In the wake of big disasters, commentators are often quick to proclaim, as they have since the terrorist attacks on the World Trade Center and the Pentagon, that the world has changed. But saying as much, and then outlining what the new world might look like, are quite different exercises. Among the lessons that history teaches is that most predictions turn out to be just plain wrong. Nonetheless, the value of provocative thinking shouldn’t be underestimated. What follows are some of the changes that Institutional Investor’s writers think might come to pass in the days ahead. They range from the return of big government to new approaches to the antiglobalization debate, from a New York Stock Exchange that must reconsider its commitment to a physical stage for its trading to the revitalization of technology and the revival of some emerging-market countries’ fortunes.
Technology could make a comeback
The Internet was going to change everything. Then stocks collapsed, and dreamy dot-coms and debt-overloaded telecommunications companies became international laughingstocks.
But following last month’s attack on the World Trade Center, these once-promising technologies are poised to regain their cachet.
Begin with the obvious: The new technologies work. Paper files went up in smoke, telephone lines failed, roads were blocked and grounded airplanes kept the mail from moving, but the modern technology prevailed. Electronic databases survived, e-mail provided the most trustworthy mode of communicating in the early hours of the disaster, and Web sites sprang up to post invaluable information. Stories abound of people staying in touch and conducting business via wireless pagers and relays of cell phones. In short, the nation’s high-tech, virtual communications backbone remained intact and proved that it could bear the burdens of modern commerce.
That the Internet should have passed its stiffest operational test comes, in one sense, as no surprise. After all, it’s the descendant of Arpanet, a U.S. Defense Department network that was designed in the 1960s to withstand a nuclear attack.
“If there’s one thing we’ve learned in recent days, it’s that the Internet is the most pervasive and robust network out there,” says F. William Conner, chief executive officer of Entrust, a Dallas-based vendor of digital security software.
It took six days for U.S. equities markets to get back in action, but technology proved only a minor stumbling block. Streets had to be cleared of debris to make the New York Stock Exchange’s symbolically important trading floor accessible, and communications lines to outside brokers had to be restored. But the NYSE’s back office was never fully disabled. Nowhere was operational resiliency more evident than at eSpeed, the trading technology spin-off of the devastated government securities giant Cantor Fitzgerald, which lost almost three fourths of its New York staff in the collapse of Tower One. Thanks to backup facilities in London and New Jersey, eSpeed hardly missed a beat.
“The long-term effects of the attack on our financial system will be measured, tragically, in human capital,” says Richard Schenkman, CEO of Brut, one of the leading alternative trading systems for Nasdaq stocks. “The technology performed seamlessly.”
Now, as individuals, businesses and the government adapt to a new world of hitherto unforeseen dangers, they are likely to become more dependent than ever on computers, software, databases and digital communications - and on support systems that ensure operational reliability and security even in the face of lethal threats.
Though computer manufacturing, semiconductor production and related sectors have been reeling from cutbacks in corporate capital expenditures, they will soon be stimulated by the billions of dollars now pouring into the military effort and into the reconstruction of downtown New York and nearby environs. Needham, Massachusetts-based research firm TowerGroup estimates that the securities industry alone will spend $3.2 billion on equipment, services and software to repair the damage from the terrorist attack.
Individuals and businesses alike took note of the technological success. Cell phone and pager companies reported a surge of individual orders last month. Wireless BlackBerry e-mail devices proved so valuable during the disaster that Brut’s Schenkman is making sure that all of the firm’s 75 employees carry them; only 45 did before.
People will lean more on technology to stay connected as they travel less. Says John Herrlin Jr., an oil industry analyst at Merrill Lynch & Co.: “You used to do three cities in one day, and that’s just not going to be possible now. The whole process will take longer. I think this means more videoconferencing.”
The market has taken notice. Share prices tanked when trading resumed after the disaster, but among the rare gainers, alongside defense and aerospace companies, were telecommunications and wireless carriers. Investors are betting on a movement toward a more virtual society, less dependent on travel and physical proximity, in business and personal life alike.
Of course, technology is no panacea. And disturbingly, the same technologies that shone during New York’s recovery are available to terrorists, too. They surely won’t want to risk streaming their conspiratorial voices or video images across the Internet, but they can wreak cyberhavoc in other ways. It will take technology to fight them.
Exactly one week after the deadly airplane strikes, a computer virus called Nimda began worming into Internet servers and personal computers at an alarming pace. Could it have been a related case of cyberterrorism? As in most such instances, the source was not conclusively traced, but U.S. authorities took it seriously as a possible hint of cyberwarfare to come.
Winn Schwartau, president of Seminole, Florida-based consulting firm Interpact, predicts growing interest in cyberattack defenses - antivirus software, data encryption codes, intrusion detection systems, firewalls - for obvious reasons. But Schwartau also urges his clients not to neglect threats from within; that means controlling access to sensitive areas and doing employee background checks.
Demand for personal identification and authentication systems, particularly to control passports, visas and border crossings, is also likely to explode, says Neil Livingstone, chairman and CEO of Washington, D.C.-based crisis management firm Global Options. “One sector of technology that should do exceedingly well is biometric identification. Passwords have to go. IDs are too easily faked,” says Schwartau. “People who really understand system security have known about the need for stronger controls for a long time,” he says. “Now the world has changed. Maybe what we’ve all been saying for years is finally hitting home.”
As the struggle against terror unfolds, technology is a sure winner. - Jeffrey Kutler
The globalization debate shifts
Protesters planned to shut down the meetings of the International Monetary Fund and the World Bank scheduled for Washington last month. They succeeded in sharply curtailing the agenda: then the terrorist attack on the World Trade Center prompted cancellation of the meetings.
Talk about a hollow victory. The September 11 tragedy marks a treacherous crossroads for the mass protest movement that burst into public consciousness in Seattle in 1999. The terms of the debate over globalization are changing, presenting protesters with new opportunities - and plenty of danger to their cause.
On the plus side for the protesters, who have disrupted meetings from Melbourne to Göteborg to Genoa, the limits to the promise of globalization had become clearer to many even before the Trade Center attack. Commerce doesn’t conquer all. A Big Mac in every hand doesn’t guarantee peace and prosperity. The nation-state remains firmly rooted in people’s consciousness; religious and tribal allegiances persist.
Before September 11 the antiglobalization forces were beginning to win sympathy. In the Financial Times in early September, Lazard Frères banking legend and former U.S. ambassador to France Felix Rohatyn called for a new Bretton Woods conference to reform the IMF and the World Bank. And in the run-up to the IMF/World Bank meetings, Prime Ministers Gerhard Schröder of Germany and Lionel Jospin of France created a working group on globalization that will include a study of the feasibility of a so-called Tobin tax, a levy on currency trading named after Nobel Prize winner James Tobin.
But some of that momentum was lost, perhaps for good, after the attack. The protest movement, an ungainly coalition of interests, remains united in its goals - narrowing the gap between rich and poor and making global economic institutions like the World Bank, the IMF and the World Trade Organization more democratic - but has become increasingly divided over the issue of tactics.
Many European groups want to continue with their familiar mass street protests, but others, mainly in the U.S., fear that such actions could be counterproductive, even swinging public opinion against them. Shortly after the attacks, U.S. labor unions and the Mobilization for Global Justice, the umbrella group of environmentalists, religious organizations, students, antipoverty and anticorporate activists that had taken the lead in planning protests in Washington, decided to cancel the street actions and outdoor rallies that were the centerpiece of their plans - even before the World Bank and IMF called off their meetings.
“We didn’t think the public and the media would be interested in our message on structural adjustment,” says Soren Ambrose, a policy analyst at Fifty Years Is Enough Network, an activist group. “Most likely, we would be seen as insensitive if we were to go ahead with the street protests. Those activities have lost their relevance.”
And activists were concerned that antiglobalization protests could be seen as anti-American or that the movement itself might even be linked to terrorists by those seeking to discredit it. “Now is not the time in the U.S. to do anything that can even be remotely construed as having an antipolice message or even taxing police resources,” says one activist. “We were less likely to be asked about sharing political objectives with terrorists if we canceled the demos.”
Yet others argue that the U.S. antiglobalization movement must continue to use mass protests. “There are concerns, but we aren’t going to cancel out the most effective strategy we have, which is mass street protests,” says Kevin Danaher, an organizer at Global Exchange in California.
Indeed, the Anti-Capitalist Convergence and another group, the International Action Committee, decided to proceed with their planned protests in Washington, switching their target from economic imperialism to what they call President Bush’s “capitalist war” on terrorism. “We are a movement devoted to social justice. There is no justice to be found in retribution, war, racism, corporate globalization or capitalism itself,” proclaims ACC’s call to action. The more mainstream Mobilization for Global Justice has decided not to support that effort, though individual members of the group are likely to join in.
“There is a lot of overlap between people working on corporate globalization and peace issues,” says Robert Weissman, who works with the MGJ and is co-director of Essential Action, a Ralph Nader-founded organization in Washington. “But it is really critical that the peace organizations that have historically worked on those issues take the lead on this to avoid any criticism of [antiglobalization activists’] motives.” That appears to be happening. The ACC and the IAC held separate peace marches on September 29 against U.S. military retaliation. In doing so they joined forces with such established pacifist organizations as the Washington Peace Center and the American Friends Service Committee, which held a march in Washington the following day.
“A lot of us are shocked and saddened,” says ACC member Charles Munson. “We will be less confrontational.” Some activists think that making a linkage between economic issues and terrorism, risky though it may be, could help strengthen the movement and broaden its appeal.
They argue that economic inequality and deprivation created by the global capitalist system create the conditions that foster extremism. “We don’t justify what happened, but terrorism exists because of poverty and the violence of the system - the terrain is fertile for this kind of movement,” says Christophe Ventura, a member of Attac, a leading European antiglobalization organization. “If we play our cards right, the movement will come out much stronger in six months, because of the military dimension,” says Global Exchange’s Danaher. - Deepak Gopinath
Welcome back, big government
The past two decades have been an era of peacetime prosperity marked by deregulation and liberalization, by the free and abundant flow of capital and ideas. Since the early 1980s, following the election of Ronald Reagan, U.S. policies have largely aimed to reduce government involvement in business and day-to-day life, in part by shrinking spending. Republicans have raised the once-untouchable issue of Social Security privatization. An ever-empathetic president, Bill Clinton, even overhauled welfare, and Democrats and Republicans alike jumped on the free-trade bandwagon.
Such small-is-better thinking has changed - who knows for how long - since September 11, when terrorists attacked the Pentagon and the World Trade Center. The multiyear war against terrorism envisioned by President Bush will cost plenty, and the price won’t be paid just in cash, although both Republicans and Democrats are rushing ahead with plans for massive spending bills to jump-start New York’s recovery, upgrade military preparedness and improve intelligence gathering.
Ironically, the Bush administration arrived in Washington as a champion of laissez-faire economics; in June it dropped the government’s petition to break up Microsoft Corp. Now it has morphed into the spender of last resort, doling out $15 billion to bail out the airline industry. A long line of petitioners, from insurance companies to rental car agencies, has formed, all with their hands out for government assistance. Steelmakers have renewed their push for trade protection. Farmers are pushing for financial support. How easy will it be for the CEO president to turn his back?
Before the attack, notes Eric Olbeter, a senior analyst at Schwab Washington Research Group, “the idea of bailing out an industry that was constantly accused of monopolistic behavior would not have gotten any traction. The government will now be the equity and the debt market for the airline industry.”
Airlines will seek loans from the Airline Transportation Stabilization Board, whose members include Federal Reserve Board chairman Alan Greenspan and Treasury Secretary Paul O’Neill. The government will likely federalize security in airports, although the issue remains unresolved. It is no doubt a wise move, but it’s a bureaucratization that represents a reversal after years of deregulation.
The efforts to combat terrorism are likely to draw the government ever closer to meddling in the markets, for the best of reasons. Even before the attack Congress was moving ahead on not very visible but potentially landmark legislation that would give it an unprecedented ability to intrude in U.S. capital markets. In June the House of Representatives approved - 422 to 2 - a bill that would prohibit companies doing business in Sudan from raising money in U.S. capital markets. The Sudan Peace Act would also require companies to disclose their business activities in Sudan to the Securities and Exchange Commission. The bill has been shelved at the request of the administration because of Sudan’s cooperation on intelligence matters.
The Department of Justice has drafted legislation to increase the government’s authority to approve wiretaps and obtain e-mail routing and address information without judicial review. The Bush administration has announced increased authority to detain immigrants - indefinitely in times of a national emergency. And the Department of Treasury has created a new intra-agency group - the Foreign Terrorist Asset Tracking Center - to more closely monitor the financial accounts of terrorists and their supporters worldwide.
“Justice realizes that things they have wanted to do for a long time they might be able to get done now,” says James Lewis, director for technology and public policy at the Center for Strategic and International Studies. Some issues represent intelligence agencies catching up with technology - for example, tapping all of an individual’s phones, including cell, across a variety of localities, instead of one line in one district. “It’s an unfortunate wake-up call for the intelligence community and the military,” says General David Baker, a former deputy joint chief of staff who works with Schwab Washington Research Group. “A transformation has to take place.”
Of course, this transformation won’t come cheap, and that means more government spending at a time when the economy is wobbling and tax revenues are shrinking. And some revenue-raising measures that might have gotten play before, such as reducing so-called corporate welfare, may now fall victim to recessionary fears. President Bush had proposed cutting $11 billion of a total $87 billion that the libertarian, Washington-based Cato Institute estimates is provided to corporations. Now, says Stephen Slivinski, fiscal policy analyst at Cato, “I fear those ideas might meet more political opposition.” , Jenny Anderson
The Big (vulnerable) Board
Amid much fanfare and apprehension, the New York Stock Exchange resumed trading on September 17, four business days after the terrorist attack on the World Trade Center shut markets down for the longest period since World War I. Stocks promptly plunged, but the reopening was hailed as a triumph, as markets remained orderly despite record activity.
The glow may be short-lived. Obvious questions linger: Why did the exchange have to close in the first place? And why did it take so long to reopen? The simple answer - that the NYSE’s auction market remains rooted to a set physical location where buyers can meet sellers through the intercession of specialist market makers - raises another question. Why, in an age of technological marvels like the Internet, is the exchange still doing business the same way and in the same place that it did two centuries ago under the buttonwood tree?
This isn’t the first time the NYSE has been challenged on this point. Two years ago its biggest and most powerful members - Goldman, Sachs & Co., Merrill Lynch & Co. and Morgan Stanley - led a minirevolt. They urged the Big Board to lead the creation of, or merge into, a centralized “virtual” market, an electronic network where buy and sell orders could be automatically matched. Politics and a bear market got in the way. But the reasons for reform - greater efficiency, lower costs and a level playing field for all market participants - remain. Had such a market been in place on September 11, there might have been no need for a shutdown.
“I can’t tell you how many people have called since this happened, saying, ‘Isn’t it time? You know, if we weren’t stuck to this NYSE floor, we could have opened,’” says R. Steven Wunsch, president and CEO of the Arizona Stock Exchange, an electronic auction system based in lower Manhattan.
Indeed, despite the devastation in downtown Manhattan, much essential activity went on following the attack, as the Internet passed its first major test. E-mail and Web sites proved the most reliable means of communication, even as telephone lines failed. Trading in U.S. Treasury debt continued, despite the near obliteration of the market’s dominant dealer, Cantor Fitzgerald; traders turned to Cantor’s online-trading subsidiary, eSpeed, and a competitor called BrokerTec Global.
New Economy electronic communications networks and trading platforms, such as Island ECN and Instinet, as well as the more venerable Nasdaq Stock Market, could have stayed open but shut down in a spirit of patriotic unity. Nasdaq and the others waited for the NYSE, which worked feverishly with government and private sector officials to restore transportation, telecommunications, power and security to the area surrounding its building. “It’s true we could have kept trading open, even on Tuesday,” says Matthew Andresen, CEO of Island. “But everyone has been trying so hard not to profit from this.”
That the Big Board didn’t stay closed longer is no small achievement, given the logistics. NYSE chairman Richard Grasso, who rallied Wall Street’s leaders, and his staff spent the weekend sleeping on office couches, making sure the reopening would proceed without incident.
Now Grasso must answer the critics. The NYSE is, after all, a prime terrorist target. No one wants to live in fear, but new circumstances raise the old question: Why leave the heart of the U.S. equities market dependent upon thousands of people congregated in one place, when dispersed electronic systems have proved capable of handling the bulk of trades? And if the exchange is committed to a physical floor, why is there no backup site where trading could continue in the event of a disaster? Says the head of trading at one major NYSE member firm: “Every major company in the country has a backup site. Why doesn’t the exchange?”
The Big Board has two “hot” sites for disaster recovery: data centers in Manhattan and Brooklyn that are used to disseminate quotes. Member firms already are wired to them, so why weren’t they used? Some firm officials say the sites just aren’t spacious enough to back up the main trading floor.
Grasso says that some firms located near the disaster had connectivity problems through the weekend anyway and that the industry didn’t want to divert public and private resources from the rescue effort at ground zero. Still, he is busy making further contingency plans: “You have to look back and say, ‘Had we been hit or in some way damaged, what would we be doing today?’ We’re going through that now.” One option: moving some trading to the American Stock Exchange, which the NYSE welcomed with open arms after the attack rendered its smaller trading floor inoperable. Grasso says the two exchanges are looking at developing a remote site to be used if either of their main floors is shut down.
The NYSE has long defended the value of its face-to-face auction system, which provides unsurpassed liquidity and price discovery. But not all stocks need that kind of treatment.
Blue-chip companies with big market capitalizations attract enough trading interest that intermediaries rarely have to step in with their own capital and act as buyer or sellers to keep the market moving. Roughly 80 percent of the orders in NYSE stocks are matched by specialists on the floor without their acting as a party to the trade.
The floor helps to steady markets, so to move to an electronic platform, the exchange will need to come up with a substitute. “If we are to migrate to a fully virtual system, we will need an electronic version of that stabilizer - a good electronic call market, one that people are familiar with and would know how to use during a time of instability,” says AZX’s Wunsch. Call markets are auctions that ask all market participants to enter bids and offers for a stock and begin trading in that stock at a “clearing” price - where the best bid and offer in the queue meet after a set time period expires. AZX is an electronic call market, but it has attracted little trading interest. “In terms of survivability, the ultimate market would be a combination of what Nasdaq does and an electronic call at the open. I think that would reduce our vulnerability to the NYSE floor becoming ground zero,” says Wunsch.
Grasso defends the human auction approach as superior: “The instantaneous, academic observation is, ‘Well, wouldn’t it be safer if you had the New York Stock Exchange in seven different locations?’ The answer to that is, ‘Sure.’ But if you ask, ‘Do you have a better market model if you’re virtual or if you’re in seven different locations?’ The answer to that is ‘No.’” Grasso has been taking small steps toward freeing the exchange from its dependence on the unique yet fading magic of its face-to-face auction. But he’s moving forward with a plan to build, at a cost of more than $1 billion, a new trading floor and office tower.
The unprecedented four-day trading halt was called because the market couldn’t function. With the technology the world has available today, that seems inexcusable. - Justin Schack
Re-emerging markets
Few will suffer more from the global economic downturn than the emerging-markets countries. But last month’s terrorist attacks on New York and Washington will, paradoxically, soften the blow for some. A lucky handful may actually benefit.
The U.S. needs to sign up allies in its war against terrorism, and those countries that are strategically positioned - and helpful - will reap increased U.S. aid, loans from the International Monetary Fund and the World Bank and, possibly, write-offs of official debt. Already, Pakistan and Turkey, courting internal political risk to support U.S. efforts, have begun to see a payoff. The U.S. lifted sanctions imposed three years ago against Pakistan because of its nuclear arms testing (it also lifted them from Pakistan’s archrival, India) and is planning debt relief as well. Turkey, where the U.S. has a strategically valuable air base, has already received two IMF bailouts in the past year and is likely to get even more aid.
Some analysts are even talking of mini-Marshall plans for the many impoverished countries whose aid the U.S. is seeking. Pakistan has hinted it would like to see $50 billion over 20 years, though that seems extremely unlikely. “There is no question that the September 11 event has caused a geostrategic realignment in whose implementation financial support will be an important element,” says Amer Bisat, an emerging-markets portfolio manager at Morgan Stanley Asset Management.
Since the collapse of the Soviet Union, the countries benefiting from U.S. and multilateral largesse have been those needing help embarking on so-called Washington consensus economic reform programs. This time around, however, free-market credentials won’t be a requirement. In fact, many of the countries that stand to benefit aren’t exactly paragons of economic liberalism.
The IMF, for example, rushed to disburse $135 million of an existing loan to Pakistan despite the fact that its economic reform efforts have been choppy and incomplete; the agency is now discussing another loan, which is expected to pave the way for Pakistan to negotiate much-needed debt reduction from its Paris Club creditors. And on September 24 the U.S. agreed to reschedule $379 million of Pakistan’s foreign debt. “The aid package to Pakistan, from lifting sanctions to debt rescheduling, is one of the most blatant cases of expedient deal-cutting in recent memory,” says David Rothkopf, a former Clinton administration official and president of Intellibridge Corp., a Washington-based political and economic consulting firm. “It doesn’t help the world long term, but it is simply in the shorter-term interests of the U.S.”
In the Middle East, Jordan won a long-awaited free-trade agreement with the U.S., also on September 24. The country has made progress in reforming its economy, but the trade deal with the U.S. leaves free-market beacons like Chile, which has long been seeking a similar deal, out in the cold.
Providing debt relief for allies, of course, is not a new phenomenon. In 1993 Egypt was rewarded for its support of the U.S. in the Gulf War with a Paris Club debt write-off. “We have to do something that shows the rest of the world that there is a benefit to associating with the U.S.,” says Rothkopf.
Free-trade pacts and direct aid will be among the carrots the U.S. offers. Indeed, Congress is now working to approve a fast-track law that would give President Bush authority to conclude free-trade agreements without having to negotiate their details with Congress.
Indonesia, home to the world’s largest concentration of Muslims, also stands to come out ahead. Indonesian President Megawati Sukarnoputri was in Washington soon after the attacks and got a pledge of at least $130 million in U.S. aid in addition to more than $400 million worth of export credits and trade preferences. Russian President Vladimir Putin, who clearly declared his support for the U.S., is now in a good position to get the Paris Club to renegotiate his country’s Soviet-era debt.
The benefits for these nations is hardly unalloyed, however. Helping the U.S. could have destabilizing domestic consequences. And in any case, no matter how much aid they receive, it can only do so much to shield them from the effects of the downturn. The IMF has only $90 billion in liquid capital available to lend - not much, considering the hundreds of billion of dollars in foreign direct investment that emerging markets as a whole stand to lose. (In 2000 total FDI to emerging markets was $133.2 billion, compared with net official flows of -$1.2 billion.) Private capital has far outstripped official capital flows in importance for emerging markets. And an IMF loan that is motivated by political necessity may not have the investment-boosting effect it might otherwise have had. In the end, however, the U.S. appetite for giving aid won’t last forever, and emerging-markets countries will have to pursue free-market reforms if they are to survive long term. - Jenny Anderson and Deepak Gopinath
