Some Rough Rides for a Fall

Record interest rates set best-laid plans agley

A financial maelstrom hits big and small, the prosperous and the striving, without discrimination. Mighty IBM, a seemingly surefire Boston real estate project, and the gold futures market were all sent reeling in last week's crunch. Even the Wall Street Journal had a hard time putting it all together.

From Blue to Red

Of all blue-chip stocks and bonds, few radiate so pure an azure as IBM's. Thus when the mammoth computer corporation decided to raise $1 billion, half of it in 25-year debentures, some Wall Street underwriters anticipated a field day. To be sure, interest rates were expected to go up another notch in late October, but by moving up the launching date two weeks, IBM and its principal underwriters, Salomon Brothers and Merrill Lynch, were confident that the timing was right. It was hideously wrong. The bond issue turned out to be perhaps the greatest underwriting fiasco in Wall Street history.

In all, 228 underwriters--including the Abu Dhabi Investment Co.--were involved in the syndicate selling the issue, and their losses may run as high as $25 million. The main reason was that the Federal Reserve Board jumped the gun in pushing up the discount rate to banks to a record 12%.

Historically, bonds have been difficult to sell at a time of rapidly rising interest rates. The IBM paper carried a yield of 9.41%, whereas even the new Treasury notes and government bonds returned fractionally higher interest. Also, over the Columbus Day weekend, rumors began to circulate that IBM's third-quarter earnings were down. In fact, as announced late in the week, they fell 18%. The unsold paper, possibly $300 million worth, was dumped on the open market, where it fared badly. IBM's timing ignored a hoary Wall Street axiom: "Never commit yourself to a major issue before a long weekend. Who knows, we may be at war by Tuesday." There was no war, but the underwriters were routed nonetheless.

Imperiled Dream

On a near freezing day in Boston, Nick Deane, 35, sees his dream in jeopardy. Two years ago, for $265,000, the novice developer had bought an incomparable old factory building for conversion into 21 condominium apartments and several offices. The 19th century structure, designated a historical landmark because it has one of the oldest cast-iron facades in the Northeast, commands spectacular views of Boston. Every unit in the planned conversion was sold before Deane went to the bank for his building loan. With 10% up front from every investor in the building and all the cash he could pull together, Deane was able to swing a loan of $1.6 million. The project was to be completed last April. Then he had trouble putting the package together. Work on the building started 14 months behind schedule. Meanwhile, the interest rate on Deane's loan has been going up and up; last week it reached 17.75%. The people who had been assured of mortgage loans are no longer certain that they can get them, or afford them, at the new rates. The space he hopes to sell has risen by as much as 50% in value over the past two years, but the costs of sitting on 56,000 sq. ft. of a largely unoccupied building have eroded his potential profit when he gets the building finished.

Glooming over Gold

Those who trade in gold should logically be as euphoric as Forty-Niners striking a new lode. But logic does not govern this market. "It's terrible now," says Richard Lowrance, 23, a trader who fills customers' orders at the Chicago Mercantile Exchange. "Since gold went over $350 an ounce, the volatility has increased fivefold. Our volume has dropped 50%."

While Lowrance glooms over gold's fickle ways, he is suddenly surrounded by gold-jacketed runners and other traders clad in bright red, green and purple coats. They talk excitedly about a broker's blunder: the man has made a mistake in filling out a customer's order, and it will cost him $2,500. A runner asks: "Does that mean we won't be going out to dinner tonight?" "No," answers a trader. "It just means we'll be going to McDonald's."

Hiding the Heat

The crunch made a big front-page splash in just about every newspaper. But the Wall Street Journal, forced by its staid though successful format to use only a single column on page one for the story, had to bury considerable news inside. The paper felt obliged to provide readers with a guide, which ran on the front page:

"A top government official warned that some big-bank failures may lie ahead, partly as a result of the Federal Reserve's actions. See story on page 3. For an explanation of the Fed's new approach to monetary policy, see page 7. In St. Louis, officers of the Federal Reserve Bank there were pleased because they had long advocated such a move. See story on page 6. In the nation's money markets, large certificates of deposit and other short-term instruments quickly matched the one-point rise in the discount rate. See story on page 2. Foreign-exchange traders, happy about the Fed's actions, sent the U.S. dollar up by 2%; gold fell more than $17 an ounce. See story on page 3. But the U.S. stock, bond and commodities markets were less sanguine. See stories on pages 47, 37 and 38."

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