The week that changed Seattle's economy

The events of the past week leave a crater in the Puget Sound economy. It may well widen.

Safeco, founded in 1923, was absorbed Monday into Liberty Mutual of Boston. The home-business-auto insurer was a victim of the equivalent of a financial drive-by shooting: fears about its portfolio, though unfounded, in the credit crisis, and the Wall Street addiction to mergers, helped along by rootless chief executives, highly compensated for selling off their firms.

By Friday, the largest bank failure in U.S. history leveled Washington Mutual. The 119-year-old institution's headquarters helps define the city's skyline; its leaders helped precipitate the worst financial collapse since the Great Depression. Depositors will be protected as JPMorgan Chase takes over. The same can't be said for its thousands of employees and Northwest shareholders who loyally supported the hometown thrift.

Yet the danger to the dwindling number of Fortune 500 companies in the Northwest is not over. Whatever one calls this economic distress, it is putting companies under stress they haven't seen in years — even decades — and shows no sign of letup. Two companies that must be on every local chamber of commerce's worry list are Alaska Airlines and Weyerhaeuser.

Alaska Airlines is eliminating 1,000 jobs starting in November. Ultimately, it may fall victim to the same misplaced dynamics of consolidation. High fuel costs and a litany of structural woes have hit nearly every airline save Southwest on the merger watch list.

Then we have Weyerhaeuser, a company that literally built the Northwest economy from the forests up. It's not in danger of being acquired. In the last year, it has sold off large divisions and announced that 1,000 headquarters jobs are being eliminated.

Already sliced in half from its former dominant size, Weyerhaeuser is destined to become a Wall Street play called a real estate investment trust (REIT). It may be good for investors. Yet it will certainly mean a smaller engine in the regional economy.

Regular readers of this column know I am obsessed with the importance of major headquarters companies. These are the ones with large, well-paid employment bases, where decisions of national and international reach are made, where talent and capital flow.

These companies not only support a quiet universe of vendors, but they produce ranks of experienced executives that leave to start new firms. When the chief executive lives here, he or she can knock heads and write checks to make the kind of great community that will attract the best and brightest. At their best, these companies have deep roots of stewardship and philanthropy. I don't know of a successful city without them.

Loss of headquarters

To be sure, Boeing moved its headquarters, but the heart of its business — building commercial airplanes — lives here. The loss of headquarters jobs was a small percentage of the well-paid work force that remains in the region.

Boeing workers continue to be the top givers to United Way, in total dollars. The Chronicle of Philanthropy reported that in 2006, Washington Mutual employees pumped $50.5 million into various organizations; Weyerhaeuser employees gave $15.7 million.

In the cases of Washington Mutual and Safeco, the damage will be severe. It includes the loss of paychecks, talented workers, giving to arts and charities, and power in world capital markets.

Most cities lost their major financial headquarters in the 1980s and 1990s. Seattle, while losing the likes of Seafirst, happily preserved two significant players for years, but now even they are gone.

Downtown office space

For downtown Seattle, the loss of workers with disposable income and the vacating of vast tracts of office space will present a major challenge. Washington Mutual owns or leases 1.6 million square feet of space downtown — more than any other company.

More than 3,500 workers report to WaMu jobs downtown. I know of no successful city without a healthy center-city downtown.

But the real and potential fallout from Alaska Airlines and Weyerhaeuser is also great. For example, having a major airline hub is a big part of the revenue flowing into Seattle-Tacoma International Airport.

And Weyerhaeuser, sawed down to a REIT from an integrated timber company: It's difficult to see it reaching its ambitious promises of innovation when most revenue must pass directly to shareholders, rather than go to research and development.

Another consequence of these losses is a body blow to the region's enviable economic diversity. One-trick ponies don't do well: Ask Houston in the 1980s or Phoenix now.

A healthy mix of sectors ensures that at least some businesses will be prospering. Now Seattle, which has seen the pain that can come from over-dependence on aerospace in the 1970s and technology in the late 1990s, is more vulnerable.

This turning point comes at an unsettling time, and not just with the sea changes in the capital markets. Part of Seattle's genius has been reinvention. Like most U.S. cities, it lost iconic companies. Unlike them, it kept growing new ones. But now Microsoft, Starbucks and Amazon.com are maturing. And a cohort of growing firms has been snapped up by outside companies this year.

We're net losers in the critical game of mergers and acquisitions. For example, Getty Images and Pyramid Breweries were sold. While some operations will remain, the decision-makers will be based elsewhere. Tully's Coffee sold off its wholesale business. Meanwhile, promising technology and biotech firms are being pinched by the credit crisis.

Fortunately, Seattle and the Puget Sound area are blessed with so many assets and advantages. So many, indeed, that we might be tempted to be complacent about becoming a branch-office town. Or we might try to cleverly say we've transcended all that, thanks to technology, become a postmodern whatever.

Don't kid yourself.

The world is not flat. More than ever, it's sorting itself into big winners and big losers, and the key units of competition are metropolitan areas. Last week, we lost wealth that had taken decades to create. Last week is history. Going forward, the region will need to take stock of what it must do to compete in the street fight that is the world economy.

Jon Talton is a journalist and author living in Seattle. For more than 20 years he has covered business and finance, specializing in urban economies, energy, real estate and economics and public policy. You may reach Jon Talton at jtalton@seattletimes.com