Nicholas F. Brady stood atop China's Great Wall on Oct. 19, 1987, when someone rushed up to him with an urgent message.
"Have you heard the stock market is off?" the person said.
Brady, who was touring an H.J. Heinz Co. baby food plant in Guangzhou with other directors of the company, was stunned. Halfway around the world, in the bastion of Communism, news about the U.S. stock market was reaching him.
But this day, the news was big. The U.S. stock market was collapsing.
In a frenzy of panicked trading, the market plunged 508 points -- its biggest one-day drop in history. It wiped out fortunes, blew apart multimillion-dollar merger deals, and washed away $500 billion in value in a tidal wave of trading. This kind of devastation hadn't been seen since Oct. 28 and 29, 1929, when the Dow
Jones industrial average crashed more than 24 percent. But on Oct. 19, 1987, it took just one day for the market to plunge 22.6 percent.
Its swiftness was stunning.
"It scared the world," said Brady, former Treasury secretary under President Ronald Reagan, in an interview.
Ten years later, the enormity of the day, known as Black Monday, has not been lost, although its significance is heatedly debated.
Some see it as nothing more than a jolt that simply slowed a racing stock market, with little significance today since the Dow, the most closely watched barometer of the stock market, has nearly quintupled to 8,080 points since the crash.
"It was really a blip," said Raymond A. "Chip" Mason, chairman and chief executive of Legg Mason Inc., a Baltimore-based brokerage and asset management firm. "It truly turned out to be a relative nonevent."
Yet many who experienced the crash say it is a day they will never forget. They argue that the crash demonstrated how quickly the simple art of buying and selling stocks could erupt into chaos. It revealed flaws with the system: The New York Stock Exchange, for example, buckled under a flood of sell orders. Large pension and insurance funds single-handedly drove stocks into a free fall as one computerized sale fed upon another. Most important, it reminded the world that the stock market is irrational, unpredictable and uncontrollable.
"We can say that it was nothing but the market went into the fetal position for a month," said Ralph J. Acampora, head of technical research at Prudential Securities Inc., who predicts the Dow could hit 10,000 by mid-1998. "It shows how fragile the system can be. If anything, it scorched our psyche."
Friday, Oct. 16, was another miserable day, but Andrew Brooks didn't make much of it. Even though the Dow plunged 108 points that day -- and 394 points over the previous two weeks -- he wrote it off as simply a reflection of a jittery market that would bounce back soon.
Brooks, a trader for T. Rowe Price Associates Inc., was so confident that he refused to cancel plans he and his wife had to spend a weekend in Bozman with two other couples.
One evening, while sipping cocktails and gazing out over the water, one of his friends asked if he should hold off on purchasing a new home, given the sliding market.
"I think we are going to be fine," Brooks answered. "It's just a little nervousness."
In the plush office on Pennsylvania Avenue in Washington, things couldn't have been better for Marvin McIntyre. The money manager for Legg Mason Inc. had all the business he could handle, and then some, handling money for business executives, retirees and a handful of professional athletes.
Customers literally walked in off the street -- handing McIntyre as much as $1 million to invest. Everyone wanted to be in the market. And why not? The Dow had jumped 826 points, or 43.5 percent, in just eight months.
But as McIntyre returned the last few phone calls to clients at the end of Friday, Oct. 16, he was uneasy.
Although he always buried himself on weekends in the financial pages of newspapers and magazines, he couldn't stand to read anything until Sunday. There were too many frightening signs.
The Federal Reserve Board had increased interest rates four times in six months to fight inflation. The country's budget deficit had ballooned to around $221 billion, and the trade deficit was swelling, too. Congress was talking about eliminating the huge corporate tax breaks that were helping fuel the acquisition binge and pushing the stock of takeover targets to highs.
And a handful of market experts, most notably Shearson Lehman Hutton's Elaine Garzarelli, had predicted a 500-point market crash.
There were problems overseas, too. Rumors swirled that the nation was on the brink of war with Iran after an Iranian Silkworm missile hit an oil tanker bearing a U.S. flag in Kuwaiti waters that Friday.
What bothered McIntyre most, though, were the huge volumes of stock that could be traded in seconds by pension funds and insurance companies that managed billions of dollars.
The mixture, he feared, was combustible.
It blew on Monday.
Black Monday begins
The first warnings came from abroad, where stocks in Japan and Europe were pounded in reaction to what had happened to U.S. markets the previous Friday. A handful of portfolio managers began dumping stocks and bonds of U.S. companies traded on the foreign exchanges well before the markets opened in New York at 9: 30 a.m.
Then, about 90 minutes before the opening bell, news organizations reported that a U.S. Navy warship had destroyed an Iranian oil platform in the Persian Gulf. The country appeared to be on the brink of war.
Andrew Brooks was in the office by 8 a.m., reading the latest Barron's over a cup of coffee. He had seen what had happened overnight in the Asian markets, and as he watched the market in London take a beating, he wondered what the day would bring.
Marvin McIntyre reported to work promptly at eight. He grabbed a large glass of ice water and a bagel. He didn't want to be at the office. He had "bad vibes."
By 9 a.m., a flood of sell orders hit the New York Stock Exchange's automated order system, known as the "SuperDot." Managers who handled billion-dollar portfolios raced for the exits and dumped stocks. Before the opening bell rang at 9: 30, there were 14 million shares worth about $500 million waiting to be sold. Another $475 million was pumped into the system between 9: 30 and 10 a.m.
When the bell rang, 11 of the 30 stocks on the Dow didn't open because a crush of investors wanted to sell and nobody was buying.
At 9: 45, the Dow slipped 21 points. Fifteen minutes later it plunged 104 points.
The descent had begun.
"It's hammer time," McIntyre thought to himself.
In New York, Wall Street was in a state of pandemonium.
At about 10 a.m., executives of some of the nation's largest and most influential brokerage firms raced to the New York Stock Exchange in lower Manhattan to get a first-hand look at what was happening.
John J. Phelan, the stocky chairman of the exchange, wanted their impressions: How were their firms holding up under the pressure? Where was the market headed? Should the NYSE be closed?
The last question was the most difficult and most crucial. Phelan had to make a conclusion -- fast. He did. For better or for worse, he announced, closing the New York Stock Exchange was not an option. He decided the exchange was going to have to "tough it out."
The markets took little heart in that, and sell orders continued to pour in. It was as if someone had opened a fire hydrant and was trying to pump gushing water through a garden hose. The orders swamped the exchange's computer system.
Those selling weren't the small investors, but pension funds, insurance companies and mutual funds, whose computer programs were telling them to dump large blocks of stock.
It was an avalanche. One sale forced another, and each sale pushed the market down further.
As mutual fund investors redeemed their shares for cash, the funds sold large blocks of stock to raise money to pay shareholders.
Some institutional investors thought they were safe from a falling market because they used an investing technique known as portfolio insurance, designed to protect the profits they had already made.
With portfolio insurance, the big investors hedged their equities portfolios by owning futures contracts and betting that an index of underlying stocks would fall.
When the futures market began falling, computer programs told the portfolio insurers to sell their holdings. This led index arbitragers, who try to profit from differences between the index and the stocks underlying it, to buy the futures at low prices and sell stocks.
The portfolio insurers and index arbitragers unloaded billions of dollars in stocks and futures, sending the markets down in swift, sudden jolts.
It was paralyzing.
In Washington, McIntyre was so frightened he couldn't sell a single share. The market was falling too fast. But his phone was ringing off the hook.
"What should I do?" a client asked.
"Hold tight," he said. "Let's give it time for the market to hold out."
But another client, with a portfolio of about $400,000, demanded out. "I can't take this," he said.
McIntyre tried to persuade him to hang on because stocks were falling so fast the losses could be huge. Then, he gave in.
"Okay. I'll get you out," McIntyre said. "But if you weren't scared in an environment like this, you weren't paying attention."
Shortly after 10: 30 a.m., a portfolio insurer unloaded $100 million in stocks. It was just the first of 13 $100 million-plus sales that day.
By 11 a.m., most stocks had opened, but the Dow slid another 100 points to 2,080, and volume on the New York Stock Exchange rushed at a record pace of 154 million shares.
Just then, a rally broke out in the futures market, pumping up the Dow.
"Maybe it's not going to be so bad," McIntyre thought. "Maybe it's not going to self-destruct."
But the rally fizzled just before noon under the weight of another frenzy of selling.
Trading rooms across the country were in chaos. Some investors complained they couldn't place their sell orders because brokers weren't answering their phones.
But at Alex. Brown Inc. in Baltimore, every call was answered. It cost the firm dearly as it lost millions of dollars that day.
Shortly after 1 p.m., the Dow Jones news wire quoted Securities and Exchange Commission Chairman David S. Ruder as saying he had no discussions with the New York Stock Exchange or Reagan about halting trading, but "anything is possible."
From 1: 15 p.m. to 2: 05 p.m., the Dow slid again -- falling below 2,000 points to 1,969, despite the announcement that some companies were buying back their shares in an effort to prop up the market.
At 2: 05, the Dow began to rally again, and over the next 40 minutes it gained about 50 points. But again it sputtered and the index began a free fall.
In Baltimore, T. Rowe Price's trading room on the ninth floor was jammed with people. Dozens of analysts, portfolio managers, secretaries and computer specialists packed the room to watch the events unfold.
The room was normally home to eight noisy traders. But an eerie silence fell over this crowd. All eyes were fixed on the ticker tape on the ceiling, whose bright green numbers trekked past with prices of stocks and the Dow's disastrous results.
Then someone broke the silence.
"Things are going to be fine," a senior executive with the firm said. "There is an opportunity here. Let's roll up our sleeves and get to work."
But the market continued to plunge.
Brooks' phone rang. It was his wife, Libby.
"I just heard the market is down 300 points," she said.
"Lib, I can't talk now," Brooks snapped. "I've got to get back to work. It's scary."
In the last hour and fifteen minutes, the market broke, cascading nearly 300 points. Only the clanging of the final bell stopped the ++ plummeting.
The damage was extensive. By day's end:
The Dow had fallen an unprecedented 508 points, nearly 23 percent.
Volume topped 600 million shares, nearly doubling Friday's record volume.
Stocks were decimated. For every stock that rose on the New York Stock Exchange, 40 had fallen.
The New York Stock Exchange's DOT system melted under the strain. Nearly 400 million shares were funneled through the system, but 112 million shares were not executed. At times, the execution of stock trades ran more than an hour behind.
Brooks was in a state of shock.
He walked to the window of the trading room and looked out onto Light and Lombard streets, gazing below at the people scurrying by as if Monday, Oct. 19 was just another day.
Life went on, he thought. But life, as he knew it, had been turned upside down in six and a half unforgettable hours.
"We lost control of things," he said. "It was lunacy. It was like the end of the world."
Exhausted, Brooks slipped behind the wheel of his 1983 Nissan Sentra station wagon and drove to his home in Ruxton. The stress showed on his face. He had recently bought a house, and he and his wife had just had a baby.
When Brooks arrived home, he told his wife that the annual bonus was probably out, and he warned they'd have to tighten their belts.
"Gas, food and electricity. That's all we are spending our money on," he said.
The magnitude of the day wasn't lost on anyone. Phelan of the New York Stock Exchange told reporters that night: "It's the nearest thing to a meltdown that I ever want to see."
In Washington, Reagan tried to restore confidence. "There is nothing wrong with the economy. I don't think anyone should panic because all the economic indicators are solid," he said.
An eerie quiet settled over Wall Street the night of Oct. 19. The kind of quiet that follows a tornado after it ravages a town. But the crisis was not over.
Tuesday, before the market opened, the executives who ran "specialist" firms were in a panic. They worked feverishly to secure loans to pay for stocks they bought on Monday.
Specialists were in charge of keeping order in the market. On Monday, they tried to slow collapsing stocks by buying them with the hopes that they could sell when prices rose. The market never bounced back, though, and specialists, holding bulging inventories of stocks, faced a cash crunch. They had five days to pay for their stock, and on Tuesday, they called banks for loans.
The vaults were shut.
If the specialists couldn't get the money they needed, they would fail, and the market might cease operating. Shortly before the market opened, the Federal Reserve came to the rescue. It encouraged banks to lend to the specialists, and said it would back them fully.
When the Dow opened, it soared nearly 200 points in the first hour of trading. But the mood suddenly changed. The market was smashed by a wave of sell orders. Stocks like Phillip Morris, USX and Eastman Kodak didn't open for hours. Others stopped trading. Phelan was under pressure to close the exchange. Another rout had begun.
But the market battled back. By day's end, the Dow had closed up 102.27 points.
What was going wrong with the world's most powerful stock market? The search for answers began almost immediately.
The Securities and Exchange Commission, Chicago Mercantile Exchange, Commodity Futures Trading Commission and General Accounting Office also ordered their own studies.
But the highest profile examination came after Reagan tapped Nicholas F. Brady, former New Jersey Republican senator and chairman of Dillon, Read & Co. stockbrokerage, to find out what went wrong.
Two months later, the Brady Commission compiled an inch-thick book detailing the causes of the crash. Among them: high interest rates and tax legislation that threatened to squelch the booming and lucrative takeover business.
But the crash, it said, was sparked by the sale of large blocks of stocks by portfolio insurers. Mutual funds and smaller hedge funds, pension funds and money management firms followed. One sale built upon another until the market spiraled.
The study noted that the stock and futures markets were linked and moved "sympathetically." But Monday, Oct. 19, they "disengaged, both going nearly into a free fall."
The report made several recommendations, all of which were implemented. The most crucial included:
Installing "circuit breakers" to stop trading during sharp declines and give everyone time to cool off. Circuit breakers were introduced in 1988. They stop trading for half an hour when the Dow falls 350 points from the prior day's close, and for an hour when it falls 550 points.
Creating a single agency to coordinate issues that affect the different markets. Five months after the crash, the President's .. Working Group on Financial Markets was formed as the coordinating agency.
Using new information systems to monitor transactions and conditions in the markets. Today, there are open phone lines connecting all of the markets and linking them with the regulators.
Other changes were made.
The New York Stock Exchange invested heavily in its computer system to handle more than 2 billion shares a day -- almost five times the average daily volume.
And Congress passed legislation giving the SEC the power to issue emergency rules over the stock market and to halt trading in dire conditions. Only the president of the United States can prevent the agency from shutting down the market.
The Brady Commission's recommendations, and the changes that followed, were designed not so much to prevent a crash as to help the industry manage one. If the industry could handle a similar drop in stocks, it could prevent investors from panicking.
To date, the circuit breakers have never been used, and some experts believe the threshold for their triggering should either be raised to at least 1,000 points, or eliminated entirely. The market is so high today that it would take a loss of more than 1,800 points to match Oct. 19th's 22.6 percent fall.
"We want to be sure that our financial plumbing has the capacity to withstand these kinds of shocks that occur from time to time," said Hans R. Stoll, professor of finance and director of the financial markets research center at Vanderbilt University. "I think our financial plumbing is in better shape."
Can it happen again?
Despite these changes, few dismiss the notion that the market could crash again, especially these days when it has risen so quickly to its highest level in history.
The Dow has climbed more than 6,000 points since the 1987 crash. Millions of investors have poured money into the market, many of whom have never been tested by a bear market. There is an air of optimism that the market will keep rising. But the stock market can't go up forever, and some day, when we least expect it, it will crash, some experts say.
"It will happen again," said Laszlo Birinyi, a panelist on "Wall Street Week" and head of Birinyi and Associates, a Greenwich, Conn.-based consulting firm. "I'm not sure whether it will be five years, 10 years or 40 years."
Michael Metz, chief portfolio strategist with New York-based Oppenheimer & Co., and a longtime bear, said people have learned little from the past. Hedging techniques, like the ones used by portfolio insurers, are even more prevalent today, he said.
"Yes, it can [crash]; whether it will is something else," he said. "The vulnerability is worldwide. Nothing is safe."
Others aren't so sure.
"It can happen again, but it is highly unlikely," Stoll said. "This is once in 100 years, once in 50 years type of events."
Brady said another crash doesn't look imminent, even with the market at such high levels.
"I don't know. The market is high, but the world is better," he said. "We don't have a common enemy as we did with the Soviet Union. A lot of issues about how the world goes around have been settled. There is a calmness about those things."
It may be calm today, but it wasn't on Oct. 19, 1987.
Legg Mason's McIntyre remembers going home that evening and being greeted by his wife, Jo Anne, and their four children, who gathered around him with solemn faces, as if someone had died.
"It is going to be all right," his wife said.
"I'm scared," McIntyre replied.
McIntyre remembers the day with such clarity you'd think it had happened only yesterday.
How would he react if the market crashed again?
"It would be right up there with suicide and castration," McIntyre said.
Pub Date: 10/19/97