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Black Monday
The Catastrophe of October 19,1987...and
Beyond
Tim Metz
Former Wall
Street Journal writer and current financial communications consultant
Tim Metz takes you up to and through the stock market crash of October 19
and 20, 1987, by looking into the minds of eyewitnesses and participants
closest to the event. He introduces you to specialists on the NYSE, traders
in the Chicago
pits, government officials who monitor the country’s finances, and
exchange officers who have responsibility to oversee securities trading, all
who played a part in what happened.
Although the blame for the mania leading up to the
crash, and the crash itself, can be spread around to many contributing
factors, especially portfolio insurance (a dumb idea) and
program trading (index arbitrage), one clear hero emerges in the person of
NYSE chairman John Phelan. Metz
assigns him prime responsibility for having the foresight and stamina to
keep the exchange open in the face of incredible pressure to close it by
practically all others concerned. This brave act probably prevented a worse
panic and the resulting loss of confidence in markets in the future.
The main point of Metz’s investigation centers around
the “second” panic of mid-morning Tuesday, October 20. I was a member of
the Pacific Stock Exchange at the time, and Metz is correct in stating that
as the market began to roll over after a strong opening, professionals
became transfixed with fear that maybe we were really beginning to see the
wheels come off for good. As Fred Sanford would have said, “This is the
big one, Elizabeth!” We had survived the expected Monday “crash,” and
Tuesday should have seen some sensibility returning to the action,
especially with the Dow having fallen some 37% from 2700 to support at
around 1900. But the strong opening quickly gave way to new waves of selling
that seemed to have no end. Even those of us who had begun the week short
were deluged with so many sell orders that we quickly became net long...and
net losers.
The Merc’s S&P pit halted trading, as did many
Dow stocks in NY. Then, miraculously, out of nowhere, the MMI pit on the
CBOT caught a bid. Prices recovered. And that was the bottom -
12:30
in NY,
11:30
in
Chicago
,
9:30
in
San Francisco. Metz
implies that “manipulation” (government ?) may have had a hand in the
turn, as have many other commentators since then. But it may just as well
have been Adam Smith’s unseen hand stepping into the momentary void
vacated by sold-out sellers. We’ll probably never know for sure. Whatever
it was, it saved the day. As Metz
aptly points out, the market is as much a psychological creature as it is a
function of supply and demand, and a heroic gesture at the right moment can
turn the tide of battle.
The book is laid out like a shipwreck disaster movie,
which begins by introducing a representative cross-section of passengers and
crew, then follows them as imminent danger eventually engulfs everyone’s
lives. Who will survive and who will perish?
It’s a good read. But the real enjoyment comes at the
end when you realize that so many people you’ve been following and care
about worked in cooperation to keep the market afloat, and that critical
decisions made under intense pressure preserved the system we have today.
The market treaded water for the next few years as it
repaired the damage, then took off on an eight-year 9800-point Dow rally
that would have never been possible except for the brave actions by the
people who took charge to preserve the integrity of the market when it was
under its most frightening assault.
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