t Was a Very ___ Year
1998: (a) Volatile, (b) Merger-rific, (c) Cyber-spaced, (d) All of the
Above
By Tim Smart
Washington Post Staff Writer
Sunday, December 27, 1998; Page H01
Few who gathered that late July morning in the hearing room of the Senate
Banking Committee to hear Federal Reserve Chairman Alan Greenspan's
mid-year report card on the economy could have foreseen how quickly events
would unravel.
At that point, a cheery Greenspan engaged in a little uncharacteristic
celebration of the economy, praising the combination of low inflation and low
interest rates that had produced a climate as "impressive as any I have
witnessed" in nearly 50 years of reading economic tea leaves.
Six weeks later, President Clinton direly warned that the financial turmoil in
Asia and a Russian debt default presented the world with the "worst financial
crisis in a half-century."
It was that kind of year in business, the economy and the markets: One
moment, irrational exuberance; the next, manic panic; one month, the global
triumph of Western-style capitalism long awaited by the faithful; the next, the
worldwide collapse of same, long predicted by Marxists.
It's possible, given the topsy-turvy nature of the year's events, that holders of
either view could find the facts to support their theories. Perhaps the most
amazing thing, though, was that with the year ending, both the U.S. economy
and the markets were doing quite well -- just as they were at the beginning of
the year. If only one had slept through it all.
And on the odd chance you did, here's what you missed.
The stock market soared to new heights only to crash spectacularly -- and
rebound to even greater heights. It was the year of the megadeal, as companies
devoured their competition and grew ever larger. Yet it was also the year in
which tiny Internet-related companies with minimal revenue and nonexistent
earnings were able to raise millions of dollars in public stock offerings.
It was all brought home more vividly than ever to a generation of Americans
who for the first time had more of their personal wealth tied to the stock
market than to the equity in their homes. Working people found themselves
glued to nightly reports on the fluctuations of the Thai baht, the Indonesian
rupiah and the Russian ruble.
Through it all, the U.S. economy reigned supreme, with prices falling even as
labor markets grew tighter than a drum and worries over deflation surfaced
for the first time since the Great Depression. By contrast, the Japanese
economy suffered its worst decline since World War II.
The government even posted a budget surplus, its first since the days of
Vietnam and Woodstock.
"It has been a year that confounded many experts," said John Challenger, a
business consultant who tracks workplace trends, confronting them with a new
world order in which old rules governing prices, markets and the economy
were no longer of much use.
"It's like we've flipped through to the other side," Challenger said. "We're in
the twilight zone. All the dials are going in the opposite direction."
Nothing captured the year's craziness more than a largely unknown
Greenwich, Conn., company that purported to offer sophisticated and
well-heeled investors an opportunity to earn returns better than the norm.
Long-Term Capital Management L.P., as the firm was known, was a hedge
fund that counted among its star managers two Nobel Prize-winning
economists whose economic model was designed to protect against risk. But
the model could not predict the unpredictable, and when the worldwide bond
market cratered in August after the Russian default, the fund lost billions and
had to be rescued by its investors with a friendly nudge from the Fed, which
feared that the aftershock of the fund's collapse would bring disaster to the
world's financial system.
Memo to the wise men: You should have bought Amazon.com stock, which
posted a 1,000 percent-plus return.
Long-Term Capital operated at the edges of the world financial markets,
making huge leveraged bets on interest rates. But when those bets went awry,
and global interest rates refused to behave as Long-Term Capital and other
hedge funds expected, its near-demise ricocheted throughout the real economy
and brought corporate borrowing to a halt. Overnight, a handful of traders in
Greenwich had brought the world's markets to the brink of chaos.
Here was the dark side of the long-promised linkage between domestic and
global business and between markets and the economy, raised to a new level
by the presence of 24-hour technology and round-the-clock financial news
programs.
In a perverse irony, it took an orchestrated bailout of the fund by rich
investors, neatly choreographed by the Fed, to save Long-Term Capital and
restore order to the financial markets. Some Asian leaders, who were being
force-fed a steady diet of fiscal austerity by practitioners of Western
capitalism, saw in the rescue the very "crony capitalism" that they were being
accused of practicing.
But like much of everything in 1998, almost as quickly as the crisis surfaced,
it seemed to ebb, as Treasury Secretary Robert Rubin circled the globe putting
out foreign fires. The partying began again on Wall Street and in financial
markets. The Fed eased the pain with three successive cuts in interest rates,
and economic growth was back to a robust rate, at least in the United States.
Even Thailand and South Korea seemed to be recovering.
Not even the impeachment of the president for only the second time in history
could derail the rise of the Dow Jones industrial average: The market rose
more than 140 points in the first hour of post-impeachment trading.
While Long-Term Capital was a billion-dollar example of the trend, there
were plenty of other daily gyrations in the markets that meant as much to
individual investors and their retirement accounts as Long-Term Capital
meant to the world economy.
Indeed, the year was marked with unprecedented volatility in the stock
market. One minute, the bulls roared. The next, the bears were growling. A
September cover in Fortune proclaimed "The Crash of '98," and Newsweek
went so far as to ask "The Recession of '99?"
The roller-coaster ride began in the spring, as the market soared. It crested in
July, with the Dow peaking at 9337.97, then crashed almost 20 percent before
recovering in time for Christmas. Daily trading on the New York Stock
Exchange surpassed the billion-share mark, and daily swings of 100 points
became common.
"Despite the roller-coaster trajectory and renewed discovery of risk, the year
was a good one for investors," said Don Hilber, an economist at Wells Fargo
Norwest.
Technology stocks in particular rewarded those strong enough to ride out
their stomach-churning moves. Anything with an Internet connection seemed
golden. Online auction house eBay Inc. went public at $18 in September and
last week was up nearly 15-fold for the year. The behavior of technology
shares seemed as confounding to industry experts as it was to novice investors.
"The stock market has gone insane," said Sheldon Laube, chief technology
officer at USWeb, an Internet consulting group. "It's not even unpredictable
anymore -- it's unimaginable."
Technology heightened the unbelievable nature of the year's events, as the
microprocessor continued its inexorable march into every nook and cranny of
our lives. People rushed to trade stocks online, buy books on the Internet, and
communicate with one another by wireless phone or personal computer.
"You've Got Mail" -- the chirpy greeting that signals incoming e-mail on
America Online -- became a popular movie as well as a metaphor for the
e-mail era.
"The Internet really came of age," said AOL chief executive Steve Case. "It
became a major part of everyday life."
In a move with Freudian overtones, one savvy Netizen found a way to
combine the two most popular habits of the Internet age -- looking at
pornography and checking stock prices -- into one Web site, the aptly named
Sexquotes.com.
America's love affair with the new medium paid off for the Washington area,
as high-technology firms and their insatiable demand for workers powered the
local economy. A study produced by accountants PricewaterhouseCoopers and
consultants Potomac Knowledgeway found one in seven local workers
employed in some aspect of the information technology industry.
This changeover accelerated the trend of home-grown companies disappearing
by the wayside. As if to punctuate the point, Giant Food Inc., a company as
synonymous with the region as the beloved Redskins, was gobbled up by a
Dutch supermarket chain. And Mobil Corp., which was local in address if not
in spirit, is in the process of being acquired by Texas-based Exxon Corp.
Meanwhile, AOL, a company whose business is the very essence of breaking
down borders, emerged as one of the Washington scene's best-known local
companies.
The surge in value of technology stocks helped unleash a wave of high-tech
dealmaking, with Compaq Computer Corp. swallowing Digital Equipment
Corp. and Case's AOL agreeing to buy browser company Netscape Inc. Both
deals showed the speed with which conventional wisdom could be proved
wrong. A generation ago, Digital was the company that most in the computer
industry pinned their hopes on as an alternative to the mainframe-dominant
world of International Business Machines Corp. Similarly, as recently as a
year ago, people were counting on Netscape to be the counterweight to
Microsoft Corp.'s hegemony in the personal computer domain.
But the real merger action took place elsewhere, as some of America's
best-known companies decided they could no longer go it alone in a world of
global competition. Wave after wave of consolidation swept across industries
as disparate as food retailing and defense contracting. Antitrust regulators
tried their hardest to keep up, blocking the $11.6 billion purchase of Northrop
Grumman Corp. by Lockheed Martin Corp. but giving their okay to many,
much larger combos, such as Ameritech Corp.'s marriage with SBC
Communications Inc., which began the reassembly of the former Bell system.
May saw the "deal of the century" as Citicorp and Travelers Group Inc.
merged in a $70 billion deal. Six months later, that merger was eclipsed by the
proposed $81 billion marriage of Exxon and Mobil.
Bigness was in, unless you were Bill Gates. Both the government and industry
advocates of an alternative to the Microsoft monopoly joined forces to attack
Gates as the new Rockefeller. Meanwhile, the proposed Exxon-Mobil deal
brought back together two units of the original Rockefeller oil trust. And a
third, Amoco, paired off with British Petroleum PLC. Big Oil became Bigger
Oil.
While size once again mattered, it was not achieved without some cost. Not
every deal proved as beneficial as executives imagined, either to their bottom
lines or to their own personal careers. Some high-profile executives found
themselves unemployed, fall guys for perceived lack of judgment as their
companies made bad investments in foreign lands or failed to deliver on
promised earnings growth.
Jamie Dimon, the heir apparent at the newly merged Citigroup, found himself
out of work after a personality clash with Sandy Weill, his former mentor,
and John Reed, the long-surviving head of Citicorp. David Coulter, chief
executive of Bank of America, was shown the door shortly after his
company's merger with hard-charging NationsBank and misguided
investments in hedge funds.
Even sometime dealmaker Albert J. "Chainsaw Al" Dunlap, who earned his
moniker for the ruthless way in which he chopped heads after acquisitions, got
the ax after disclosures of accounting irregularities at his Sunbeam Corp.
The wacky world left policymakers and market gurus alike struggling to keep
pace. Conventional economic wisdom proved little help in an economy where
prices kept falling in the midst of strong demand -- and record levels of
employment were accompanied by historically low inflation rates. Early in the
year, experts heralded the triumph of American-style capitalism. But with
Asia's free fall, there were questions about whether free-market excesses had
unleashed a new bout of economic chaos.
In Japan, consumers refused to spend as the government repeatedly promised
stimulus packages to rescue an economy mired in its worst recession. In the
United States, consumers refused to do anything but spend, encouraged by
$500 personal computers and $1-a-gallon gasoline.
But while the Japanese suffered, the Germans romped. Daimler-Benz AG
bought Chrysler Corp., thereby acquiring the current maker of the Jeeps that
helped defeat them in World War II. Bertelsmann AG increased its hold on
the publishing world, buying Random House. Deutsche Bank sought to
purchase Bankers Trust Corp. as the American bank stumbled with losses
from trading in emerging markets. And Volkswagen, maker of the people's
car, won out in a bidding contest for Britain's Rolls-Royce, purveyor of
horseless carriages to the gentry.
The Fed battled the specter of inflation as the year began, then found it
necessary to cut interest rates three times in the fall as international debt
markets froze up.
Throughout it all, the American worker toiled and toiled. Unemployment fell
to 4.3 percent in November, the lowest level in a quarter-century.
Productivity, meanwhile, rose strongly. Inflation remained in hibernation,
with consumer prices growing at less than 2 percent annually. Despite the
turmoil overseas -- Indonesians took to the street to riot and forced strongman
Suharto from office, while in Russia there was an ominous return of
authoritarian economic views -- Americans adopted a "What, me worry?"
approach to life. Home sales reached record levels, and malls were crowded
with shoppers.
The contrast between what was happening at home and what took place abroad
was, at times, stark. Famed international investor George Soros's mutual fund
lost $2 billion when Russia imploded, yet the average American holder of an
index mutual fund earned a return of better than 20 percent. It was the fourth
such year of stellar returns -- and had many wondering why they should invest
in managed funds when the indexed accounts outperformed all but a handful
of professionals.
All year long, economists and policymakers warned of the gathering storm
from Asia. But, except for a downturn in manufacturing employment and a
weakening of U.S. exports, the U.S. economy seemed to take much of the bad
news abroad in its stride.
Not that there weren't plenty of close calls. In early January, the International
Monetary Fund worked out a deal with Indonesia, under which the country
would adopt numerous reforms aimed at curtailing privileges enjoyed by the
friends and family of Suharto. But the nation's currency promptly plunged --
and within weeks, Suharto was gone.
Early summer saw a deepening of the Asian crisis as the Japanese yen slumped
and the United States was forced to join Japan in a massive propping-up of the
currency. But Russia was already taking its own route downhill, despite an
IMF-led $22 billion rescue package. On Aug. 17 (coincidentally the same day
President Clinton acknowledged his relationship with a former White House
intern), Russia devalued the ruble and effectively defaulted on its debt.
As pandemonium gripped world markets, policymakers rushed to offer words
of support while many criticized the IMF for applying the wrong medicine.
Even World Bank President James Wolfensohn got in the act, delivering an
impassioned speech implicitly critical of the fund's reliance on fiscal austerity.
"We all assumed their formula was the right one," said Harvard Business
School professor Samuel Hayes. "Suddenly, they look like they have feet of
clay."
What came to the IMF's rescue, as well as to the countries suffering through
its harsh discipline, was the interest rate cuts by the Fed and some European
central banks, which seemed to calm panicky markets. By early October, some
prognosticators dared to proclaim the crisis over.
As if to provide its own coda, the Dow rebounded strongly in the waning light
of the old year. On Thursday it closed at 9217.99 up 16.56 percent since the
start of the year.
Not bad for a year in which we survived the worst financial crisis in half a
century. But exactly as one might expect given that we lived in a time when
the economy was the best Alan Greenspan had ever seen.
Ready for 1999?
Staff writers Elizabeth Corcoran, Leslie Walker, Shannon Henry, John M.
Berry and Paul Blustein contributed to this report.
A superlative year
1998 was the year of the . . .
Biggest comeback; Apple Computer with the iMac
Biggest proposed merger: Exxon and Mobil, in a deal valued at $81 billion.
Biggest financial services merger in U.S.: Citicorp and Travelers Group, to
form Citigroup.
Biggest one-day decline in a company's market value: $11 billion, due to the
departure/ouster of a single executive, Jamie Dimon, from Citigroup.
Biggest takeover of a U.S. bank: Bankers Trust by foreign bank, Deutsche
Bank.
Biggest merger of a U.S. and a foreign carmaker: Chrysler and
Daimler-Benz.
Biggest decrease in gasoline prices in a single year.
Biggest product debut: Viagra, for which an estimated 6.2 million
prescriptions have been written.
Most leveraged hedge fund: Long-Term Capital Management.
Biggest rescue of a hedge fund: Long-Term Capital.
Second-biggest comeback: Attempted antitrust enforcement.
Biggest comedown: Bill Gates (see above)
Worst performance on videotape: Bill Gates.
Worst performance: The Japanese economy.
Biggest threat to Bill Gates: AOL's buyout of Netscape and its alliance with
Sun Microsystems.
Most expensive proposed settlement of lawsuits: The $561 billion deal between
Congress, the states and the tobacco industry.
Most astronomical legal fee for a single set of lawsuits: $8 billion for the 18
firms handling the states' actions against tobacco companies after the above
deal collapsed.
Largest civil penalty assessed by a U.S. agency (Commodity Futures Trading
Commission) against a company: $150 million from Sumitomo to settle
charges that it manipulated world copper prices.
Biggest dose of own medicine: The "Dunlapping" of Sunbeam Chairman
"Chainsaw" Al Dunlap, so famous for brutal cost (and job) cutting at other
companies that his last name became a verb.
The region's biggest deal that never happened: Tellabs' $7 billion acquisition
of Linthicum, Md.-based Ciena, announced June 3, scuttled on Sept. 14.
Biggest political casualty of Asian economic crisis: Suharto, forced out of
office after decades of strongman rule.
Biggest scapegoat of Asian economic crisis: A tie, between the International
Monetary Fund and George Soros, the fund manager and speculator blamed
by Malaysian Prime Minister Mahatir Mohamad, for causing a run on the
ringgit.
Most poorly timed commemorative stamp: The U.S. Postal Service's stamp
commemorating the stock market crash of 1929. |
