Best-selling author Tom Wolfe gives The New York Times his take on the economic downturn over the last year

June 26th, 2008

The Bonfire of the Vanities, the Sequel

When the Blackstone Group went public about a year ago, Tom Wolfe, the author of “The Bonfire of the Vanities,” on hand on the trading floor of the New York Stock Exchange, delivered this prophecy: “We may be witnessing the end of capitalism as we know it.”

A year later, while it may not be the end of capitalism, it looks as if Mr. Wolfe got it a lot closer than the investors who plowed money into Blackstone, Andrew Ross Sorkin argues in his latest DealBook column. According to Mr. Sorkin, capitalism today — at least as Wall Street defines it — is a very different, and worse, business. And, he says, it is only going to get tougher from here.

A 'Bonfire' Returns as Heartburn
The New York Times

Almost exactly a year ago, Tom Wolfe, the author of “The Bonfire of the Vanities,” was wandering the floor of the New York Stock Exchange. Dressed in his trademark white suit, he darted around traders and whisked past trading booths, shaking hands and waving, just before the market was about to open.

It was a sunny, ebullient morning. The Dow stood at 13,337. Deals were zipping across the ticker: Barneys, the luxury retailer, was sold that morning to an investment arm of the Dubai government. Investment bankers were getting ready to take a half-day Friday and drive out to the Hamptons.

But the real excitement — the reason, traders whispered, that Mr. Wolfe must be in attendance — was that the Blackstone Group, the big private equity firm, was minutes away from going public, the largest initial public offering in the United States since 2002. (At the time, he told The New York Observer that a friend was giving him a tour.)

Just then, a CNBC reporter pulled Mr. Wolfe aside to ask him what he made of all the hubbub. Mr. Wolfe paused for a moment to contemplate his answer.

And then, with a wry smile, he delivered a prophetic declaration: “We may be witnessing the end of capitalism as we know it.”

Here we are a year later, and while it may not be the end of capitalism, it looks as if Mr. Wolfe got it a lot closer than, say, the investors who plowed money into Blackstone.

Capitalism today — at least as Wall Street defines it — is a very different, and worse, business. And it is only going to get tougher from here.

Sherman McCoy, Mr. Wolfe's bond-trading protagonist — who always bemoans he is “hemorrhaging money!” — would probably be selling his 12-room apartment on Park Avenue right about now.

Or, as Mr. Wolfe told me during an interview Monday, “He would be eating his heart out wanting to run a hedge fund, but he's not smart enough!”

Mr. Wolfe, who returned Monday afternoon to Manhattan from South Hampton on the Hampton Jitney, said he was mesmerized by what had happened to Wall Street in the last year. “Nobody understands where the actual value is — and they don't care anymore,” he exclaimed.

Of course, Mr. Wolfe's 1980s Wall Street — of privileged WASPs (and Jewish Anglophiles), the sons of Harvard and Stanford and Princeton braying for money on the bond market — is pretty much gone now. It was replaced, in part, by the world of private equity and hedge funds, by hypernumerate quants and bankers who think proprietary trading is more important than serving clients.

And now that world is crumbling, too.

Blackstone's stock has gone nowhere but down since it went public, dropping nearly 50 percent from its high the day it started trading. But that's the least of it.

The once mighty Wall Street investment banks have been brought to their knees, sending out pink slips to more than 83,000 employees worldwide, racking up billions of dollars in losses as a results of their foolish forays into subprime mortgages. Bear Stearns all but went out of business before being “saved.” Some hedge funds have gone belly up.

Those lords of private equity, many of which were preparing to follow Blackstone into the public markets, have been put on semipermanent hiatus. (Kohlberg Kravis Roberts & Company refuses to withdraw its I.P.O filing, almost a year after submitting it, with no immediate hope in sight.) Their deal-making has all but stopped.

As Mr. Wolfe nicely put it, “It sounds like even the firms that aren’t in trouble are in trouble.”

And yet, there has been a perverse, and misguided, optimism that somehow the situation will improve in the second half of 2008. How? Sure, the big banks may take fewer write-downs — but there is no way of knowing that. The news a few days ago that the big bond insurers were being downgraded will create new havoc — and losses — for holders of toxic subprime debt. Indeed, the bigger issue is what kind of business is going to generate any return for its investors. When you can't lend or trade — and you can't invest with the leverage that juiced returns to support seven- and eight-figure bonuses — how exactly are you going to make money?

“It has always interested me that the word 'credit' comes from the word 'credere,' which means 'to believe,'” Mr. Wolfe said. “It only works if people believe in it.” He's right, of course: one reason the credit markets have tanked is that people don't believe anymore.

Foreign investors seemed to have too much faith last fall, pouring money into firms like Citigroup. But their stocks just kept falling, so much so that no big sovereign wealth fund came to the rescue of Lehman Brothers in its hour of need this month.

In truth, Wall Street is in for a radical makeover. Fewer people, lower margins, lower risk, lower compensation — and ultimately, fewer talented people. It is likely to change the culture of an industry that for nearly a century has been the money center of the world. “There would be a lot of firms leaving New York if it wasn't for lunch,” Mr. Wolfe said with a laugh, remarking that bankers still like being fawned over by captains and waiters who speak in “movie French.”

Wall Street will clearly have to downsize. Citigroup is cutting 10 percent of its work force this week, and even the wonder boys over at Goldman Sachs are cutting 10 percent. And that may not be enough.

In 1973, Wall Street shrank by 15 percent amid a severe economic downturn. The bloodletting continued into the next year when 12 percent of the work force was booted out the door. That pinstriped massacre was caused by a stalling economy, amid skyrocketing oil prices, rising inflation and a faltering bond market — very similar to the problems that the economy is facing today.

Stir in a bit of globalization, and the world becomes more challenging. “I think that what's going to come back to bite us is globalization,” Mr. Wolfe said. “It's never been tested. It's like a Ponzi scheme in which we are the Ponzi and everyone else makes money except us.”

Still, Mr. Wolfe remains cautiously optimistic. “This country is so rich,” he said. “I don't see people cutting down much in New York City.”

When I asked Mr. Wolfe about his comment on the floor of the stock exchange, he said, “I didn't realize anyone would take me seriously.” He says he has since made up an explanation of why he thought it could be the end of capitalism.

Citing Joseph A. Schumpeter, the economist, Mr. Wolfe said, “Stocks and bonds are what he called evaporated property. People completely lose touch of the underlying assets. It's all paper — these esoteric devices. So it has become evaporated property squared. I call it evaporated property cubed.”

Then he cautioned, “Of course, I'm not an economist.” Maybe that's why he's gotten it so right.

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