“The day of reckoning will come, when the market goes down like it will never stop.” This warning from the economist and historian of financial crises, John Kenneth Galbraith, collected in an article published in The Atlantic magazine in January 1987, proved prophetic just a few months later.
Indeed, the wall street floor cracked on october 19, 1987. He did Crash!, and the parquet jumped into a thousand pieces. The Dow Jones stock index, which had almost 100 years behind it, plunged inevitably as never before. It plummeted 22.6 percent in a single day, which from that moment was forever etched in the memory of the markets. No other session, not even those that took place during the crash of 1929, equaled in magnitude the declines suffered during that day, baptized for history as Black Monday. In fact, no other day has since wrested such a dubious honor from him.
That was black monday
In just a few hours, US investors lost $550 billion. Such was the magnitude of a fall that it was so brutal and extensive that it did not discriminate between professionals and individuals. Thus, and according to Justin Martin in Greenspan’s work, the man behind the money, Warren Buffett lost $347 million; Bill Gates, $255 million; and the family of Sam Walton, founder of Wal-Mart stores, saw their wealth dwindle by $1.75 billion.
Outside the United States, the impact, while less pronounced, was also calamitous. Among the sharpest declines were those of the Japanese Nikkei 225 index, which fell 14.9 percent, and those of the British Footsie 100, which fell 12.2 percent.
bad omens
Although the events occurred on Monday, October 19, the breeding ground for the crisis had already been forged in the previous sessions. Even the weather seemed to guess what was coming. “Black Monday followed a weekend of terrible weather in the UK. On Friday we had a storm in the UK which caused considerable damage and brought down trees and buildings,” says Richard Reid, who is now Europe’s investment director. of Citi and who was a direct witness to the crash because she already worked in investment banking twenty years ago.
More than a metaphor, this storm was also noticeable in the parquets, which before October 19 already fell sharply. Between October 14 and 16, the Dow had dropped 10.5 percent, a decline that caused Time magazine to carry the headline October Massacre on Wall Street on its cover that week. As had happened in 1929, the tenth month of the year once again crossed the path of investors.
goodbye to euphoria
Those falls set off alarm bells. What had happened so that the Dow, which in August had marked its record above 2,700 points, began to fall with such virulence?
From the outset, all eyes were on the Federal Reserve (Fed). But not only because it is the central bank of the United States, but because it had just become its boss. On August 11, Alan Greenspan had been sworn in as Fed Chairman replacing Paul Volcker.
As soon as he took office, Greenspan knew that difficult times were ahead. In the last year, the inflation rate had gone from 1.9 to 3.6 percent. And as Greenspan acknowledges in his book The Age of Trouble, “Wall Street was going through a speculative episode.”
In this environment, the Fed was clear: it was necessary to raise interest rates. And so he did at the beginning of September. So, the focus was on discount rates, which are what the central bank charges entities for the money it lends them, and the North American institution raised them from 5.5 to 6 percent. Official rates rose to the same extent, and went from 6.75 to 7.25 percent.
Although Greenspan had feared the impact of that increase, Wall Street suffered only a 2 percent cut in the days that followed. And then they returned the purchases without further ado.
The fateful October 19
But the residue of the crisis was there. “Signs of economic trouble kept coming. In early October, fear turned into something close to panic,” says Greenspan. And the fateful October 19 came. And with him the nerves. Mariano Rabadán, president of the Inverco fund association, recalls that in Spain the collapse was suffered the next day because Madrid had already closed when Wall Street collapsed: “On the 20th we went to the stock market very early to try to sell what we could, because there was no liquidity in some securities.” Rabadán, who was responsible for the management of Grupo March, recalls that the Madrid Stock Exchange “was full of people, with intermediaries operating out loud because at that time there were not even quote screens.” “At that time we didn’t know the effects it could have on the economy and pundits went on TV to talk about the similarities and differences to the midlife crisis,” adds Richard Reid.
Like investors, the Fed understood that there was no time to lose. Greenspan suspended a conference in Dallas and insisted on the need to release an official statement. Brief, but direct. To Greenspan’s taste: The Federal Reserve, consistent with its responsibilities as the nation’s central bank, today affirmed its willingness to serve as a source of liquidity to support the economic and financial system. That was it. And the truth is that this laconic message calmed things down. Unlike in 1929, when the Fed’s harsh action aggravated the crisis, the institution said that she was prepared to act as a lender of last resort.
Other Fed efforts, such as his negotiations to prevent Wall Street from closing its doors and the three rate cuts he undertook between November and February -they went from 7.25 to 6.25 percent-, were key to tackling the problem. Fears that Black Monday would degenerate into another Great Depression faded within months.
“Contrary to initial fears, the economy held firm, growing 2 percent in the first quarter of 1988 and a brisk 5 percent in the second. At the beginning of 1988 the Dow stabilized around 2,000 points, back to the levels at which 1987 had begun.and stocks resumed a modest but more sustained run higher,” says Greenspan.
accumulation of factors
But what really happened? What factor caused a collapse of such dimensions? The interpretations, as usually happens in these cases, are diverse. Subsequent studies, some of them sponsored by the main North American economic institutions, blamed the huge public deficit that the United States accumulated at that timewhich had distorted market expectations. Others did not forget the rise in interest in September. “Some cited that the increase in discount rates at the beginning of September was part of the mix of factors that shook the market,” Justin Martin points out in his work. His own also had an influence, especially in the speed of the falls, the new technology that had just been introduced. “The Wall Street cash market and the Chicago derivatives market had just connected, and when the declines began, the sales systems jumped and produced a panic situation,” confirms Mariano Rabadán. And, of course, the previous euphoria did not miss his appointment with the history of the crisis. “In the fall of 1986, my attention was fixed on the speculative operation that was taking place at that time on the stock market, the casino-type demonstrations (…) and on the enthusiasm linked to this situation emanating from the search and capture of companies, from purchases of leveraged stakes and the mania for mergers and acquisitions.(…) No one will seriously deny that the months and years before the stock market crash of 1987 were characterized by intense speculation.” Galbraith categorically assures.
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