Financial turmoil: the elephant in the room

When the twin towers went down in 2001, I was at a small, geographically distributed Web startup. We all sat stunned in our offices up and down the east coast, emailing and calling each other, wondering what to do; we eventually pulled ourselves together and created a little memorial on our home page. The world seemed to lose interest in the Web after that, at least for a few months, although in fact the dot-com bubble had already burst, and with it our dreams of eventually taking the company public and securing our futures.

Even though this week’s turmoil in the stock market didn’t have the drama of a terrorist attack, it was no less scary. For some reason, though, we in the technical press weren’t saying much about it: outside of a few financially-oriented technical reporters and bloggers, we kept on reporting about things like Microsoft’s advertising campaign and Sarah Palin’s email instead of talking about the elephant in the room. Because that’s our job, nyet? It’s the Wall Street Journal’s and the New York Times’ and the Financial Times’ job to talk about the markets.

Still, for retirees, a few months ago it was unthinkable that a life’s savings that was prudently invested in the boring interest-bearing preferred stocks of large, old investment banks such as Lehman Brothers could ever be disrupted. This week, Lehman quickly and quietly faded away, as the snark it was hunting turned out to be a boojum.

For baby boomers contemplating retirement in the next five or ten years (as I am), the prospect was less dire, but still ugly: who wants to have to work into their seventies because of a financial crisis brought on by other people’s greed, a glaring failure of regulation, and broken risk management at major institutions?

As it happened, I came out of this whole, although shaken. By pure chance, my largest investment of the last couple of years had finally worked last month, I had sold it off, and I was sitting on “dry powder”: over 20% of my retirement portfolio was in bank deposits. I was able to buy good stuff cheap on the two days when the market was in the deepest panic: I literally called my broker and asked “Is there blood in the streets?” I had to steel myself not to look at my alarming paper losses and the potential for the entire market to collapse, while I bought quality stocks that I and my broker felt had been oversold.

I felt better about the risk I had taken when I heard that Warren Buffet had essentially done the same thing, albeit on a much larger scale. And it worked, or at least it has so far, for both of us.

Knock on wood for me, will you? I think Warren can probably take care of himself.