20 minus 4

October 15, 2007:
It is almost twenty years since October 19, 1987, the largest one-day stock market crash in history. The Dow lost 22.6% of its value or $500 billion dollars (I have a photo of the Quotron machine, the precursor to today’s Bloomberg terminal, to prove it!) In honor of the 20th anniversary, I am devoting this entire week of SPOVs to what led up to the crash of 1987, my personal memory of the week and day itself and what lessons we might be able to draw twenty years later as the Dow Jones Industrial Average and the S&P 500 Index are making new highs.

I consulted Miss Manners to find that the appropriate gift for a 20th anniversary is china, which strikes me humorous for this anniversary for two reasons: one, it’s just so easy to shatter (a fine metaphor for a market melt-down!) and two, today the word “china” is equated with the fasting growing economy in the world, not a Lenox place setting. That being said, instead of a new set of china, my gift is to use my experience of trading on the floor of a major exchange at that time to help you understand how a boom and subsequent bust can create an indelible memory and form future investment psychology.

I distinctly remember the events leading up to October 19, 1987. When the year started, I was still in college, but I was actively following the stock market because I had worked the previous summer for my father’s specialist firm on the floor of the American Stock Exchange. They were upbeat about the year ahead, after completing a record-breaking one in 1986. I was also trying to pay attention because I had accepted a job trading options on the Commodities Exchange of NY for Spear, Leeds and Kellogg. It was time to trade in the Brown Daily Herald for the Wall Street Journal.

In January, bond yields were near their lowest levels in nine years and there was a vibrant market for junk bonds, the important ingredients in the financing of corporate merger and acquisition activity. The junk bond bonanza was about to crack wide open, as the SEC pursued big players of the junk bond world, including Ivan Boesky, Kidder Peabody and Drexel Burnham Lambert, the firm that made junk bonds popular. A young US Attorney in NY named Rudolph Guliani turned his efforts to Wall Street and would soon become famous for instituting “perp walks” of businessmen in handcuffs.

By the spring, there was a keener focus on the declining value of the US dollar and increasing bond yields, which in April increased above 8% for the first time in 13 months. At the end of April, the dollar and bond prices both plummet after the House of Representatives passes an amendment to take measures to reduce the trade surpluses held by many Asian nations, particularly the Japanese. Despite these concerns, stocks race ever higher and the public is entranced by their returns.

I graduated from college in May and my first day of work was Monday, July 6, 1987. I was fingerprinted, passed the drug test and walked into 4 World Trade Center, where I was outfitted with a bright blue trading jacket and issued my COMEX identification. I had no idea that I was about to participate in a historic period of time.