Wall Street upheaval feeds local worries and jitters

Wall Street can seem a long way from Granby Street, Kempsville Road or Great Bridge Boulevard, but the uncertainty and fear gripping financial markets last week also visited Hampton Roads.

Brokers and financial advisers were deluged by clients inquiring about the safety of their investments. Some sought guidance or asked about investment opportunities. Others had an edge of panic and insisted, "Get me out of everything."

Bankers, meanwhile, sought to assure depositors that their institutions were sound and covered by federal deposit insurance even as they cut back on lending and tightened borrowing standards.

Like their customers, financial executives acknowledged that they were jolted by the upheavals on Wall Street.

"I've seen things in the last two weeks that I thought I'd never see," said Bob Aston, TowneBank's chairman and chief executive officer.

The government took over giant mortgage companies Fannie Mae and Freddie Mac; the investment bank Lehman Brothers collapsed into bankruptcy; and Merrill Lynch hurried into a merger with Bank of America to avoid a similar fate. Stock prices plunged, then rebounded as the federal government began formulating a plan to ease the crisis by taking on the worst debts crippling banks.

The emergency actions taken late last week will calm the fears of some investors, "but the volatile swings that we've seen in the stock market have got to scare people," said Roy Pearson, an economic forecaster and retired College of William and Mary professor. "It's been a week of shock and awe for the average household, as well as for those on Wall Street."

Families' fears about the safety of their savings and investments come in the wake of declines in household net worth during the first half of this year. Even before the recent turmoil, "people were feeling pretty dismal about their prospects," Pearson said.

"People are worried," he said. "First, they saw problems with mortgages and then with investment banks and insurance companies and now with money-market mutual funds.

"The average person sees this as a domino effect and wonders, 'Where will this end?' "

Economic growth in Hampton Roads already had slowed before the upheaval on Wall Street began.

Personal income in the region hasn't kept pace with the increases in household expenses, especially the cost of gasoline, said Vinod Agarwal, an economics professor at Old Dominion University and a member of ODU's Economic Forecasting Project.

Still, the region continues to add jobs, and defense spending, a major source of support for the Hampton Roads economy, continues to grow.

"If home prices do not decline significantly, I think we're OK," he said.

What could hamper economic growth in the region and the country is the psychological pain that investors feel, especially if their homes have lost value. When their net worth is growing, individuals are much more inclined to spend, something known as the "wealth effect."

"We're just beginning to see a reverse 'wealth effect,' " Pearson said. "If your wealth goes down by $100, you will likely adjust your spending by about $5 over time. It's not a big dampener, but it's definitely a dampener."

More significant is the mounting credit crisis. Credit markets logjammed last week as big banks hoarded cash and avoided lending.

The crunch pinches both consumers and businesses. Some households are seeing reduced borrowing limits on credit cards and freezes on their home equity lines of credit. Some may not be able to get new loans for a car, a refrigerator or a home.

That hurts businesses, some of which may also see their credit lines cut, never mind borrowing money for expansion or new investment.

It could become a vicious cycle that leads to wage freezes and job losses, further squeezing households already stressed by rising energy prices and worries about falling home values.

Some institutions, including Charlotte, N.C.-based Wachovia Corp., already had scaled back their lending because of heavy losses related to troubled mortgage-backed securities.

Wachovia, whose bank subsidiary holds the largest share of Hampton Roads' bank deposits, has made no secret of its contraction.

Hurt by crippling mortgage-related losses at its Golden West subsidiary in California, Wachovia expects to shed at least $20 billion of loans and securities by year-end, Robert Steel, its chief executive officer, told securities analysts during a presentation in New York City two weeks ago.

Even banks that haven't suffered losses on troubled mortgages and mortgage-related securities have tightened their credit standards and hold more cash that they normally do.

"We are intentionally staying very liquid because of the unrest in the markets," said TowneBank's Aston.

The turbulence in the national credit markets has prompted giant banks to compete more aggressively for deposits at the local level, pushing up the rates that smaller banks have to pay.

"The No. 1 issue we face is trying to grow our deposits," the raw material for bank loans, Aston said.

At Monarch Bank in Chesapeake, executive vice president and chief financial officer Brad Schwartz said, "We're very selective about who we lend to" because of the slowing regional economy.

Meanwhile, the brokers and financial advisers who spent much of last week addressing clients' fears about market conditions are encouraging them to stick with their long-term plans.

Ron Pearson, head of Beach Financial Advisory Service in Virginia Beach, said he had to remind a few clients that selling stocks in the midst of last week's turmoil "would be the cardinal sin of investing."

"It's natural to be fearful," Pearson said. "The key is to not act on it."

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com