PANIC IN THE YEAR ZERO ZEROCan the financial world reprogram its computers in time?
It's 11:59 p.m. on Friday, Dec. 31, 1999. As the ball drops in Times Square, computers at some of the world's financial institutions shut down. With their lifeblood cut off, these banks, brokerages, and insurance companies, most of which operate in a limited way over the weekend, are forced to close their doors, at least temporarily. Other financial firms whose computers are still functional try to keep operating. But because linkages among financial institutions are so elaborate, even healthy companies begin to falter. By Monday morning, billions of dollars in transactions have been disrupted or aborted. A domino effect goes into play, and in the ensuing confusion the entire financial world teeters into chaos.
The pitch for a Hollywood blockbuster? No, it's the daytime nightmare of one of the most technologically advanced and well-managed firms on Wall Street, Morgan Stanley & Co. It is deeply worried that the computers that keep the financial world alive have not been properly programmed to make the transition to the next millennium.
``IN DENIAL.'' Wall Street is just one of many industries facing the ``Year 2000'' problem, which has been getting some press lately. The inability of many computer programs to make accurate calculations after Dec. 31, 1999, will affect everything from the Internal Revenue Service to computer-operated elevators.
The world of finance, though, is especially vulnerable. ``Because of the interconnectedness of worldwide financial institutions, the absolute worst case, albeit highly unlikely, is a global financial meltdown,'' says Kevin E. Parker, Morgan Stanley's head of information technology. Says William Bautz, senior vice-president for technology at the New York Stock Exchange: ``Due to the unique nature of this business, everybody has to have the problem fixed, or they create problems for somebody else.''
If the specter of financial chaos isn't enough, plaintiffs' lawyers are already viewing securities firms as juicy targets for a year 2000 litigation bonanza. Investors could sue their brokerage firms over failed trades, unpaid interest, or bad investment decisions caused by incorrect date-based calculations. Law firms are looking into holding boards of directors liable, says Kevin Schick, research director at Gartner Group Inc.
Yet despite the risks, the securities industry has been slow to respond, in part because they are not anxious to spend the estimated $4 billion it will cost to become year 2000-compliant. ``Here is an industry that prides itself on risk assessment and management,'' says Schick. ``And yet, when faced with this potential crisis, they are in denial.''
The problem began some 30 years ago. Because of the limited memory space of early computers, programmers didn't want to squander four digits writing out, say, 1962. So they designed software to store dates using only a year's last two digits. The conventional wisdom was that programs would be replaced before 2000 rolled around. But many are still in use. So when 1999 turns to 2000, many computer programs will go from 99, or 1999, to 00--or 1900.
If left uncorrected, this will throw the financial world into convulsions like it has never seen, say Morgan Stanley's computer whizzes. That's because it threatens the underpinning of all financial transactions: the accurate recording of time. The markets are utterly dependent on dates. There are trade dates, maturity dates, settlement dates, record dates, ex-dividend dates, and payable dates, to name a few.
If these dates get screwed up, Wall Street firms' computers will no longer accurately calculate any number of things, says Michael B. Tiernan, a vice-president at CS First Boston. He is also chairman of the Securities Industry Assn.'s Year 2000 subcommittee, and testified at congressional hearings in April. Clearing and settlement of transactions could break down. Stocks held electronically and checking accounts could be wiped out. Interest might not be properly credited to accounts. Customers might be denied access to their accounts. Deposits or trades might not be credited to an account, and customers' funds would not be available. ``If year 2000 problems are not addressed, the consequences may be catastrophic, from a business and economic perspective,'' Tiernan testified. And there's a further complication: 2000 is a leap year, which means computers may not assume there is a Feb. 29.
Yet common reactions are: The computer geeks can fix it, or it can't really be as serious as all that. Schick estimates that only 20% of the industry is taking action. Very few securities firms have done audits of their computer programs, the first step toward getting a handle on their situation, he says.
In fact, fixing the problem is far more time-consuming than might be imagined. All of the older programs used by all of the financial firms must be revised manually. Morgan Stanley alone is spending tens of millions to change 3 million lines of code. ``It's ugly. You have to inventory every single piece of code and then manually fix it,'' says Parker. Programming work must be done on the weekends, since most of the programs are in use during the week. There are only 179 weekends left until Dec. 31, 1999. ``You can't do it on the weekend of the greatest party of the millennium,'' says Joshua S. Levine, a Morgan Stanley managing director whose office overlooks Times Square. ``The sand is running out of the hourglass.''
Morgan Stanley plans to complete the job well before Jan. 1, 1999. Then the firm will spend 1999 evaluating the efforts of its thousands of counterparties in correcting their year 2000 problems and deciding who to stop doing business with. ``We can't assume the risk of being caught in a domino effect,'' says Morgan Stanley Managing Director Eric M. Kamen.
OVERBLOWN? The white shoe firm is also trying to get other financial institutions and U.S. government regulators to focus on the problem. In June, Elaine LaRoche, a managing director at Morgan Stanley and president of the Public Securities Assn., had meetings with Treasury Secretary Robert E. Rubin and Securities & Exchange Commission Chairman Arthur Levitt Jr. to sound the alarm. Sources at the meeting with Rubin say he was surprised and sobered. ``It is viewed as a technology issue,'' says LaRoche. ``But this is a settlement, counterparty, and systemic financial risk problem.'' She is referring to huge risks that could be created if millions of transactions between thousands of institutions could not be promptly completed.
Despite these alarms, many institutions are reluctant to make a big investment to solve the problem. ``Here we're spending tens of millions of dollars, and it's not going toward anything productive or improving our competitive position,'' says Parker. Firms that spend the necessary money get to stay in business. And some of those are plotting to take advantage of their competitors' possible demise, says Schick. ``We have players looking forward to the great market crash of zero zero,'' he says. He thinks as firms run out of time to fix their 2000 problems, they will discontinue certain lines of business or even fail.
Of course, not everyone is as apocalyptic as Schick and Morgan Stanley. Renee Nalitt, one of Chase Manhattan's main year 2000 techies, says: ``For the most part, we're already in pretty good shape.'' Securities & Exchange Commissioner Steven M.H. Wallman does not believe the year 2000 presents systemic financial risks and says the issues are being addressed responsibly. George Munoz, a Treasury Dept. assistant secretary who heads a year 2000 Interagency Task Force, says Treasury will be ready by yearend 1998.
The NYSE and Securities Industry Automation Corp., its trade-processing arm, predicts the transition will be seamless. Why? In June, 1996, the industry went from processing trades in five days to three days, a potential back-office disaster that went without a hitch. ``There is no chance of the industry not making the changes that are necessary in time,'' says Michael Reddy, who heads the securities industry year 2000 unit of EDS Corp. He could be right. But if he's not, the next century will start with an unwelcome financial bang.
By Leah Nathans Spiro in New York
Updated June 14, 1997 by bwwebmaster
Copyright 1996, Bloomberg L.P.