War came to Wall Street on September 11, 2001. It was a war that began just over five years earlier, with Osama bin Laden’s fatwa or edict declaring war against the United States. It is a war that is not over today, though Al Qaeda is clearly severely damaged, not least by the much-deserved bullet delivered in May via Navy Seal to its leader’s face.
Al Qaeda’s choice of targets on 9/11 reflected a perceptive grasp of the sources of national power. The hijacked jets were aimed not just at military and political nerve centers (the Pentagon and, with downed Flight 93, presumably the Capitol or White House) but also at the World Trade Center and surrounding financial district, substantive and symbolic wellsprings of American economic might.
A nation’s military power and political influence depend greatly on its economic prowess, which in turn draws on the strength of its financial sector. In attacking the geographic heart of American finance, Al Qaeda hoped to cripple markets and institutions that ultimately are crucial to the nation’s ability to harness and project power. Despite the spectacular and horrible effects of the attack, it was a gamble that would fail.
(See complete coverage of 9/11: Ten Years After on AdvisorOne.)
The 9/11 atrocities overall killed nearly 3,000 people, more than 2,750 of them in the New York attacks. The financial industry was heavily represented among the victims. Cantor Fitzgerald, located just above the impact zone at One World Trade Center, lost 658 people. Marsh & McLennan, with offices on the impacted floors, lost 355 people. Keefe, Bruyette & Woods lost 67 people in the collapse of Two World Trade Center.
As the human catastrophe unfolded, there also was the danger of a massive economic and financial collapse. That collapse did not occur, however. America’s economy and markets showed considerable resilience in sustaining the damage. Fast action by financial institutions to resume operations was a key reason.
For example, Merrill Lynch, which lost three people, evacuated some 9,000 employees from the area (most were at the World Financial Center, a block from the Twin Towers) and within minutes had transferred critical management functions to a New Jersey command center. The firm had most of its displaced employees working at remote locations within a week.
Lehman Brothers, with headquarters at the World Financial Center and offices in the World Trade Center, lost one person. The firm soon had its trading operations set up in Jersey City and was using other spaces around the metropolitan area, including the entire Sheraton Manhattan Hotel in midtown.
The Federal Reserve moved quickly to expand liquidity and keep payment systems functioning, despite the disruption of activities at the New York Fed’s stone building on Liberty Street a few blocks from Ground Zero. The Fed’s discount-window lending on Sept. 12 was more than 200 times the previous month’s daily average, and the central bank’s open-market operations and implementation of expedited check clearing helped stabilize financial institutions and money markets.
Government securities trading resumed within 48 hours.
The New York Stock Exchange reopened on Mon., Sept. 17, its columns draped in a giant American flag. The Dow dropped 685 points that day from its Sept. 10 close, a 7 percent fall, and it was 14 percent down at the week’s end. Bin Laden gloated about this decline in a later-released audio tape, exulting that the market’s fall was “equivalent to the budget of Sudan, for instance, for 640 years.”
That downtrend, however, proved transitory. The Dow closed above its pre-crisis level on Nov. 9, less than two months after the attacks. The Nasdaq Composite and the Standard & Poor’s 500 both were even quicker to recoup their losses, exceeding their Sept. 10 closes on Oct. 11.
Fears that the U.S. economy would tip into recession turned out to be unfounded. Gross domestic product expanded by 1.4 percent in the fourth quarter of 2001. The attacks caused an estimated $28 billion in property damage and $40 billion in insured losses, and additional effects included disruptions of air travel. A World Bank study estimated that national income dropped by $90 billion as a result of 9/11, a fairly small impact on what was already a $10 trillion-plus economy.
Some analysts argue that, in a broader sense, Al Qaeda succeeded in imposing huge costs on the U.S. economy, by triggering costly interventions in Afghanistan and Iraq and a slew of expensive policy changes. After bin Laden’s death, a National Journal article assessed the terrorist’s total toll on the U.S. as “at least $3 trillion over the past 15 years, counting the disruptions he wrought on the domestic economy, the wars and heightened security triggered by the terrorist attacks he engineered, and the direct efforts to hunt him down.”
Such analysis, however, strays too far into unknowns. We will never know what human and economic costs would have arisen if 9/11 had not prompted a U.S. attack on Al Qaeda’s base of operations in Afghanistan, or for that matter if Saddam Hussein and his sons had remained in power in Iraq. The debate over U.S. policy decisions made in 9/11’s aftermath will continue for a long time, but it should not be set against an unrealistic baseline of some peaceful, untroubled alternative.
A few weeks after the attacks, Defense Secretary Donald Rumsfeld visited Sultan Qaboos bin Said of Oman, who suggested the atrocities might save lives by bringing a response that will prevent even worse terrorist attacks from occurring in the future. That too is possible.
From the perspective of a decade later, Al Qaeda appears to be a considerably diminished foe. It no longer operates freely in Afghanistan, its involvement in the Iraq insurgency fell short and it has failed to produce further attacks on U.S. soil. Bin Laden once described his movement as a “strong horse” that people would admire precisely for its strength. But that might-makes-right ethos turned out to be a weakness as Al Qaeda failed to live up to its pretensions of being a powerful entity.
There remains the possibility this brutal organization will pull off a new mass murder, but the current situation would have seemed an optimistic scenario in 9/11’s aftermath. And a key reason for this favorable development of events is that the U.S. financial industry targeted in the attacks responded with adeptness and resilience.
Facing Future Crises
The robustness that the financial system displayed in the wake of 9/11 cannot be taken for granted. The financial crisis of 2007-09, though not comparable to 9/11 in human impact, was of greater magnitude in terms of financial turmoil and economic damage. Financial institutions that had weathered 9/11 now failed or survived only in altered form. Lehman Brothers vanished. Merrill Lynch became part of Bank of America.
Public perceptions of the financial industry following the two crises were markedly different. After 9/11, financial firms and people received much admiration and sympathy, for being on the front lines and acquitting themselves well. After the mortgage meltdown, the financial sector reaped much public anger, both for reckless practices that helped bring on the crisis and for getting federal bailouts to stay afloat.
Such anger is understandable but has not necessarily produced policies and politics that will make for a better financial sector. It remains to be seen whether the Dodd-Frank reforms will make the financial industry more resilient — or less so, by tangling it in bureaucratic red tape. Stepped-up political antipathy to the Fed also could weaken safeguards against financial shocks. The Fed’s role in limiting 9/11’s economic fallout should give pause to efforts to constrain or abolish the central bank.
National security, as well as economic prosperity, requires that the financial industry be well-prepared for future crises, whether financial or non-financial in origin. What those crises might be is a matter of speculation. Perhaps a future cyber-warfare attack will target America’s banking system and electrical grid. Perhaps a deadly virus will spread across the country, bringing a contagion of financial panic as well.
In a world of fast-moving, interconnected markets, any future national crisis will have at least some financial element. The financial industry’s response to 9/11 is instructive as an example of facing extremely adverse conditions and doing it right.
A 9/11 Hero
Cyril Richard “Rick” Rescorla saved thousands of lives on 9/11. The 62-year-old World Trade Center-based security chief for Morgan Stanley Dean Witter had long worried about the danger of terrorism at the Twin Towers — including the possibility terrorists might crash, say, a cargo plane into the complex.
The British-born Rescorla, a decorated U.S. Army veteran of the Vietnam War, was crucial in evacuating the Trade Center after the 1993 truck bombing there. He had pressed Morgan Stanley to move to a safer location, but the firm’s lease wasn’t up until 2006. He had raised concerns with officials of the Port Authority-owned complex, but gotten brushed off. He had held regular evacuation drills of Morgan Stanley employees, to be prepared for whatever might happen.
When a plane hit the north tower at 8:46 a.m. on 9/11, Rescorla immediately began evacuating Morgan’s offices in the south tower and nearby Five World Trade Center. Port Authority officials, thinking the event could be contained, wanted most Trade Center occupants to stay put, and called Rescorla to complain as Morgan’s evacuation began. He rejected their recommendation, using colorful language.
Rescorla was on the scene with a bullhorn as Morgan employees streamed out. He was heard singing “God Bless America” as well as a song from his native Cornwall. He told people reassuringly to “slow down, pace yourself” and said that “today is a day to be proud to be an American.”
By the time the second plane hit the south tower at 9:02 a.m., most of Morgan’s 2,700 employees there had gotten out (as had about a thousand more elsewhere in the complex). Rescorla and his deputies continued overseeing the evacuation in the now-burning building. He was seen as high up as the 72nd floor, just five stories below the crash site.
Rescorla and his team were doing sweeps to make sure nobody had been left behind when the south tower collapsed at 9:59 a.m. Morgan Stanley’s death toll on 9/11 ended up being six people, including Rescorla and his deputies Wesley Mercer, Jorge Velazquez and Godwin Forde.
On September 11, 2001, the tomb of Alexander Hamilton, located in the churchyard of Trinity Church in lower Manhattan, was covered with several inches of debris. The terrorist attack at the nearby World Trade Center was, in a sense, a strike at Hamilton’s legacy, a point noted by historian Richard Brookhiser in narrating the recent documentary film Rediscovering Alexander Hamilton.
As the nation’s first Treasury secretary, and in other capacities including as founder of the Bank of New York, Hamilton played a central role in building a vibrant financial sector in the early United States. He did so, moreover, in recognition of finance’s importance as an element of national stability and power.
The tomb was cleaned up in the aftermath of the attack and is the scene of regular wreath-laying ceremonies held by the Coast Guard to commemorate Hamilton’s founding of the Revenue Cutter Service, precursor of the Coast Guard.
(See complete coverage of 9/11: Ten Years After on AdvisorOne.)