A Cheery War Story from S. McGrath

My smart and savvy pal David scoffs at the Year 2000 problem we reprised again yesterday. He says his own firm beat this problem ages ago-they’ve been trading bonds maturing past the year 2000 for nearly 30 years. And banks? They’ve been writing mortgages that don’t come due until 2027. David offered to bet me last night that this whole thing will turn out to have been just one more false alarm. And he may be right. But he may also be forgetting that banks and brokers (and everyone else) use more than one computer program. The program that handles the mortgages is not the same one that controls the mainframe’s air-conditioning system.

For another view, comes this from S. McGrath:

“Here’s another Sixties programmer reporting in. I worked for a major insurance company, and back in the mid-1980s one of our major accounting systems started going crazy for selected policyholders, one at a time. After a few months, we were instructed to delve into the program and find out why accounting reports were no longer usable for these clients. Seems the system used a one-digit year. If the one-digit year code was 5 or greater, the previous policy year for the policyholder was assumed to begin in 197x; otherwise the date was assumed to be 198x. By 1985 the accounting years were containing 120 months of claims, not 12. What does Dan mean, ‘the documentation doesn’t match the programs.’ What documentation? We never got around to doing that; there was always another system to write. Back in the 1960s, programmers were scarce, and we didn’t waste our time writing documentation. Besides, that wasn’t any fun . . . we wanted to program. It scares me when any company says that they have the Y2K problem under control. What gets you in any system change is what you haven’t thought of, not what you’ve programmed and tested. I don’t think I’ve ever worked on any major system change when everything worked 100%, even after it was tested and tested and tested. And the ratio of complete failures to successes for new systems (i.e., when the whole system is junked rather than put into production) used to be about 1 in 6 (and not just for insurance systems, for all systems), so a total system rewrite may not solve it, either. I certainly hope that the ratio has improved recently. I’m glad I’m not a programmer in 1999; I’m sure their New Year won’t be happy.”

Nervous? Well, then, how about this:

From an FDIC attorney: “Don’t be too complacent that American financial institutions are addressing the Y2K problem. The FDIC has already issued a ‘cease and desist order’ against an institution whose board has done nothing, so far, to investigate whether its systems are Y2K compliant. This is just the beginning of FDIC’s push to get the bank and thrift industry in shape; this is a very serious potential problem. Just having the big banks, like Citibank, in compliance is not enough. All banks and thrifts in the economic food chain (and credit unions, too) must be compliant or the little non-compliants will drag down the big compliants.

“An analogy would be GM, building cars utilizing the ‘just in time’ parts supply assembly process. Recently, one tiny parts supplier suffered a strike. The little company temporarily ceased production, and that, in turn, stopped GM’s production of a line of cars for lack of that part.

“If smaller, correspondent banks can’t participate overnight with the clearinghouse and the big banks, then there will be a major liquidity problem first, with other problems to follow. Remember back when Penn Square Bank failed in Oklahoma City in the early 80’s? In and of itself it wasn’t a big bank or big failure, but its failure was a direct cause of the failure of Continental Bank in Chicago, a real biggie in its time.

“I suspect there will be large charge-offs by corporations over the next three to four years, either to head off the Y2K problem or to clean up the meltdown after Jan. 1, 2000. A compelling reason to be diversified into bonds and cash (especially in light of sky-high PE’s for many stocks today).”

Still not nervous? Try this, from Walt Lamphere. It might even hint at one reason Warren Buffett recently bought 20% of the world’s silver supply:

“Every large problem began with a small wrong decision. The greatest problem we have before us with YK2 is the present wrong decision of the majority of businesses, government, and even the individual, who thinks that ‘someone else will fix it.’ We will all soon be involved in the worst of financial chaos, such as the world has not known to this day. The impact will be far more catastrophic than any can imagine, and the results, virtually unimaginable.

“If ever there was a need to begin to teach the truth of the precarious status of our financial system, this situation calls for the utmost effort on the part of every finical [sic] institution. I suspect that the majority of the effort has been devoted to a ‘band aid fix,’ with most corporate officers keeping a tight lid on the immensity of the problem. The fact is, there is not one person in the community of nations that will not be impacted.

“In an age when public confidence in government is daily eroded by the increased revelations of the peccadilloes of our leadership, and business is so intimately tied to our government, it is not beyond imagination that a financial collapse is not only possible but more, likely.

“It is likely, not imaginative thinking, that once the general public comes to understand the potential of the immensity of the loss to their own financial situation due to the “glitch” of the YK2, the run for their funds will occur. Who will stop them? Who will prevent them? The Government may well be forced to close the banks. And the military could be the agent of the worst repression this country might ever experience.

“Every person that begins to understand the enormity of the disaster looming on the horizon will contribute to growing awareness. But, who will leave his/her money in the bank, when it may be impossible to get your money the next day, or next week. Who will not join the rush? Will you leave your money in your bank if there is a more than good chance you will not have access to it, due to computer lockup.

“I suspect the value of hard currency will also be greatly enhanced in the near future. Gold and silver have been historically the haven of those concerned with the retention of value of their money. ‘Buy Gold,’ ‘Buy Silver,’ etc., will be the cry of the masses, but will there be enough gold and silver to satisfy the demand? Of course not. So . . . have you begun to diversify to hard currency yet? Do you trust your bank? Watch the slowly increasing propaganda of banks and government, attempt to smooth over the growing nervousness related to the shaky situation of YK2. But it will crash in a day. The day after will be too late to get your cash. And it won’t be the day after January 1, 2000.

“I suspect that the greatest new guessing game in the country will not be speculation about how much will the stock market Dow index increase, but rather, what day will I no longer believe my money is available to me from my bank or fund, or market. I nominate July 5, 1999. Independence is having control of your own money. That will be the day that people will suddenly understand that the closure of the banks will be necessary, within five more months. What a rush. The Gold rushes of history will be minuscule in comparison.

“And the greatest irony of all will be that the computer, that makes us all more information conscious, will ultimately be the cause of the greatest potential disaster the world financial institutions and markets could ever have. Personally, based upon the record of my own bank, which doesn’t seem to think that the problem is all that significant, I may not wait till December 1999. No, maybe not even till July 5th., 1999, either.

“I don’t think I am a trouble maker. I did not create the computer glitch. I use a PC everyday. But I am not an ostrich either. This problem is not being solved adequately to meet the deadline of January 1, 2000, and I know the mind of the people, that when they realize that the problem involves ‘their’ money, they will move it. My suggestion: Buy a little gold and silver as a safety currency. That’s what I’m going to do, just in case.”

OK. Now I’m nervous. I like to think my friend David is right. And I do have a lot of faith in American ingenuity when it comes to fixing stuff in a crisis. But it’s hard to imagine there won’t be some problems.

Tuesday: Zaide on the Internet