Financial woes too severe to be papered over


September 26, 1990|By Philip Moeller | Philip Moeller,SUN BUSINESS EDITOR

I do not know what the onset of a financial collapse would feel like, and I hope I never find out. But the disquieting signs of distress are abundant these days.

This is not 1907 or 1929 or 1933 or 1979 or any of the other modern crisis years for capitalism. It is 1990, with its own sets of strengths and weaknesses, magnified by a technology-aided market volatility that brutally punishes mistakes.

Although general business conditions are weak today, it's not the world of tangible goods and services that is so worrisome. Yes, a recession would hurt many companies, and bankruptcies certainly have been on the rise for several months. But such a contraction is very much a trait, albeit unpleasant, of a business cycle we have come to accept.

In the world of financial assets, however, a decline is now occurring that threatens to snowball into something else -- something quite ugly that no one wants to see.

The distress now being felt in the world of paper assets and paper values is hardly surprising in one sense. The U.S. stock market started its long ascent in the summer of 1982, both reflecting and influencing a financial boom abroad.

The demand for financial assets then spilled over into "tangibles," fueling a historic wave of corporate takeovers and tremendous foreign buying of almost anything American -- companies, office towers, golf courses and resorts. Still, these very real commodities were made affordable by a huge run-up in the value of paper assets -- the Japanese yen, the market value of American stocks and the rising "worth" of real estate holdings.

In Japan and West Germany, perhaps, the values of these paper assets were supported by vigorous and expanding "real" economies -- autos, chemicals and other manufactured products.

In the United States, however, the excessive leveraging of financial assets and institutions propelled the financial sector far higher than real-world conditions warranted.

This was no secret. But the pundits and worried regulators were no match for the up-front fees and huge commissions available to the financially fleet.

Now, of course, it's all threatening to come apart.

The decline of the financial world was already well under way before Saddam Hussein's troops invaded Kuwait. But the resulting oil shock has helped speed the process, further weakening what I call the real economy and reducing the level of support that this real economy can provide to the world of financial assets.

So, the stock market has dropped roughly a sixth of its value during the past couple of months -- a fact that will become painfully clear to working America as periodic pension-plan reports start to flow in.

Up to a point, small declines in market values can be absorbed. But the sustained fall we've been witnessing hurts other business activities wherever paper values are used to support business dealings -- as collateral for loans and "floors" for any number of other personal and institutional business dealings.

The drop in the stock market adds to the woes in the real estate market. Although land and buildings are quite tangible, the market value of real estate has long included financial and speculative components. And, as some participants are learning, the volatility of real estate values can be every bit as frightening as being caught on the wrong side of Wall Street's computerized program trading.

All these financial woes are being seen precisely where you'd expect.

The banking system is shaky, and it's not being pulled down by Third World loans but by real estate problems, over-leveraged balance sheets and management weakness. Does that sound strangely like the trio of ills that tubed our savings and loans?

Our banks were supposed to be stronger, and we've been told for several years that the bank insurance fund could handle whatever failures might occur.

Now, it appears that is not the case. The Federal Deposit Insurance Corp. cannot absorb even one large bank failure.

That's been true for years, of course, but no one thought that such a failure could occur. Now they think so. All the time.

Chase Manhattan and many other large banks are deep in the throes of "restructurings" -- a code word for cutting dividends, reducing employment and jettisoning whatever other

operations they must to keep their institutions afloat. Meanwhile, their volume of bad loans is rising to dangerous levels, with little -- sign of any quick reversal.

Maryland's dominant banking company, MNC Financial, may have kept its dividend (for now) but it has lost its longtime chairman, Alan P. Hoblitzell, who announced his resignation Monday.

MNC, which has been engaged in the arduous process of merging theformer Equitable Bank into its Maryland National Bank subsidiary, has been hurt badly by real-estate loan problems. It faces an unpleasant, corporate version of triage -- selling off ailing parts of its business to raise or conserve capital needed to shore up the core of its banking operations.

Outside the United States, signs of a credit implosion also exist, as lenders everywhere rediscover their conservative roots. Japanese banks, once considered sources of limitless capital, have made it painfully clear to the financial community that they are sharply reining in their operations.

Meanwhile, there is still a slew of other economic problems that won't go away soon, including escalating oil prices and the continued inability of congressional leaders to agree on a package of budget cuts.

Faced with the likely combination of declining business output and rising prices, many economists think a mild recession may already be under way. Most businessmen I talk with would almost welcome a mild recession if they felt that's as bad as things would get.

They don't, and neither do I.

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