street sense
The Collapse in Stocks Left Scars
The financial fallout from the 2000-2002 market will produce distress for years to come.
By Jerry Helzner

It will probably take decades for all the financial problems caused by the collapse of the stock market to resolve themselves. Despite recent stock gains, market losses adversely affected every segment of the economy, from individual retirement accounts, to corporate pension funds, to local and state governments. Our most stable institutions still face big budget shortfalls, with no real hope of making up the gaps anytime soon.

If the booming stock market of the late 1990s boosted tax collections, swelled college endowments, and made the average wage earner feel financially secure, the falling market of 2000 through 2002 made both individuals and institutions fear for the future.

In this column, I'll explain why hard times are here to stay, at least for awhile.

One big problem with the recent stock market collapse is that so many people were affected by it. Unlike other market shocks, this one hit the middle class very hard. Most families had a portion of their assets in stocks. Losses in millions of retirement accounts that were heavily invested in unproven "growth" stocks often exceeded 60%.

And it wasn't just individuals who believed in these fast-track growth companies. Many colleges, pension funds and even hospitals put substantial percentages of their assets into these investments and are now paying the price for their unrestrained optimism.

For example, the New York Times has reported that the world-renowned Cleveland Clinic, regarded as a leader in many areas of medicine, including ophthalmology, lost hundreds of millions of its endowment, mainly because of significant commitments to high-flying technology stocks that fell to earth with a resounding thud.

The fallout from these stock market losses has included a general belt-tightening at the hospital, a major planned debt refinancing, the postponement of even routine capital investments such as computer systems, and a delay in constructing a $300 million heart center that was intended to reinforce the Cleveland Clinic's reputation as the leading cardiac care center in the world.

The Cleveland Clinic's problems were caused in part by the rampant optimism of one its key benefactors, whose strong personality and powerful influence were largely responsible for keeping the hospital heavily invested in growth stocks.

The Distress Has Spread

But the woes of the Cleveland Clinic aren't unique. Everywhere, stock losses have translated into cutbacks, shortfalls and lower tax collections. Reduced revenue and war costs are causing the federal government to run big deficits after years of surpluses. States and cities around the country are cutting, or even eliminating, basic services because tax payments are down sharply over the past 3 years.

In some cities, schools closed for the summer weeks early to conserve cash, and in some states, prisoners were released from jails before their sentences were completed.

In yet another distressed sector, some insurance companies have been forced to raise their premiums for such basic protection as auto and homeowners insurance because large losses in their investment portfolios left them with severely diminished reserves to pay future claims.

In sum, the ripples stemming from the stock market collapse are still causing damage to many of this country's most solid institutions. Don't expect a quick snapback from this market shock. The wounds it created will take time to heal.

Ophthalmology Management Senior Associate Editor Jerry Helzner has written more than 50 articles on stock investing for Barron's. He has been a regular stock market columnist for other business publications and was a member of the equity research department of a major regional brokerage firm.