apt to be a smaller center. Beyond the exchanges, Chicago has ceded ground in banking, losing out to hard-charging rivals in New York and Charlotte. Continental Bank, once one of the nation's best-regarded, disappeared into Bank of America six years ago. Earlier, giants Harris Bank and LaSalle National Bank were snapped up by foreign outfits--the Bank of Montreal and ABN Amro, respectively. "Chicago's financial power in the banking arena has been seriously impaired," says Norman R. Bobins, president and CEO of LaSalle Bank. "Its influence, unfortunately, has declined as major banks have their decisions made elsewhere or in a fashion that isn't Chicago-centric."
TAKEOVER BAIT. Bank One has yet to prove that it's in the city to stay. Formed in 1998 when First Chicago NBD was absorbed by Banc One in Columbus, Ohio, it now calls Chicago home, but some observers expect it will be swallowed up by an outside bank or Wall Street investment firm. James Dimon, the Citigroup veteran brought in to turn around the struggling Bank One, is laboring to prevent just that. "We want to stay independent," insists Dimon. "We would like to be an acquirer and not be acquired." For the time being, though, the nation's fifth-largest bank won't be buying, but will likely be shrinking as Dimon cuts costs.
Lately, shrinkage is also the dominant note in a third financial realm, Chicago's insurance community. Allstate, the highest-profile outfit here, is wrestling with the growth of insurance sales on the Net and is cutting costs by converting employee-agents into independent contractors. It expects to have 13,000 contractors in tow by Dec. 31, a cut of 2,000 representatives since the beginning of the year. Says CEO Edward M. Liddy: "Anytime you change, it's hard."
Yet another leg in Chicago's financial structure, its mutual-fund industry, has largely been bought up by outsiders who've managed to expand it--but not enough. Over the past decade, the biggest gainer has been Van Kampen Funds, the Morgan Stanley Dean Witter unit that has more than tripled assets under management, to about $66.2 billion, according to Morningstar Inc., a Chicago tracking service. John Nuveen & Co., a holding of St. Paul Cos., has posted similar growth rates, bringing it to $11.3 billion. Two other stalwarts--Zurich Financial Group's Kemper Funds and Liberty Mutual's Stein Roe Funds--have more than doubled their assets under management, to $36.2 billion and $5.9 billion, respectively.
Problem is, such growth rates pale next to the mammoth gains at Fidelity Investments and Vanguard Group--each of which has grown more than 1,300%. And Fidelity counts over 10 times the asset base of Van Kampen, with $695.8 billion under management. Denver's Janus Funds, with $243.9 billion in assets, has rocketed 14,328% over the decade.
Local fund managers blame the disappointing comparisons on lost opportunities. At Stein Roe, the owners early on balked at hefty investments in marketing and infrastructure, argues Marshall B. Front, its ex-president. "Stein Roe wasn't much different in size from Fidelity and Vanguard [in the 1970s]," he says. "Those organizations were more forward-thinking. They saw the potential of mutual funds."
But some critics cite the managers' timid investment choices, concentrating on bonds rather than aggressive growth models--the big winners in the recent bull markets. "Our city made the wrong bet," John H. Rekenthaler, research director at Morningstar. "They were bond shops, not stock shops. Now, the Chicago funds are puttering along at a meaningful, but unimpressive, level."
To get up to speed, the exchanges must come to terms with electronic trading, as the more farsighted exchange leaders are trying to do. For many mutual funds, the fight for local control is over, but that doesn't mean they can't show their savvy by posting big gains. In banking, Dimon's efforts at Bank One offer grounds for hope. As for the flight of corporate headquarters, Chicago companies face absorption if they don't get a jump on their globalizing rivals. "The corporate Establishment has to wake up and develop a sense of urgency," says World Business Chicago's O'Connor. "Get hungry again, get aggressive again, and go become the aggressors and the predators because this is a battle for all the marbles."
For Chicago, the stakes couldn't be much higher. More than a decade ago, the growth of Los Angeles turned the moniker of Second City into a joke, and it's now just the dated name of a comedy club in the U.S.'s third-largest metropolis. If corporate leaders can't rise to today's new challenges and turn Chicago into a 21st century city, the joke will get even crueler.