Tom Clancy - Debt of Honor

By this time, the panic within the entire financial community was quite real, reflected in a tenseness and a low buzz of conversation in every trading room of every one of the large institutions. Now CNN issued a live special report from its own perch over the floor of the former NYSE garage. The stock ticker on their "Headline News" service told the tale to investors who also liked to keep track of more human events. For others, there was now a real human being to say that the Dow Jones Industrial Average had dropped fifty points in the blink of an eye, and was now down twenty more points, and the downward spiral was not reversing itself. There followed questions from the anchorperson in Atlanta, and resulting speculation on the cause of the event, and the reporter who hadn't had time to check her sources for information, winged it on her own, and said that there was a worldwide run on the dollar that the Fed had failed to stop. She couldn't have picked a worse thing to say. Now everyone knew what was happening, after a fashion, and the public got involved in the stampede.

Although investment professionals looked upon the public's lack of understanding for the investment process with contempt, they failed to recognize the crucial element of similarity they shared with them. The public merely accepted the fact that the Dow going up was good and its going down was bad. It was exactly the same for the traders, who thought they really understood the system. The investment professionals knew far more about the mechanics of the market but had lost track of the foundation of its value. For them, as for the public, reality had become trends, and they often expressed their bets by use of derivatives, which were moving numerical indicators that over the years had become increasingly disconnected from what the individual stock designations truly represented. Stock certificates were not, after all, theoretical expressions, but individual segments of ownership in corporations that had a physical reality. Over time the "rocket scientists" on the floor of this room had forgotten that, and even schooled as they were in mathematical models and trend analysis, the underlying value of that which they traded was foreign to them—the facts had become more theoretical than the theory that was now breaking down before their eyes.

Denied a foundation in what they were doing, lacking an anchor on which to hold fast in the storm sweeping across the room and the whole financial system, they simply did not know what to do, and the few supervisory personnel who did lacked the numbers and the time with which to settle their young traders down.

None of this really made sense at all. The dollar should have been strong and should grow stronger after a few minor rumbles. Citibank had just turned in a good if not spectacular earnings statement, and Chemical Bank was fundamentally healthy as well after some management restructuring, but the stocks on both issues had dropped hard and fast. The computer programs said that the combination of factors meant something very bad, and the expert systems were never wrong, were they? Their foundation was historically precise, and they saw into the future better than people could. The technical traders believed the models despite the fact that they did not sei it—reasoning that had led the models to make the recommendations displayed on their computer terminals; in exactly the same way, ordinary citizens now saw the news and knew that something bad was happening without understanding why it was bad, and wondered what the hell to do about it.

The "professionals" were as badly off as the ordinary citizens catching news flashes on TV or radio, or so it seemed. In fact, it was far worse for them. Understanding the mathematical models as well as they did became not an asset, but a liability. To the average citizen what he saw was incomprehensible at first, and as a result, few took any action at all. They watched and waited, or in many cases just shrugged since they had no stocks of their own. In fact they did, but didn't know it. The banks, insurance companies, and pension funds that managed the citizens' money had huge positions in all manner of public issues. Those institutions were all managed by "professionals"—whose education and experience told them that they had to panic. And panic they did, beginning a process that the man in the street soon recognized for what it was. That was when the telephone calls from individuals began, and the downslope became steeper for everyone.

What was already frightening became worse. The first calls came from the elderly, people who watched TV during the day and chatted back and forth on the phone, sharing their fears and their shock at what they saw. Many of them had invested their savings in mutual funds because they gave higher yields than bank accounts—which was why banks had gotten into the business as well, to protect their own profits. The mutual funds were taking huge hits now, and though the hits were limited mainly to the blue chips at the moment, when the calls came in from individual clients to cash in their money and get out, the institutions had to sell off as yet untroubled issues to make up for the losses in others that should have been safe but were not. Essentially, they were throwing away equities that had held their value to this point, for which procedure the timeless aphorism was "to throw good money after bad." It was almost an exact description for what they had to do.

The necessary result was a general run, the drop of every stock issue on every exchange. By three that afternoon, the Dow was down a hundred seventy points. The Standard and Poor's Five Hundred was actually showing worse results, but the NASDAQ Composite Index was the worst of all, as individual investors across America dialed their 1-800 numbers to their mutual funds.

The heads of all the exchanges staged a conference call with the assembled commissioners of the Securities and Exchange Commission in Washington, and for the first confused ten minutes all the voices demanded answers to the same questions that the others were simultaneously asking. Nothing at all was accomplished. The government officials requested information and updates, essentially asking how close the herd was to the edge of the canyon, and how fast it was approaching the abyss, but not contributing a dot to the effort to turn the cattle to safety. The head of the NYSE resisted his instinct to shut down or somehow slow down the trading. In the time they talked—a bare twenty minutes—the Dow dropped another ninety points, having blown through two hundred points of free-fall and now approaching three. After the SEC commissioners broke off to hold their own in-house conference, the exchange heads violated federal guidelines and talked together about taking remedial action, but for all their collective expertise, there was nothing to be done now.

Now individual investors were blinking on "hold" buttons across America. Those whose funds were managed through banks learned something especially disquieting. Yes, their funds were in banks. Yes, those banks were federally insured. But, no, the mutual funds the banks managed in order to serve the needs of their depositors were not protected by the FDIC. It wasn't merely the interest income that was at risk, but the principal as well. The response to that was generally ten or so seconds of silence, and, in not a few cases, people got into their cars and drove to banks to get cash for what other deposits they did have.

The NYSE ticker was now running fourteen minutes late despite the high-speed computers that recorded the changing values of issues. A handful of stocks actually managed to increase, but those were mainly precious metals. Everything else fell. Now all the major networks were running live feeds from the Street. Now everyone knew. Cummings, Cantor, and Carter, a firm that had been in business for one hundred twenty years, ran out of cash reserves, forcing its chairman to make a frantic call to Merrill Lynch. That placed the chairman of the largest house in a delicate position. The oldest and smartest pro around, he had nearly broken his hand half an hour earlier by pounding on his desk and demanding answers that no one had. Thousands of people bought stock not just through, but also in, his corporation because of its savvy and integrity. The chairman could make a strategic move to protect a fellow bulwark of the entire system against a panic with no foundation to it, or he could refuse, guarding the money of his stockholders. There was no right answer to this one. Failure to help CC&C would—could—take the panic to the next stage and so damage the market that the money he saved by not helping the rival firm would just as soon be lost anyway. Extending help to CC&C might turn into nothing more than a gesture, without stopping anything, and again losing money that belonged to others.