Wall Street Gets Blindsided by the Coronavirus Meltdown

(Bloomberg Businessweek) -- Some of the world’s most famous hedge fund managers gathered on Sunday night at the Capital Grille near Rockefeller Center, a steakhouse where the double-cut lamb chops with mint gremolata run $53. There was John Paulson, who made his billions from the housing collapse that helped trigger the last financial crisis. And David Einhorn, who came out on top when the dot-com bubble burst. And Dan Loeb, who got rich by baring the sharpest teeth.

But these masters of capitalism, brought together by Goldman Sachs Group Inc., were lacking their usual swagger. Instead, they spent the night trying to grasp what was going on as the coronavirus known as Covid-19 raged around the world and a fight between Russians and Saudis hurled the oil market into chaos, according to people there. The fallout could resemble the 2008 crisis, the 2001 collapse, global chaos in 1998, or something else—the very investors who made their fortunes from them weren’t sure. They stared into phones that told them stock futures were falling so much that trading would soon be halted.

Then things got worse. Markets were in chaos on Monday and rebounded on Tuesday before the Dow Jones Industrial Average fell into a bear market on Wednesday for the first time in more than a decade. That was nothing compared with Thursday, Wall Street’s bleakest rout since 1987’s Black Monday. By day’s end, the coronavirus, now officially a pandemic, had killed at least 4,740 worldwide and infected more than 128,390. Even with a Friday bounce, it was a brutal week.

Billionaires and bosses at the top of Wall Street didn’t see things getting so bad so fast. Even when the executives who run the biggest banks gathered for a sit-down Wednesday at the White House, they had little to offer skittish markets. Much of Wall Street’s wealth, pride, and chutzpah spring from its ability to stay a step ahead by understanding and managing risk. But these giants seem as bewildered as everybody else. If they have lost the ability to prepare for chaos and profit from it, that could be because this catastrophe is rooted in the real world, not a financial one.

“I didn’t think this would happen, I thought people would calm down,” said Marc Lasry, who co-founded the $10.5 billion investment firm Avenue Capital Group and co-owns the Milwaukee Bucks. “Most people were like me. They were, like, ‘Yeah, whatever, it’s not that big a deal.’” Until Wednesday, Lasry said, he “totally misunderstood this virus.”

That morning, in a skyscraper near Central Park, top financial and corporate figures were still calm enough to chuckle at a joke from New York’s governor about hand sanitizer. While executives pecked at salad and chicken during a board meeting of the Partnership for New York City, an industry group, Andrew Cuomo appeared on a video screen. “The governor presented how he’s got upstate prisoners making 100,000 gallons of sanitizer a week,” said Kathy Wylde, who runs the organization. “And he asked the Wall Street bankers if they’d like to take it public. They all laughed.”

The partnership’s board includes billionaires, finance leaders, and other top executives. “They have a far better sense of ‘This too shall pass,’” Wylde said after the meeting ended. “Right now, it’s a health problem for a certain vulnerable group, it’s a psychological crisis for everybody else, and it has the potential to be a huge economic crisis. But it’s not, yet. And they clearly all believe it’s going to be managed.” 

The heads of the biggest U.S. banks skipped the meeting because they were posing for photos with President Donald Trump in Washington and trying to reassure markets. Encouraging words didn’t work—then or later, when Trump delivered an error-laden address from the Oval Office. The next day, Wylde’s mood was grimmer. “The sense from today is that the pandemic is going to last longer and impact the economy more seriously than we realized,” she said.

Last month, even as the coronavirus was spreading outside of China, Wall Street was its usual roaring self. On Feb. 21, Lloyd Blankfein traded barbs with Bernie Sanders on Twitter, where the former Goldman Sachs boss said the presidential candidate “wants to feel hated because HE hates.” On Thursday, the billionaire said it was time to “go all-in on social separation and all-in on financial relief to those most economically vulnerable.”

By then, Goldman Sachs had told its employees that a worker in a gym at its Jersey City, N.J., office was suspected of having contracted the virus, Morgan Stanley and Wells Fargo & Co. both had confirmed cases, and Barclays said the virus had hit its New York trading floor. 

Gary Cohn, Goldman’s longtime president before he became Trump’s top economic adviser, said the Saudi news on Sunday was an “Oh, my God” moment. He texted friends and traders: “Hey, look, we’re going to have a bad day or two.” On Thursday, he arrived early for a 12:30 p.m. lunch at Oceana and was the only guest in what’s usually a Manhattan hotspot. “It was empty,” Cohn said. “That was another ‘Wow.’”

At about the same time, across the street from Goldman’s headquarters, three men who work for the bank were ordering a second round of IPAs at P.J. Clarke’s. The only one of the three not sporting a vest said he was worried about the effects, pointing at a TV showing a basketball game between Florida State and Clemson that had just been canceled. One of the other men said he could handle working from home for two weeks, but not two months. That day, Goldman told employees to work from home in staggered shifts.

“We’ve never experienced anything like this,” Bill Daley, who oversees government relations for Wells Fargo, said on Thursday. He was once President Barack Obama’s chief of staff. “Yeah we had economic collapses, ’29 or ’08, but this is a whole new world.”

Emanuel Derman, a Columbia University professor who runs a program in financial engineering, said Wall Street executives may not have seen this coming because they don’t understand the pressures on regular people. “I do think financial people live in a different world,” said Derman, a former Goldman Sachs managing director. “It’s their job to think about how other people will react. Maybe they can’t do that.”

On Sunday night in Manhattan, not everyone atop Wall Street’s hedge fund world was eating steak at the Capital Grille. One owner of a multibillion-dollar fund was trying to get a few hours of sleep so he could make it to an early morning appointment. He was in his Midtown office to start trading by 3 a.m., hours before the rest of the city woke to the start of a chaotic week.

©2020 Bloomberg L.P.