Effects of the 9/11 Attacks on Financial Markets - Essay Example

?First and Full 5 August The Effects of the 9/11 Attacks on Business Confidence and Financial Markets EXECUTIVE SUMMARY The attacks that occurred on September 11, 2001 sent shockwaves around the world. This catastrophic event that caused great emotional devastation and the mass loss of life was something that Americans had never witnessed firsthand before. This was the first major terrorist attack that took place on American soil and the consequences were devastating. There was confusion between the unpredictability of the stock market in addition to the enormous loss of infrastructure. As the tragic events took place, people from all walks of life tried to comprehend what was occurring before them. Those involved in the news media, along with CEOs and the everyday average business worker, experienced the pain of losing loved ones, not to mention the business disruptions that took place. In the immediate aftermath, most people tried to get through this tragedy by restoring a sense of normalcy as soon as possible. The purpose of this Essay is to examine the effects of the 9/11 attacks on business confidence and financial markets. This paper will build on existing studies by other experts who have previously studied these issues. The 9/11 attacks affected the financial markets and business confidence on a broad range of levels that were surprising to say the least. In terms of stocks and bonds, we must consider what occured at the New York Stock Exchange (NYSE). There were immediate electronic interruptions, not to mention the direct threat to infrastructure. Both of these issues were of immense concern to the New York financial and trading community. Even though the 9/11 attacks were horrific enough in themselves, the physical impact of the attacks is not the subject of this paper. Instead, this paper will focus on the impact of the 9/11 attacks on the foreign exchange and derivative markets, business confidence, and the effects of monetary policy. Additionally, the focus will also be on the responses to the shockwaves, if any, that rippled the business community many years after the event. INTRODUCTION One cannot differentiate financial markets from the economy. Safety issues along with the fear of future similar terrorist attacks occurring again on American soil set the stage for increased security concerns. More than this, business management teams as well as workers and investors across the country had security concerns that went way beyond infrastructure. Can electronic, software, and hardware disruptions result in unparalleled losses? It can be said that the real impact of the 9/11 attacks on the financial world may have been the immediate disruption of the New York exchange markets, loss of communications, and the horrific loss of life, all of which represented a big blow to the supply-side values of the financial and business world. As it has only been ten short years after the 9/11 attacks, it is perhaps still too early and in some cases too painful to conduct a comprehensive investigation of what the consequences of those shocking events were. This would best be done with an examination of the full range of financial markets. The issue is still relatively sensitive because of the types of questions and accusations surrounding the beneficiaries of certain trading efforts in the stock exchanges. These parties are accused of placing winning put trades and options on airline stocks shortly before the tragic attacks. It would seem as though some investors had foreknowledge that particular stock of certain airlines would dramatically plummet on that fateful day. However, for the subject of this paper, we will flesh out a sensible recounting of the effects of monetary policy responses to the shock of 9/11. This will rely heavily on Congressional Research Reports and information derived from the Federal Reserve. The financial markets and the effects of monetary policy responses to the horror of the 9/11 terrorist attacks in New York had varying, if not lasting impacts. There are experts who believe that, although the 9/11 attacks were shocking and disgusting, the financial markets and the greater global economy would have progressed in just the same way whether or not the attacks took place. In other words, even though the unfortunate events of 9/11 contributed significantly to the evolution of today’s global financial state of affairs, along with those of the United States, there is no reason not to say that this change would not have occurred anyway. Is there evidence of any lasting effects of the 9/11 attacks in the finance world today? Many experts would argue that effects of the attacks cannot be currently found or seen in the money markets. In order to fully answer this question, the foreign exchange market, derivatives, and effects of monetary policy must all be examined thoroughly. A microcosm of the airline industry will be observed because it is extremely relevant with regards to stocks in and around the time of the 9/11 attacks. Also to be observed are the effects upon the underlying economic reality that upholds the financial markets, which represents a major example of how an event can influence the business or financial sector. The examination of what occurred with the airline industry, and its stock in the light of events of 9/11, will perhaps give the best observation of the financial markets generally, because this industry has the most readily available research materials accessible today. THE AIRLINE INDUSTRY AND 9/11 It is unquestionable that technology and globalization cannot be separated from the financial sector of the airline industry. The airline industry played an integral part of the events of 9/11 because an airliner jet plunged into the World Trade Center. There is also an indication of insider trading. According to Tom Flocco (2001), a hint is given that the Executive Director of the CIA, Buzzy Krongard, played a part in the long history of stock trading during the time of the 9/11 attacks. Governmental policymakers base their decisions around the rhythm of this industry, as the airline industry permeates every corner of the globe and thus penetrates financial sectors everywhere. With the U.S. so traumatically affected by the events of 9/11, and in light of the surprising stock trades in the form of puts, which concern the downward movements of stock, the airline industry is a good place to take a closer look at financial information that is relative to the events of 9/11. According to a Massachusetts Institute of Technology report in Airline Industry Overview (2006), the total number of passengers that flew on all the world’s airlines was more than two billion people. Additionally, the historical annual growth of this industry represented double the growth of the world’s GDP. However, 9/11 was a dramatic turning point in the airline industry, as it resulted in record financial losses that cumulated $40 billion. The lowered consumer and business confidence were immediate effects of the events of 9/11, with passengers reluctant to fly after the attacks, and not to mention the national shutdown of all airline carriers in the days that followed the event. The entire financial woes of the airline industry cannot be entirely placed on the 9/11 attacks, even though it certainly took its toll. Nevertheless, the events of 9/11 exacerbated major employment cutbacks and immediate layoffs that crippled some 20% of the functionality of the airline industry’s systems. AIRLINE STOCKS, BONDS, AND PROFITING FROM A LOSS The two major airlines that were involved in the 9/11 attacks, whether coincidentally or not, experienced huge trading activity on their stocks just days prior to the event. Enormous surges in the purchases of put options, which are options that profit from a decrease in the monetary value of a stock, bond, or option, suggests that certain individuals had foreknowledge of the events of 9/11. While the focus of this paper is not to comment on the political impacts of what occured, it can be difficult to distinguish between the financial world and the political world, as everything is related in one way or another. Furthermore, there was a huge surge in the purchases of various reinsurance stocks, which were expecting to pay out billions of dollars, and surges in the purchase of major financial service companies’ put options such as Morgan Stanley and Merrill Lynch. How does this type of activity affect business confidence? The effects of the events of 9/11 on business confidence and the financial markets dealt a crushing blow to reputable businessmen and investors across the nation. As if these examples of possible insider trading were not enough to cast a shadow of doubt on the reliability of the financial markets’ stability and trustworthiness, a massive amount of call options attached to major weapons manufacturers surfaced in the days before the 9/11 attacks. Additionally, those investors who bet on Raytheon made huge gains. Five-year U.S. Treasury bond notes were no different, as huge gains were made on a buy up of stocks. Likewise, this proved very beneficial to the recipients. In the aftermath of the attacks, business confidence was shattered. Not only were the major players in the financial world going into the red, but it seemed that many perceived that, because of the unprecedented in-your-face profitability trading, the game was rigged. According to Bloomberg News (Insider Trading, 2011) the number of airline put options had spiked to an all-time high, 285 times beyond average! Yes, it is safe and fair to say that business confidence was indeed utterly shattered. In the days prior to the events of 9/11, Morgan Stanley saw over 12,000 put option trades thrown into the derivatives market. This number was well over their normal average trades of 252. According to the same Bloomberg News report (Insider Trading, 2011) on the 20th of September 2001, this surge of timely put option purchases occurred just days before the 9/11 attacks. When all was said and done, once the market had re-opened, American Airlines’ stock had fallen nearly 40%, while Morgan Stanley’s stock had dropped 11%. The question still remains: who were the financial winners in 9/11 attacks? What is known is that business confidence took a serious beating. The figure below (Insider Trading, 2011) shows the before and after values of the stocks of United Airlines and American Airlines. THE FOREIGN EXCHANGE MARKETS The foreign exchange currency market, otherwise known as FOREX, is an integral part of the financial markets as it is the biggest monetary market in the world. On September 11, 2001, you could still buy foreign currency despite the electrical and cell phone tower outages due to the tragedy in New York. This was primarily down to the pre-existing hardware and databases that were already in place. As a result of the 9/11 attacks, the New York exchange markets and the United States bond markets closed temporarily, but re-opened the following Monday on September 17, 2001. Additionally, the New York Mercantile Exchange was closed for one week after the attacks. The NYSE had experienced closure before, the longest of which happened during the few months at the start of World War II. Despite the many problems associated with the competitiveness of the financial markets in New York, it is interesting to note that on the global scene, the Over-The-Counter (OTC) derivatives market was worth $80 billion in 1998, but grew to $197 billion in 2003. Furthermore, in a continuation of the futures exchange, the Chicago Mercantile Exchange (CME), after demutualizing and going public in 2002, merged with the CBOT (Chicago Board of Trade) in July of 2006. EFFECTS OF MONETARY POLICY RESPONSES The president of the Federal Reserve of Philadelphia gave a significant speech on monetary policy two years after the events of 9/11. He prefaced that speech by admitting that the events of 9/11 had undermined business confidence. The president then proceeded to explain his perception of the three influences as well as two mega-trends that, coupled with the events of 9/11 events, set certain financial realities in motion. In terms of the influences involved, President Santomero spoke of structural changes, surprising developments, and policymakers’ actions. The two mega-trends that he referred to were technological breakthroughs and the globalization of the financial sector in addition to the economy. The president commented that the immediate effect of the 9/11 attacks was a decrease in the supply markets due to the small loss of an effective and substantial human workforce, which simultaneously resulted in reduced aggregate demand and contractionary reaction in the demand markets (Federal Reserve Bank of Philadelphia, 2003). President Santomero noted in his speech, which was documented by the Federal Reserve’s informational Web site, that aside from the immediate effects of loss of life and the immense damage to infrastructure, the “purely economic consequence of the loss of productive capacity must be assessed as relatively small.” He went on to add up the combined productivity loss in places such as airports, mailrooms, and offices. In defense of his view, President Santomero remarked that there would be increased governmental spending as a result of the events of 9/11 (Federal Reserve Bank of Philadelphia, 2003). This increased spending would largely occur in the realm of Homeland Security and, with the ongoing war in Iraq, these “uncertainties” would continue into the foreseeable future. However, monetary policy did provide a round of stimulus efforts. One positive to come from the attacks of September 11, 2001, was that this tragedy had a hand in prompting the Federal Reserve to provide a monetary stimulus plan for the economy. During most of 2003, the federal funds rate decreased to a 45-year low of only one percent. This resulted in a great challenge for monetary policymakers to plan ahead in that financial climate. In fact, the only things that can be predictable for the future are a great deal of challenges as well as the total unpredictability of changes in such a fast-paced environment of global development. Technological advances and globalization have further and will continuously impact future policymaking and will hopefully help in sustaining the growth that currently exists, and also to assist in stimulating new economic growth. At the end of his speech, the head of the Federal Reserve in Philadelphia repeated that it would be important to have close at hand knowledge of market data, and also that price stability issues were of main concern to the global environment (Federal Reserve Bank of Philadelphia, 2003). ADJUSTMENT COSTS, UNCERTAINTY, AND REAL OPTIONS Adjustment costs can be acquired on both sides of the economy, specifically the supply and demand curves. Initially, the demand side of the economy seemed to fluctuate. It is obvious that adjustment costs were necessary post-9/11. The loss of part of the labor workforce created a significant gap that corporations had to fill because of the demise of hundreds of employees who died in the World Trade Center towers. Their replacements had to incur the adjustment costs of interviewing, hiring, and training. It may be difficult to judge the combined effort of these firms’ activities and investments. Because of this, the information about these firms may not be able to be able to be found in one information base. Some standards indicate a decrease in fixed output due to this sudden increase of hiring new staff, training new employees up, and also the associated adjustment costs. Additionally, adding new workers entails advertising and a necessary slowdown of productivity due to the new influx of labor. Furthermore, according to Nicholas Bloom (2009) in the article The Impact Of Uncertainty Shocks: “When new workers are added to the production process and new capital is installed, there may be a fixed loss of output.” He also comments with regards to adjustment costs, cross-sectional issues, and time aggregation: “Gross hiring and investment is typically lumpy with frequent zeros in single-plant establishment-level data, but much smoother and continuous in multi-plant establishment-level data.” In other words, organizations with a higher number of production units can operate on a higher level of frequency, which allows them to bounce back faster from the devastation of an event like 9/11, or other emergency or downturn in the financial markets. In this case, the sub-units of a plant are actually seen as separate functional factories or different production plants that can effectively run on their own. We have witnessed a similarity of this model in regards to outsourcing. In this way, production units can effectively and efficiently optimize their resources, and develop the capability to survive in an uncertain environment such as the one after the events of 9/11. These localized mechanisms can be brought to bear as establishments overseas as well, so the shutdown of one factory does not impact the demise of an entire firm. The adjustment costs will vary depending on the volatility and general market downturn of the relative businesses and suppliers, all within the prevailing financial climate. However, it is always unpredictable and dynamic. CONCLUSION In retrospect, the events of 9/11 had an immediate and direct impact upon security, tourism, airlines and aviation, and the New York-based financial exchange markets, which include the Dow Jones Average (DJIA). But, while the travel and airline industries’ stocks fell, the weapons manufacturing sector, the pharmaceutical industry, the communications industry, and defense and militaries’ stocks rose. Make of this what you will. It would seem rational that a discussion on indexation, government purchases, or even net taxes may be useful in examining the longer-term effects from the collateral financial damage of the events of 9/11. However, it seems that the fast-paced growth of the global economy has muddied the waters. Some experts have even suggested, although not in formal settings, that the events of 9/11 represent the biggest gold heist in modern history. It has been said that there were billions of dollars worth of gold bars stored underneath the World Trade Center’s towers, and that the area was guarded at gunpoint by at least one hundred security guards. But alas, that’s a discussion for another day. The bottom line is that strategic financial planning on the part of business owners, investors, and everyday people has been undercut by treachery in high places. Business confidence will probably never be the same; however, the world’s economy is constantly changing. Unbeknownst to the majority of us, surprising developments occur everyday due to new technology and marketing environments shifting at a pace that we can hardly keep up with at times. Today, perhaps the most viable marketing tools on the planet are Facebook and YouTube. These mechanisms were not firmly in place ten years ago; however, the foundations for these modern communication tools were beginning to be laid. Works cited Bloom, N. (2009). The impact of uncertainty shocks. Econometrica (77, 3), 623-685. Federal Reserve Bank of Philadelphia. (2003). Speeches monetary policy in the post-9/11 environment: Stability through change. Presented by Anthony M. Santomero, President. [Data file]. Retrieved from http://www.philadelphiafed.org/publications/speeches/santomero/2003/10-02- 03_global-interdep-ctr-22nd.cfm Flocco, T. (2001). Profits of death—insider trading and 9-11. From The Wilderness Publications. (No volume number). Retrieved from: www.FromTheWilderness.com Insider Trading. (2011). 9-11 Research. Pre-9/11 Put Options on Companies Hurt by Attack Indicates Foreknowledge. Retrieved from http://911research.wtc7.net/sept11/stockputs.html#ref6 MIT Massachusetts Institute of Technology. (2011). Analysis global airline industry program overview. [Data file]. Retrieved from http://web.mit.edu/airlines/analysis/analysis_airline_industry.html Read More