THE ECONOMY: It's a dangerous world out there. Another glass of champagne?
December 28, 1998


The showrooms are way cool at Performance Imaging in Greenwich, Conn. There's a 12‑seat private theater like the ones PI installs for local mansion‑dwellers, and a videoconferencing room similar to the one it was set to build in the nearby offices of Long‑Term Capital Management. Of course, the LTCM deal stalled when the big hedge fund nearly blew up the world financial system in September. "Luckily, we weren't too far into it," says David Kepke, Performance Imaging's president. Well, never mind: Kepke's main headache is a three-month backlog of orders for $100,000 media rooms.

Impeachment? War in Iraq? So what? Three months and as many Federal Reserve rate cuts after a very scary moment in financial history, the amazing American prosperity machine is humming along as sweet as you please. Especially in Greenwich, a New York City suburb known for old money, new money and ‑lately‑ too‑clever‑by‑half money. It helps that the town is home to corporate chieftains, movie stars and athletes (Yankee pitcher David Cone is a Performance Imaging customer). What helps more is Greenwich's position atop the world's financial food chain. LTCM was exceptional for its Nobel laureates and $100 billion worth of wagers. But its founders were relative latecomers to the idea of leaving Wall Street to meld technology, brainpower and capital on the shores of Long Island Sound. Greenwich is home to dozens upon dozens of mutual funds, hedge funds, derivatives consultants and the like. "It's a town where you can talk to the neighbors about how to launch a mutual fund," says Kathleen Shelton Smith, whose firm, Renaissance Capital, recently launched one called the IPO Fund. Not a bad place to ponder just what happened in the global economy this year.

American financial ingenuity swept the world in the 1990s. No less than McDonald's and Microsoft, it has given the decade of globalization its very American flavor. As capitalism spread in the post‑cold-war years, financial imaginations simply soared. A mortgage‑backed securities market for Indonesia? We'll get right on it! Ru­ble bonds to finance Russia's epic transi­tion? Absolutely! Heady stuff, this high finance. And it all fits together ‑elegantly, logically and, best of all, profitably.

Until it doesn't. Make no mistake: the world's overachieving markets were so shocked by Russia's late‑summer default that they nearly stopped working. "Normally, markets are like thermostats‑they adjust slowly," says Richard Medley, whose Medley Global Advisors in New York advises hedge funds. "In August it was like a light switch." And financial institutions are scared of the dark. Folks in Greenwich say they had no idea how leveraged LTCM was‑not surprising, since its lenders didn't know either. But pretty soon, anyone could tell that something was up. "There were lines of black limos outside the headquarters," says David Ogilvy, a well‑connected local real‑estate broker.

Those limos were full of bankers ‑who, with some encouragement from the New York Fed, took ownership of the monster they'd funded on Sept. 23. Fed chairman Alan Greenspan followed up with rate cuts on Sept. 29, Oct. 16 and Nov. 17. The easing stabilized bond markets, as Greenspan intended, and gratified investors everywhere, which he grudgingly accepted. James O'Shaughnessy, an author and mutual‑fund manager, describes the scene on his Greenwich trading floor after the second rate cut. "My traders were high‑flying each other and whooping like after a touchdown," he says. "Then I watched the screens"‑which are color‑coded to distinguish falling stocks from rising ones‑"as they turned from red to green."

In an interview with NEWSWEEK, Treasury Secretary Robert E. Rubin ‑a man no less revered in Greenwich than the Fed chairman himself‑ put autumn's events into context. It was President Clinton's speech to the Council on Foreign Relations in New York on Sept. 14, he says, "that signaled that the key was to focus on promoting growth." Congress finally agreed to fund the International Monetary Fund Oct. 15; a $42 billion stability package was announced for Brazil Nov. 13; Europe's central banks‑on the eve of merging their currencies‑cut their interest rates Dec. 3. And yet, "there are still a lot of issues to deal with," says Rubin. First and foremost? "Japan is not yet back on a path of domestic demand‑led growth."

Even the Japanese government doesn't expect growth of more than 1 percent next year, after a drop of 2 percent this year; most economists are even gloomier. That makes life harder still for Japan's struggling neighbors. They're making progress, though. In Thailand the currency has stabilized, interest rates have finally fallen and the country has brought in some money by selling off assets to foreigners. In Indonesia, too, the economic indicators are turning positive, but there's much to do ‑from repairing the country's shattered banking system to completing a difficult, dangerous political transition. South Korea is restructuring its massively indebted conglomerates and has already begun repaying its $60 billion IMF‑led bailout, but at the cost of painful unemployment. And the other contagion patients? Russia remains flat on its back. Hong Kong is in recession. Brazil, with the help of that $42 billion inoculation and a determined government, is still fighting off devaluation.

But none of that seems particularly worrisome to American investors‑even the very sophisticated ones in Greenwich. Sure, the Greenwichers know that Wall Street is laying off hundreds, that bonuses are down, that more regulation for hedge funds is probably coming. They're aware that the design of the world financial system ‑Rubin has referred to it as a "new architecture"‑remains in the pencil‑and‑eraser stage. But there's still time for other architectural concerns. In November, the town tightened its zoning. The goal? To get people to cease the tacky practice of buying two-and four‑acre lots and tearing down existing houses to build huge "starter mansions." "Unfortunately," says broker Ogilvy, "you can't legislate taste."

Greenwich is like a lot of other rich American towns, only more so. At a roundtable of East Coast financial advisers in O'Shaughnessy Capital's offices -it's a modest Greenwich gathering, with maybe $3 billion represented ‑speaker after speaker talks about keeping clients in the stock market for the long term. The folks at Performance Imaging are thinking about the long term, too. Flicking off a 40‑inch Sony that shows tracer bullets over Baghdad, David Kepke says their first priority is to manage the firm's current growth. Next they'd like to open shops in other cities. Are they thinking about eventually taking the company public on the stock market? You bet they are.