A Multi-Billion Dollar Bond Breakdown

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Bush administration and other federal officials have repeatedly assured Americans this week that all efforts will be made to keep the nation's financial system operating smoothly. Easier said than done. TIME has learned that a serious delay in processing orders — at its high point covering at least $400 billion or more in securities — has resulted from a major and ongoing communications problem at the Bank of New York following the terrorist attack on the World Trade Center.

The breakdown at BONY, which along with J.P. Morgan Chase & Co. processes roughly 90% of the $1 trillion or more in daily U.S. treasury and government backed debt transactions, has also been the focus of scrutiny and conference calls involving staff from the U.S. Treasury, the Federal Reserve, the Securities and Exchange Commission and the top leadership of BONY.

[an error occurred while processing this directive]"It's certainly an issue of concern, and people have been working very hard to get it resolved," Brian Roseboro, assistant secretary of the Treasury for financial markets, a key figure among officials monitoring the situation. "It's important that this problem be fixed — we want the basic infrastructure up and working."

"The bonds and the money to pay for them are in the system," notes a former senior government official. "For the moment, the question is not if, but when that system can come up so these trades can settle."

As of Friday afternoon a BONY spokesman said that the problem was not completely fixed, but that the systems are more robust. "No transaction or money has been lost," he added. But bond market sources noted that while BONY functioning has improved, the bank was not yet operating normally.

"There are still transactions that have not gone through," said an industry source, "and we can't even be sure the problem will be fixed over the weekend for trading on Monday."

The terrorist assault caused BONY, with headquarters barely three blocks from the World Trade Center, to lose its two major computer centers for processing huge volumes of bond transactions. Ever since, it has been relying in part on a processing center in New Jersey, but many of the communication lines have been out of action for much of the week. "I had to send [records of] $400 billion in bond deals over to BONY in a taxi," said Thomas Costa, chief operating officer of Government Securities Clearing Corp., a firm that processes securities deals worth more than $875 billion daily. "It's a question of connectivity " says a BONY spokesman, referring to telecommunications links between the bank and its customers. And BONY is by no means alone: Scores of major Wall Street financial institutions have suffered severe human and operations losses in the terrorist episode.

As soon as it became evident that BONY was having serious problems, officials at Treasury, the Fed and the SEC organized a series of telephone conference calls by Thomas Renyi, the chairman of BONY, and Gerald Hassell, its president. A key issue: how to restore communications and computer functioning as quickly as possible with some 200,000 of the 500,000 phone lines in lower Manhattan out of service.

Even though the World Trade Center attack occurred at 8:48 Tuesday morning, a huge volume in unpaid-for bond transactions had already built up from dealmaking Monday, as well as early Tuesday morning, both in the US and in financial centers like London and Tokyo that open earlier. At one point in a Wednesday conference call, according to a participant, BONY predicted it would have its communications up and running in a matter of hours — only to be proven wrong by day's end. In another call, a US official promised to push phone service provider Verizon to put the repair of BONY's communication lines at the top of its work list as an urgent national priority.

The bond market closed early Friday, and trading has been light following the terrorist attack. The Fed, meanwhile, on Friday announced it was injecting $81.25 billion into the banking system, after pledging another $70.2 billion on Thursday. But the plumbing at the heart of America's largest financial market remains semi-functional. "The financial system is fragile and this problem needs to be cleared up as soon as possible," says a federal official.