Friday, July 29, 2011

August Days

by Alexandra Lebenthal

Josie and Ellen had breakfast every month at Le Pain Quotidien on Madison Avenue and 84th Street. After a hug, they sat down and ordered.

“So, how has everything been?” Ellen asked. “Work still crazy?” She was always a little worried when she asked her friend that question. Josie worked at a large investment bank, and the last few years had been full of drama, to say the least. Josie had said more than once that she thought her days might be numbered.

“Oh you know. Still uncertain. Earnings came out last week and were down. It’s been pretty slow on Wall Street. After earnings were announced, senior management announced that 1,250 positions are going to be cut. Mostly in my division. So anything could happen.”

“Ugh, that’s terrible,” Ellen said. “When will people find out?”

“Well, the good news is that there are over 9,500 people in my division worldwide. And we’ve done alright in New York, so I’m hoping most will be in other cities and countries.

“It’s really amazing though; a couple of slow quarters and everyone who works their tails off day in day out are immediately dispensable. But that’s the way the business works. Over hire in good times and over fire in the bad ones.

“I’ve been on Wall Street for twenty years and have seen this cycle too many times to count. In a way, it wouldn’t be the worst thing ever to happen to me.

”It’s not like anybody’s looking to tap me – a woman – to run the company. If I do get laid off I’ll get a nice separation package after all this time.

”It wouldn’t be the worst thing to take the rest of the summer off and figure out what to do when I grow up.”

“Wow. I’m really surprised to hear you talk like that," Ellen said. “You’ve always been so ambitious.”

“Maybe it’s defensive on my part or maybe I’m just tired. I don’t know. The last three years have been really tough. And the first seventeen weren’t that easy either.
“Anyway, let’s not talk about my career. It’s starting to bore me! Anyway, I’m spending more time thinking about this insane situation with the debt ceiling. It’s so distressing.”

“Oh I haven’t really been paying attention to it,” Ellen said. “Seems like a lot of usual Washington games and finger pointing. I mean it’s not really going to affect me is it?”

“Are you kidding? Ellen, yes! Oh my gosh. It could affect all of us. In huge ways!”

“Really? It just doesn’t seem that important. I mean the United States may have issues, but I’m sure it will all get worked out sooner or later.”

“It’s not a question of sooner or later. Later is too late. In fact, it may already be too late!”

“Really?” Ellen was curious, but didn’t really want to spend breakfast talking about Washington and finance, both of which bored her to tears.

“Yes really. Let me walk you through it.”

“Oh God, Josie, do we have to? You know I’m not good with numbers. That’s why I’m in the fashion business.”

“Yes we really have to. Ever since we were in college you’ve always fallen back on the ‘I’m not good with numbers thing’. In fact, it does affect you even being in the fashion business. You have your own business that depends on the interest rates that all come from what the United States itself pays for money.”

“Ok”, Ellen sighed, readying herself for a long explanation.

“The US borrows money regularly. It’s how we fund our country. It’s how we pay federal workers, social security checks, make Medicare payments, and give federal grants. It’s also how we pay the interest on the debt we have outstanding. In fact, all this money has already been approved by Congress. They just haven’t authorized the payment yet.”

“Really?” Ellen said. “That sounds like a strange way of doing things.”

“Well it’s the way things are done. But listen, if we don’t make any of those payments, people don’t get paid.

Imagine you’re some elderly person, living from social security check to social security check. You wait for that money so you can go to CVS for your monthly Lipitor or whatever, Stop & Shop for the cheapest food you can buy, or to pay your electric bill and keep the lights going.

The US government doesn’t send you your check, and you can’t spend it, which -- I might add -- keeps the economy going. You know, that same economy that’s barely out of one of the worst recessions ever?”

“Geez,” Ellen said. “I didn’t think about that.”

“Well, also think about the fact that the Social Security check belongs to that person who receives it. They worked all those years and paid money into the system. Kind of crazy to think about it that way.”

“Wow. I’d be really mad if that happened to me.”

“Me too, but at age 45 let’s not hold our breath that we even get social security when it’s due to us. Unless Washington makes big changes, there won’t be any. Given where they are now, I don’t have a lot of faith that long term structural issues can be solved!”

“So what else is there?” Ellen was a little intrigued now.

“Let’s talk about other payments.

Think about Maryland or Virginia. They have a really high concentration of Federal workers and those states have already been placed on credit watch by the rating agencies”

“You are losing me Josie.”

“Sorry. Let me break it down. Just like the United States has a rating, which is now AAA, so do every other country, state, city, town and any other entity that issues debt. The rating agencies which issue those ratings have said if a state has a large number of people who work for the federal government don’t get their paychecks, obviously that is going to hurt that state’s economy in the same way that I talked about before with the social security checks not going out.”

“Are you serious? People won’t get paid?”

“Yes I am. There’s some debate whether it would be August 2 or a few days after, but that’s what we are talking about. In fact, there’s about $305 billion due to be paid in August, but only $175 billion or so coming in. You do the math.”

Ellen was riled up now. “This is totally nuts. Just totally nuts.”

“Yup. So anyway if Maryland for example were to get downgraded, that means they will have to pay more when they need to borrow money.”

“I had no idea.”

“Of course, that gets right back to our country’s need to continually borrow money, and how much is needed to pay bond interest. If you’re not AAA, then your cost of borrowing goes up.”

“Ok, I understand that,” Ellen said, “but really Josie, if the US can’t pay on their debts, where else are people going to go. I do know the rest of the world isn’t in great shape either.”

“Yes. That is true, but here’s my fear: if there’s nowhere else to go, and what was considered one of the premier credits in the world is no longer AAA, then couldn’t everything fall apart? It’s not too farfetched to assume a major crisis could happen again. What’s funny is that after all the time Washington has spent talking about evil Wall Street causing the financial crisis, now they are the ones that are potentially causing one.”

“Gosh, you’re right”, Ellen said. “You said before that this could affect me and my business. How does that work?”

“Well, the entire interest rates system is pegged off US treasuries. Municipal bonds, corporate bonds, what you pay for a business loan or mortgage. Even your credit cards will go up if the treasury rates go up. With the economy limping out of recession, if everyone has to pay more for credit, that hurts the economy.”

“Wait,” Ellen interrupted, “my mortgage is variable and I am talking to the bank about a small business loan! I would be affected!? This is all so scary and wrong. What is going to happen?”

Josie sighed. “Well here’s where it gets a little more frightening. The rating agencies have said that even if Congress raises the debt ceiling by August 2, unless there is a credible plan for balancing the budget, they may still downgrade them. All this bickering between the President, Democrats, Republicans, tea partiers, you name it certainly doesn’t seem like a plan can be agreed upon. So we may get downgraded regardless.”

“Wow. But if they do approve one a few weeks later then they can go back to AAA, right?”

“No, not necessarily. Ratings don’t move all that frequently. It takes a lot to go down, and a lot to go up. If any issuer shows a cavalier attitude towards their finances regardless of whether they are the United States or Timbuktu, that’s something a rating agency will consider. It’s not just ability to pay debt, it’s willingness too! I think it could be a long, long time.

“So that, my dear friend, is why I am so agitated by this. If my job gets eliminated, that’s the least of my worries.”

“I totally get it now. I just cannot believe that our representatives, who we voted into office to represent us, are doing this with our money.”

“You got it,” Josie said. “End of story.”

Hopefully, this isn’t the end of the story. As I finish this at 4:45 on Thursday, July 28 2011, I wonder if next week at this time, this will all be moot. Will the parties and leaders come together, realizing the precarious position we are all in now, or will we have put economic recovery in jeopardy and taken a disastrous turn for our country?

On behalf of Ellen, Josie and the rest of us, I hope I’m wrong.
Alexandra Lebenthal learned from her father, Jim Lebenthal, and grandmother before, about the basics of finances and investments. Today she is the CEO of Lebenthal & Co., LLC and its wealth management division, Alexandra & James Co.