Happy Anniversary Baby, Got You on My Mind

I remember it well.  It was 25 years ago October 19.

  •  The Bangles were walking like Egyptians.
  • Gordon Gekko was slapping Bud Fox around in the park.
  • Mr. Belvedere was cancelled by ABC.
  • Reagan was at the Berlin Wall, punking Gorbachev.
  • Coked-up/coke-dealing stockbrokers were being arrested around the country.

1987 was one hell of a year.

25 years ago today it was Black Monday… the day the stock market had its largest single day percentage loss in its history.  In one day, the market fell 22%.

On that day, I was 59 days into my new career with a regional broker/dealer.

My personal remembrances from that day remain somewhat fuzzy – a mishmash of extreme emotions and mind-bending fatigue.  The day started with a sense of foreboding, since the market had lost 108 points on the Friday prior.  Before our markets opened, Singapore had dropped 33%, Tokyo was down 17%, and Hong Kong had dropped by 11%.  London was down 22%; Frankfurt was down 13%.

90 minutes before the market opened, the phones were ringing.  A lot.

I hadn’t yet sat for my Series 7 exam, so I was not in a legal position to offer investment advice to the callers.  Yet the calls were so numerous that everyone, including me, was picking them up as best as we could.  The company line was “tell the investors to stay the course” and that’s precisely the advice we offered.

Not that it mattered all that much.  At least half of our clients were in open-end mutual funds that wouldn’t be priced for redemption until the end of the day.  Most of the rest were in 3rd party managed accounts (wrapped at 3%, I might add) over which the investor had no discretion.  For those investors, it was going to be a day of watching a video-taped train wreck one painful frame at a time.

When the market opened, things weren’t as bad as we expected.  A bit of cautious optimism began to seep into the office as normalcy bias was on full display.  In retrospect, those feelings were terribly unwarranted – the opening was only moderately weak due to the fact that many stocks had failed to open immediately while their investors were being warned of the impending opening prices.

Once all stocks opened, things got bad.  Later in the morning, things got really bad.

And, being 1987, technology was not what it is today; particularly for small firms like ours.  Order flow in the markets was so extreme, getting a price for placing a sell order was impossible.  A market order, for those desperate to sell, might sit for an hour or more before being executed at an unknown level.

The noise, both physical and mental, was nearly deafening.

There are no patterns in a panic.  A desperate search for information, a desperate crush of fruitless client-assuaging calls, and a desperate on-going attempt to measure the damage.  All these acts being performed randomly by random employees.  “Fire in the movie-house” style.

By the time the carnage was over, the market closed 508 points lower.

I think everyone sat in the office that day until well past 10 p.m.  We really weren’t doing anything productive.  The phones had stopped ringing and the TV’s were shut off.  At the time, most of us were in our mid-20’s; children in terms of stock market experience.  We were feeling like the unlikely survivors of that frame-by-frame train wreck – wandering around zombie-like, with no real sense of what to do now or what was to come tomorrow.

The pervasive emotion I recall at that time was numbness.

By the time I left for home that Monday, I was stepping over Tuesday’s morning paper that was resting by the front door of our office.

Taken in a context larger than that of a regional broker/dealer and a 20-something new hire, Black Monday was the culmination of many factors that converged in a short period of time:

  • By August 25, 1987, the Dow had gained 43% for the year.
  • Before the Crash, 158 companies had split their stocks on the NYSE alone.
  • “Portfolio Insurance” was a popular way to limit your losses.
  • Takeovers had been so prevalent earlier in the year, on October 14th there were open discussions about applying a punitive tax on takeover profits.
  • Germany and the US were verbally engaging in a currency war, culminating with Treasury Secretary James Baker appearing on the Sunday talk-show circuit saying outright, “Either inflate your Mark, or we’ll devalue the Dollar.”  This was October 17th.
  • On September 9th the newly sworn in Fed Chief, Alan Greenspan, made a pre-emptive strike on inflation by raising the discount rate by 50 basis points.
  • On the back of record high trade deficit figures, the Prime Rate spiked on October 15th and the bond market began to collapse.
  • On October 16th a rare hurricane hit London, forcing their market to close and sending European investors seeking liquidity to sell in New York.
  • In the midst of the Black Monday morning, a rumor circulated that the SEC was going to halt the market.  This only accelerated the selling.

Hindsight makes the Crash (at least its probability, if not its magnitude) seem like it should have been expected.  But clearly, that wasn’t the case.

When the smoke cleared and the analysis began, it became apparent that the day following Black Monday had the potential to make Monday look merely like a warm-up.  Banks were no longer willing to accept stock as collateral for their short-term loans to market makers.  Liquidity was sucked from the system, stocks began to crash and be halted, and indexes tumbled.  The day after the worst day ever was beginning to look catastrophic.

In the end, the Fed ultimately intervened, instructing the banks to step up and provide liquidity.

Stocks closed in positive territory on record volume (608, 120, 000 shares) that Tuesday.

On October 21, the market saw its largest one-day percentage gain since 1933, tacking on 10%.

As a newbie, the events of those two days forever shaped my perception of risk.  When this company was founded over 20 years ago, systemic risk management was a central theme.  It remains so to this day.