With Rubin Out, Wall Street Needs D.C. Help Washington’s Help

On Sept. 14, President George W. Bush finally came to Wall Street. The following Monday morning, so did Treasury Secretary Paul O’Neill, to preside over the New York Stock Exchange’s opening bell.

The President rose to the occasion: Casually dressed but charged with adrenaline, he had one of those great Presidential moments as, megaphone in hand, he roused the firefighters and police officers before him. Mr. O’Neill, on the other hand, seemed to have been shrunken by it. Small, pinched and bureaucratic, the Treasury Secretary–who was in Japan the previous week and virtually invisible to the American people–stood stone-faced and stiff, sandwiched between an emotional NYSE chairman Richard Grasso and New York Senator Hillary Rodham Clinton.

It was a time for Mr. O’Neill to ooze quiet resolve and confidence in America’s fractured investment psyche. And the 65-year-old Mr. O’Neill tried his best. “I’d be buying stocks right now if I were allowed to,” the former Alcoa chairman and chief executive later said on CNBC. But to no avail: Stocks crashed 7 percent for the day.

Many fears and other factors went into Monday’s dive. But one can’t help but suspect that there were more than a few traders on the NYSE floor who felt an ache for the strong, comforting presence of former Treasury Secretary Bob Rubin.

Sitting in their midtown offices, their disaster-recovery sites in Jersey City or, still in many cases, their house or apartment offices, Wall Street executives–a hardened and jaded lot–seem more than ready for an embrasso from Washington. The days when the utterings of Mary Meeker and Henry Blodget could move markets are over, and Wall Street needs help. The Twin Towers are gone, a graphic symbol of the end of the 90′s boom. Friends and colleagues have plunged 100 floors to their deaths; office space has been abandoned; a brutal recession, layoffs and a market crash loom.

“People are profoundly shaken,” said one senior investment banker. “It’s going to be hard to get business done. And on top of that, you have the virtual certainty that people are going to be let go in another round of layoffs. Wall Street firms are staffed for a level of business that is not out there right now, and it could be years before that business returns.”

As far as embraces go, this will be an awkward one. For Wall Street, it’s been a decade since anyone even looked to Washington for anything more than tacit approval. For President Bush and his Treasury Secretary, it means getting to know a part of the economy that is virtually alien to them. The Treasury Secretary is an old Washington hand and a former mid-American C.E.O. As for the President, he’s more comfortable mingling with the executives of big oil and big tobacco than he is with bankers and securities chiefs.

But the national and international banking community has done its part. Alan Greenspan weighed in with his .50 basis-point rate reduction early on Monday, Sept. 17. It’s very likely to be followed by another cut on Oct. 2 at the Federal Reserve’s next meeting. Global central banks have already injected more than $100 billion in short-term liquidity into the banking system.

Since January, Mr. Greenspan has cut rates by three precentage points. Yet the markets have remained moribund. Retail investors remain in a state of shock, mergers and acquisition activity has dried up and institutional investors seem confused.

In circumstances like these, Wall Street is looking for something more–specifically, a good old-fashioned dose of Keynes-ian economics. The demand side has already been taken care of with the $40 billion recovery package approved last week by Congress. Just as important, though, could be the supply side.

Now that the Social Security lockbox has been unhinged, President Bush’s senior economic advisers, including Larry Lindsey, are said to be pushing harder than ever to pass an economic package that would include a capital-gains tax cut. The Republican leadership on the House Ways and Means Committee has been working on an economic-recovery plan featuring just such a cut, but they have yet to present an actual bill.

By cutting the rate from 20 to 15 percent, the thinking goes, the federal government could spur a renewal of market activity and provide the impetus for mergers and other corporate deals–and, as a result, windfall revenues for the Treasury.

House Speaker Dennis Hastert has expressed his support. Up to now, though, Mr. Bush has been lukewarm on the concept–he may like it in theory, but he’s been reluctant to give Democrats another excuse to label him as nothing more than “President Big Business.” And even now, most Democrats–including that old Wall Street trader himself, Senator Jon Corzine of New Jersey–oppose it.

“To create a permanent tax cut that would cost the Treasury billions of dollars in order to sway the markets in the short term does not seem like an appropriate policy,” said Joel Friedman of the Washington-based Center for Budget and Policy Priorities.

But with the toppling of the towers, the political dynamics have changed. Mr. Bush’s approval ratings now approach the 90 percent his father had at the end of the Gulf War. And the son knows better than anyone what shrunk those heady numbers: George Herbert Walker Bush’s inability to do anything about the recession and bear market that followed the war. The current President knows he’ll have to go beyond the “Message: I care” pronouncements that only heightened public perceptions of the senior Mr. Bush’s distance from the average American. And since he’s already put $300 in each tax-paying American’s pocket, he’s now free to push a plan that will aid the other end of the economic spectrum. Congress, facing those crucial midterm elections in 2002, will have to respond.

To be sure, there will be plenty of horse-trading. For example, some analysts say that including a cut in the payroll tax could very well bring recalcitrant Democrats on board for a capital-gains tax cut.

“Larry Lindsey has opened up the lockbox,” says supply-side economist Lawrence Kudlow. “Once that door is opened, you can put as much as a $150 billion stimulus into the economy. And when you start to rebuild some of this stuff, you will create some serious demand for telecom and technology investment.”

For this scenario to kick off, it will take Wall Street and Washington getting to know each other all over again. During the Clinton years, the familiarity was informal and yet assured. The Street had its man in Washington, former Treasury Secretary Bob Rubin, and a President whose many hours spent fundraising and socializing in Upper East Side salons had created an intrinsic understanding of the Street’s ethos.

Mr. Bush, however, has no Wall Street guys in his inner circle. And, unlike Mr. Gore, he spent very little time and energy hitting the Street up for campaign cash. Mr. Lindsay was famous for his bearish prognostications on the Dow, and Mr. O’Neill was a corporate man to the core.

Those on the Street were fine with that–you go your way, we’ll go ours. And so it was, until the Twin Towers crumbled into gray dust.

One of the first from Washington on the scene was newly appointed Securities and Exchange Commission chairman Harvey Pitt. At a press conference on Sept. 13 at the offices of Credit Suisse First Boston, the burly, bearded Mr. Pitt looked quietly on as Mr. Grasso and Nasdaq chairman Hardwick Simmons announced that the markets would wait until Monday before resuming operations.

“People should not expect a Black Monday,” he said gravely. “The New York Stock Exchange and the Nasdaq are highly regulated markets. When the markets reopen, the S.E.C. intends to be on the job and on the site.”

That statement alone signals a new era for Wall Street and the markets. For if there was one element that drove the new-paradigm excesses of the mid-90′s, it was the palpable feeling that no one was watching. The I.P.O. boom and the Internet bubble flourished accordingly; there seemed to be no more rules, no boundaries, no inflation even. The freedom to spend and invest was infinite. Stimulus from Washington? Who needed it when Cisco was spending billions of dollars a year on routers and Internet hubs?

Now souls are being bared; Wall Street executives are weeping, unabashed, at the drop of a hat–and the Street is calling for a firm, severe hand.

“The events of Sept. 11 give free latitude for new initiatives in spending and regulation,” says Jim Grant of Grant’s Interest Rate Observer . “Heightened regulation is part and parcel of a wartime economy. Wall Street was a big supporter of the New Deal and the suspension of gold convertibility [by President Nixon in 1971]. In the end, Wall Street likes what works.”

Whether the combination of Washington-based measures and the Fed’s rate cuts will be enough is unclear. Cisco and General Electric are already offering to buy back large amounts of their stock. There have been some rumors, too, of a mysterious cabal of bulge-bracket executives banding together to pump large sums of their capital into the flagging market. Will that happen? Probably not.

Those heady bygone days of Wall Street controlling its own destiny seem very much a thing of the past. These days, the key to a market recovery is likely to be found closer to K Street than Wall Street.