Tuesday, September 16th, 2008

The Financial Crisis: Good for Chicago?

Bear Stearns was swallowed up by JP Morgan. Lehman Bros. is bankrupt. Merrill Lynch was forced to sell. AIG is on the brink. Other banks, funds, and insurers are being forced into massive write-offs, equity raising, and job cuts. Across the pond, Northern Rock has been nationalized, other firms are taking on water, and the City is seeing huge layoffs.

New York, London and other world financial centers are getting ravaged by the financial meltdown. But one that seems to be an exception is Chicago. To date, it would seem that the brunt of the storm is hitting New York and London, where investment banking is concentrated.

It wasn’t too long ago that I thought Chicago’s financial center status was at risk. Its warring exchanges, saddled with legacy mutual structures and open outcry pits were in danger of getting passed by more nimble, electronic European exchanges. With Illinois long a unit banking state, it was never a major commercial banking sector, and its flagship names had fallen prey to outsiders, especially when Bank One (nee First Chicago) was taken over by JP Morgan.

Today, the situation is reversed. The exchange restructured and merged and are stronger than ever. In fact, they are the predators not the prey as they buy out the NYMEX. While still weak in commercial banking, Chicago became home to many hedge funds and VC operations. And it remained a major insurance center with regional companies like Allstate, State Farm, and CNA. While the Chicago financial sector is certainly not immune to the problems in the headlines, it seems on the surface to me that Chicago’s large institutions are coming through in pretty good shape.

Could this portend an increase in Chicago’s relative standing among financial centers? With NYC and London both set for an extensive downsizing of the sector, at least on a cyclical basis, Chicago is going to look like a much bigger player than it did just two years ago. This could end up being a good thing for the city. Despite having a major presence in many sectors, it is really finance that has driven Chicago’s resurgence, as it has that of so many other cities. Keeping strong and a prominent world center in that industry is absolutely critical to Chicago’s continued succeess. So while the crisis will hit the city’s tax coffers and such, hopefully for Chicago it will come through in a strong relative position than it had before.

1 Comment
Topics: Economic Development
Cities: Chicago

One Response to “The Financial Crisis: Good for Chicago?”

  1. thundermutt says:

    If the fundamental strength of Chicago is the commodities market, they may also be in for a whack.

    At the bottom of this financial crisis is the inherent risk of borrowing short and lending long. Cheap short-term money encourages structured finance that multiplies the risk of those short/long spreads. When it works right (when the economy is expanding and humming along), it throws off good returns.

    It remains to be seen how much of the present “difficulty” in markets can be laid to commodity speculation. Right now everything is being blamed on the subprime mortgage issues, but when those stopped making money a year ago, the “smart money” started chasing corn and oil.

    Someone is getting hurt with the 33% fall in oil prices; if gasoline demand and price actually drop, so will corn prices…and the speculators in that market will get torched too.

    I don’t get scared easily by macro issues, but this one is truly scary. No recovery until 2010? Falling house prices for a couple of years? Runs on banks? That reputable economists are even SAYING these things out loud is truly scary.

    Additionally, small to mid-size insurers will have portfolio exposure to all these failing companies. Conseco announced a big writedown on positions in financial stocks, and those companies you mention (State Farm, CNA, Allstate) will also likely have to mark to market at the end of the quarter.

    No, I think it’s too soon to say Chicago will weather the storm.

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