Manhattan, Deleveraged

salmon Manhattan, DeleveragedDown on Wall Street, the word of the hour is “deleveraging.” In the financial markets, deleveraging is a brutal and unpleasant thing, where lots of innocents get badly hurt.

Goldman Sachs and Morgan Stanley have become plain old-fashioned bank holding companies. Lehman declared bankruptcy. The bull (Merrill) and the Bear (Stearns) have both been incorporated ignominiously into vastly larger megabanks.

Six years into his stewardship of Charlotte-based Bank of America, Ken Lewis, who was widely credited with turning the bank over from being a regional player into a powerful, diversified bank, admitted to $527 million in losses on debt products. That had been the result of a decade-long dalliance with Manhattan-style investment banking his company had inherited.

“I’ve had all the fun I can stand in investment banking,” he told analysts.

Last week his company bought Merrill Lynch and saw its stock price plunge more than 20 percent the day the announcement was made. The fun stops there.

Now that everybody is operating under the beady eye of federal bank regulators, no one any longer has or wants a balance sheet 30 or 40 times larger than their capital base—the equivalent of buying a trillion-dollar apartment with just 3 percent down, and taking out a mortgage that needs to get refinanced daily.

Right now the Treasury secretary is Henry Paulson, a New Yorker to his fingertips. The Street knows this, and it’s grateful for the $700 billion in help that is coming its way.

But with the $700 billion comes a swearing of fealty to other, less familiar masters, in unlikely places like Charlotte, N.C.

Mr. Lewis will exhibit a very different appetite for risk than the one that propelled Mr. Paulson to the top of Goldman Sachs and then to Treasury.

He, and the federal regulators, are the stern angels of Deleveraged Manhattan. And their new Wall Street favorites are no longer the big swinging dicks who gamble billions of dollars in exotic derivatives; they’re the risk officers who tell them to stop. The brass ring isn’t a $10 million bonus anymore; it’s still having any job at all.

Even the people who get out of this thing with lots of money won’t want to spend it. It’s both uncool and unwise, these days, for a junior trader to order a thousand-dollar bottle of wine at Del Posto.

This has actually been true for a little while now. Until last summer, it was a good idea to stand out from the crowd: that was the road to promotion and wealth. If you have money, and you show it, then you must want, need, deserve more of it.

Today, it’s liable to get you fired, amid mutterings about “bad judgment.” By all means make money—that is, after all, the whole point of Wall Street. But don’t flaunt it, don’t joke about it. Don’t leverage it.

The problem for New York at large is harder to diagnose. It’s fair to say that the city’s dependence on investment bankers is a sort of leverage; and the deleveraging of Manhattan life promises to be painful.

For New York’s cultural institutions, its condominium market, its service industry, both high and low, it’s going to be a case of last in, first out. Did you just spend a six-figure sum kitting out a bottle-service nightclub on Avenue C? Did you rent out a prime midtown location for hundreds of dollars a square foot with the intention of opening New York’s 67th high-end steakhouse? Are you just embarking on a major fund-raising campaign for your start-up nonprofit organization? Prepare yourself.

Already the nostalgia for the days of intermittent poverty is beginning to bubble up. “Magical thinking,” The New Yorker’s Nick Paumgarten calls it: Maybe we’ll be able to afford a place in Manhattan! Maybe the cool kids, the ones without six-figure salaries or even any jobs at all, will start to return! Cheap beer!

“If there’s one part of this week’s economic implosion that sure smells like a silver lining from here, it is the prospect of we New Yorkers finally getting a few of our clubs and downtown streets back,” crowed one legendary downtown nightclub promoter to her mailing list Sept. 22. “Some of New York’s most enduring clubs have been born in dark financial times indeed.”

The correlation between price and prestige will see a dramatic unwind. Instantly recognizable brand-name art brands like Hirst and Prince and Koons will start seeming shlocky; the prospect of moving your family into a brand-new glass-curtain-walled apartment designed by an expensively bespectacled European architect will feel increasingly “like living in Pyrex,” in the prescient words of A. A. Gill in Vanity Fair in 2006. Only the uncouth will put themselves and their wealth on show like that in Deleveraged Manhattan, and in the new New York, the rich and uncouth would be well advised to move somewhere else, like Moscow, or Shanghai, or Dubai.

But the excesses of New York aren’t entirely the excesses of Wall Street: Indeed, there’s a case to be made that it’s the other way around. New York was home to vain plutocrats long before Salomon Brothers traders started trading mortgage-backed securities and pulling down multimillion-dollar bonuses; those traders aspired to existing modes of consumption even as they invented new ones.

And so the notion that Manhattan will become a cash-only town full of dirty nightclubs and outsider art and cheap Classic Sixes would have a certain absurdity to it even if there weren’t still an abundance of private-equity shops and hedge fund managers and other financial professionals who don’t seem to be feeling much pain at all.

The King Cole Bar Lounge at the St. Regis was built to withstand sterner corrections than the present one; it’s got a secure down payment in the permanent, unceasing wealth of Manhattan. So, too, Jean Georges, the Met (both Opera and Museum)—they might see a downtick in the amount of money coming in from New York’s wealthy, but nothing they can’t handle.

Take a trip down one of those limestone-encrusted Fifth Avenue blocks in the ’60s right now: Half the names attached to the 25-foot-wide mansions are out of the lists of managing directors of the big banks, but the other half still cross-index with the social register. After all, with very few exceptions, the rich haven’t stopped being rich, and they’ll continue to do the things that rich people do.

They might even start collecting new experiences: being outbid by a Russian at Sotheby’s, detecting a tiny hint of urgency at their club when asked whether they might be interested in actually paying an epic bar tab. Because that’s one liability Mr. Paulson will never bail out.

editorial@observer.com