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