A First-Class Catastrophe by Diana B. Henriques

Author:Diana B. Henriques
Language: eng
Format: epub
Publisher: Henry Holt and Co.

19

508 POINTS

Sometime before 8:30 a.m. on Monday, October 19, 1987, John Phelan asked a secretary to track down Leo Melamed at the Chicago Merc. Phelan, who had cut his vacation short and flown home on Saturday, could see how the day was shaping up, and it made even the worst fears of Friday night look optimistic.

Tokyo had fallen sharply overnight, as traders reacted to Friday’s epic decline in New York. The Hong Kong markets had plunged so far and so fast that officials there decided to close their doors completely, to forestall total panic and widespread defaults. London was already down 10 percent, in part because of $90 million worth of sell orders from the trading desk at Fidelity Investments in Boston. Fidelity’s $9 billion Magellan Fund was the largest stock mutual fund in the country; it was chilling to think how much it would try to sell when the Big Board opened. Traders were predicting the Dow could drop that morning by at least 9 percent, a staggering percentage figure that was twice the record-setting 108-point loss on Friday and almost within reach of the historic daily losses in October 1929.

The New York Stock Exchange’s DOT system was being swamped with orders, many of them apparently from index arbitrageurs. Specialists downstairs were struggling to find a price at which they could open trading in their blue-chip stocks, a task that suddenly had become as difficult as dealing with a deluge of closing-bell orders, Phelan connected with Melamed and briefed him on the viciously lopsided orders piling up in the DOT system. “We’re seeing ‘sell’ orders like never before,” Phelan said, adding, “It looks like a very bad market.” And then, he said, “Everyone loves a free market, but we need to slow volatility on the down side. If no action is taken, the industry stands to lose something it wants.”

It’s not clear what Phelan thought Melamed could do about the market’s wild swings. The portfolio insurers were going to sell, no matter what the local traders did in the spooz pit. And if such selling made the futures cheaper than the cash market on the NYSE, the index arbitrageurs would keep dumping stocks and buying futures. Neither Melamed nor Phelan could prevent that from happening so long as these two linked markets were open.

Then Phelan checked his calendar: a young White House aide was scheduled to visit that day, and Phelan planned to show him around; he expected to be back in his office around noon.

* * *

MANY OF THE other men who would have to cope with the day’s developments, some of them still new to their regulatory duties, were scattered from Sweden to Venezuela.

Fed chairman Alan Greenspan was at his Washington office on Monday, but was packed for a midday flight to Dallas. SEC chairman David Ruder also was in his Washington office, but he had been in it for barely ten weeks, and his more experienced aide, Rick Ketchum, had taken a 6:45 a.m. shuttle to New York.

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