Gorbachev's Ouster Jolts U.S. Markets
The ouster of Soviet President Mikhail S. Gorbachev roiled U.S. financial markets Monday, pushing down short-term interest rates and depressing stock prices.
The drop in rates, usually a favorable sign for financial institutions, was not enough to keep bank stocks from joining the broad decline.
The Dow Jones industrial average fell more than 100 points in early trading before rebounding. It closed at 2,898.03, down 69.99 points, or 2.36%.
An Excuse for Profit-Taking
The American Banker index of 225 bank stocks closed down 2.67%, as investors used the crisis as an excuse to take profits from last week's huge gains.
Because of expectations of a massive rout in the stock market and a flight to quality, the prices of U.S. Treasury securities soared initially, pushing down interest rates by 10 to 40 basis points.
But much of the gains for longer-term maturities were reversed in the afternoon as investors began to fear that the U.S. might step up its military spending, which would increase borrowing needs and boost the federal budget deficit.
Long-term Treasury rates, which had fallen as much as 5 basis points, finished up 6 basis points from Friday's close, to yield 8.11%. Rates on mortgages priced by the Federal National Mortgage Association rose by 9 basis points, to 9.07%.
But the yield on three-month Treasury bills was down 17 basis points, to 5.23%.
"It's unclear how it will affect the economy, but in might not be very much," said Kevin Logan, chief economist at Swiss Bank Corp. "People bought and asked questions later."
Despite the fall in the shares of many banks, some should benefit from the increased volatility of the financial markets. Banking companies that have large trading departments should reap rewards from the frenzied trading on Monday, but volatility would have to be sustained to have a big impact on the bottom line.
Citicorp, Bankers Trust, and J.P. Morgan are the largest U.S. banking players in securities trading, foreign exchange, and derivative instruments.
"Those banks make more money in times of uncertainty," said James Rosenberg, banking analyst at Shearson Lehman Brothers. "They ought to be able to make trading profits."
Day of Economic Uncertainty
But the lower rates and possibility of trading profits were overwhelmed by the economic uncertainty created by the coup.
Shares of J.P. Morgan tumbled $1.875, to $52.125, while Bankers Trust slid $1.875 to $56.375. Citicorp shares fell 37.5 cents to $14.50.
Indeed, bank stocks fell across the board after rocketing 22% in the last three months. Shares of Wells Fargo & Co. closed down $1.625, to $76.125.
Response to Crisis
"It's a profit-taking situation that would be the logical thing to do in a panic environment," said George Salem, banking analyst at Prudential Securities, "Especially after one of the most powerful weeks they've ever had."
Banc One Corp. eased $1 to $44.25, while BankAmerica Corp. fell 62.5 cents to $41.25. Manufacturers Hanover Corp. slid 87.5 cents to $30.125, and Chemical Banking Corp. dropped 75 cents to $26.75. Corestates Financial Corp. dropped $1.375 to $43.875. Northern Trust Corp. dropped $1.375 to $44.50, and Keycorp fell $1 to $39.
"People sell stocks when they get nervous," Mr. Rosenberg said.
Immediate Benefits Possible
The drop in short-term rates should benefit many banks. Net interest revenues at major banks have already been fattened by declining short-term rates and their historically wide difference from the prime rate. The further decrease will benefit such companies as Chase Manhattan Corp., BankAmerica Corp., and Morgan, which match their assets and liabilities to benefit from declining rates.
Alden Toevs, a specialist on asset/liability matching for First Manhattan Consulting Group, estimated that about 30% of banks are positioned to benefit from rate drops.
In its latest regulatory filing, Chase Manhattan, for instance, said that net interest revenue would benefit from a rate drop.
That means that the banking company's deposits and other liabilities abilities will mature faster than its assets, giving it a change to cut its cost of funds and fatten its spread.
Protections Serve Purpose
On the other hand, companies that have moved to protect themselves against rate swings will be less affected. Manufacturers Hanover Corp., for example, said in its recent regulatory filing that it has hedged its portfolio in the second quarter to reduce "the corporation's interest rate risk exposure."
Traders and economists were bracing for a possible easing of interest rates on the part of the Federal Reserve Board to provide ample liquidity, such as it did during the stock market crash of 1987. Already, central banks were in coordinated effort to halt the dollar's rise.
But - at least as of Monday afternoon - the nation's central banks Reserve easing. The Federal Reserve Board put out a statement saying that it was monitoring U.S. financial markets for their reaction to the turmoil in the Soviet Union.
Bargain Prices on Debt Sales
Whether the Fed moves or not, with short-term rates continuing to fall banks could take advantage by selling debt at relatively cheap interest rates, experts say. Mr. Toevs of First Manhattan said banks would be smart to lock in rates by selling intermediate and long-term debt if rates fell.
But others said the volatile markets could hamper banks' ability to raise equity and debt capital. Certainly a fall in companies' stock would hamper the sale of equity. Greg Root, president of Thomsom Bank Watch, said the disarray in the markets "could have an impact on the ability to raise capital, at least for a while."
An early test will come this week, when Bank of New York Co. was slated to sell $175 million of convertible subordinated debentures. A spokesman declined comment on whether it would be postponed.