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Captain's Blog

Captain's Blog, stardate 8/10/07

'The world almost ended last night' - Fortune's Andy Serwer on what Wall Street's big shots are saying.

By Andy Serwer, Fortune managing editor

NEW YORK (Fortune) -- MARKETS: For the first time during this housing market/subprime/credit crunch blow-up, there was real fear on Wall Street. And here I was, lunching at the number one Wall Street beehive in Manhattan, San Pietro.

I was surrounded by and was conversing with the likes of colorful bankers Joe Perella and Donald Drapkin. Ralph Schlosstein and Larry Fink of BlackRock, along with senior-most bankers from Merrill, Citi, and BearingPoint. The mood here was far from desperate - the assembled grandees had seen this movie too many times for that. And still, the first line I heard from one of them was: "The world almost ended last night." Whoa!

What this banker was referring to was what occurred overnight on Wednesday when European markets caught a bit of a cold after all these weeks of sneezing by U.S. markets. "The ECB [European Central Bank] injected $130 billion into the markets - that's more than they did after 9/11," he continued. (After 9/11 the ECB lent $95 billion.) Why did the ECB act? You may have seen that the French bank Paribas locked up three asset-backed funds after it said it couldn't (and I love this) value them properly. And that greatly exacerbated an incipient credit crunch over there. Okay so, intervention, yes, got it.

So why the firestorm? A couple reasons: First it shows that problems with asset backed securities and CLOs and all other manner of derivatives, particularly those backed by real estate assets (and particularly sub-prime real estate assets), may (surprise!) have global implications. And second and probably more important, the ECB's action was in contrast to the U.S. Federal Reserve Bank, which pointedly declined to intervene. So this dichotomy immediately provided the global markets with - if you'll pardon the expression - a world of uncertainty. (And you know how the markets hate you know what!) So which institution is right: The Fed or the ECB? Or, are they both right? As in, conditions are worse in Europe - which would be a shocker...

The bloodletting was severe. At the end of trading Thursday, the Dow had plunged 387 points (or 2.83 percent) to 13,270. And there were unconfirmed rumors that quant arb funds, say like a Renaissance or DE Shaw, had very bad days as their computer models got thrown all out of whack by extreme price swings. "One guy told me this was an eight standard deviation move," a banker told me, "and I said 'well, you better go check your model.'"

A quick update Friday a.m.: I was guest-hosting SquawkBox this morning (another front row seat) and we finally did see the Fed provide some liquidty. Bravo! But let me tell you this, it ain't over....

MARKETS PART DEUX: And so as we dined on heirloom tomatoes and buffalo mozzarella and fettucine with black truffles at San Pietro, the conversation continued. To what extent, I wondered, was this Wall Street illness likely to spread to the rest of the economy? For instance, until now these woes had hurt relatively few participants. To wit: condo flippers in Vegas. (I would submit the deflating housing has hurt relatively few Americans who weren't in the business of speculating in real estate.) Also, securitization experts on Wall Street, as well as some high rollers at institutions such as Sowood and Bear Stearns. As well as holders of high yielding securities - which could include retail junk bond funds. And private equity shops.

Seems like quite a list, but all in all not that many people. So there is a bifurcation here. Having lunched with Bruce Chizen, CEO of Adobe (Charts), earlier this week (Milos, if you must know), I can tell you that all this sturm und drang is far from his mind. Chizen is fixated on his business, competing with Microsoft (Charts, Fortune 500), partnering with Apple (Charts, Fortune 500), etc. I'm sure if you talked to the CEO of Freeport-McMoRan (Charts, Fortune 500) (even though that stock was pummeled on Thursday), he would tell you the same thing. He's just worried about mining and refining metal and selling it to the Chinese.

Of course speculation about our friends in China has played a part lately, with a Chinese researcher researcher, one He Fan, postulating that the Chinese could use its $407 billion position in U.S. Treasurys (second largest holder after Japan), as leverage in yuan exchange-rate negotiations. U.S. Treasury Secretary Hank Paulson recently called this possibility "frankly absurd."... so it will be interesting to see if this Wall Street contretemps remains, as one banker at San Pietro described it, merely "a New York/London problem." Or something much larger....

Loose change

We at Fortune had a terrific visit with Dr. Shirley Jackson, physicist and president of Rensselaer Polytechnic Institute. She spoke about energy security (as opposed to energy independence) as well as what she calls a crisis in innovation in this country. Very smart, high-end stuff. She is on the board of the NYSE, IBM, Martathon Oil, FedEx and Medtronic. (Never mind Emma Willard and Pingry!) Thanks for coming by Dr. Jackson, (and thanks Corey for setting it up!)...

New Book? Starting "The Perfect Mile: Three Athletes, One Goal, and Less Than Four Minutes to Achieve It." By Neal Bascomb. The year is 1952 and three milers are all gunning for the first sub-four minute mile. The book mixes current events. LOVE this stuff! (Thanks Doug.)... Who's going to give me a review of this one: "The Immortal Game: A History of Chess, or How 32 Carved Pieces on a Board Illuminated Our Understanding of War, Art, Science and the Human Brain," by David Shenk. (tee hee)...

Soooo nice to be out fetting the amazin' Stanley Bing. He is simply, Da Man! And nice to meet Laura for the first time too.... Hey, have you tried Mai House yet, the Vietnamese restaurant in Manhattan? It's co-owned by Myriad, Drew Nieporent's group (Drew is a blood!), along with chef Michael Bao Huynh. Amazing flavors!!!... I'm off next week - have a good one and hope things calm down for you all! PEACE! Top of page