The cleric, statesman and rogue Abbe Sieyes was once asked what he did during the French Revolution. He succinctly replied, “I survived.” In the aftermath of Oct. 19, 1987, the Chicago Mercantile Exchange could have expressed the same grim satisfaction.
The Dow Jones Industrial Average plunged 508 points, or 22%, that day. A panic-stricken market literally could not sell stocks fast enough; the New York Stock Exchange lacked both the technology and the nerves for the onslaught. Its stocks opened late, and throughout the day, NYSE stock quotes were either old or wishful thinking.
Yet, at the Chicago Mercantile Exchange, the S&P 500 futures pit opened on time. Its traders braved the deluge of sell orders and maintained a market for stock index futures. Trading volume set a record; it was twice the daily average. Frantic investors short-sold the futures, trying to protect their stock holdings against further declines. Aggressive investors also short-sold the futures; they hoped to make a profit in a collapsing market. The CME staff worked 19-hour shifts to process the transactions. By the end of that tumultuous week, a relieved CME was planning a self-congratulatory T-shirt for its traders and staff. But, while the worst was over, the absurd was just beginning.
Someone had to be blamed for the stock market crash. The media demanded it. Of course, the obvious suspect was the NYSE. Elderly Democrats still blamed the New York exchange for the Depression. So, in a wily pre-emptive strike against its detractors, Wall Street proclaimed itself the unsuspecting victim of the ruthless Chicago Mercantile Exchange.
The NYSE had a rather apocalyptic interpretation of the CME action in futures that fateful week. To its mind, Henry James had been mugged by Al Capone: the selling of the futures created a cascade of plunging stock prices. Machiavellian investors shorted the futures and then sold their stocks, pressuring more investors to dump their portfolios, panicking the rest of mankind to sell everything at any price. In this way, the NYSE compared its wholesome, time-honored stocks to Chicago’s venal, reckless futures. The trust funds of innocent orphans were ruined while the brutish traders of Chicago chortled.
The media pandered to this narrative of the refined old New York market bludgeoned by a neanderthal CME. Television’s stock footage always showed the front of the NYSE, its facade of a classical temple. The public imagined the exchange as an elegant private club; amid its Edwardian decor, an Astor and a Vanderbilt might negotiate a stock price when not reminiscing about hangovers at Yale.
In contrast, the CME had a vulgar image. Stock footage depicted a pit of frenzied traders, lunging at the camera as if they could reach through the television and assault viewers. Those flailing hand signals might be amusing, but wary onlookers inferred obscene or satanic meanings. In the wake of the ’87 crash, the integrity and purpose of stock index futures were attacked. The Wall Street Journal sneered at “Chicago’s ‘Shadow Markets,’ ” a blunt aspersion of the exchange’s integrity. The public did not understand futures or options, but it knew one thing for certain: If those markets were respectable, they would have been in New York.
The CME was not an obliging scapegoat. It held a series of press conferences and seminars to justify the value and efficiency of the futures market. Free food was provided to entice media attendance. Confronted with the CME’s detailed explanation and ponderous evidence, the reporters were bored stiff. Imagine the exchange’s predicament: Trying to teach the Black-Scholes formula for financial derivatives to an audience of English majors. The CME was asking to be hated.
Having made no favorable impression on the media, the CME was driven to irrational desperation: It hired a public relations firm. The exchange thus entrusted its reputation to flacks: people who lack the stamina for journalism, the creativity for advertising and the coordination for three-card monte. The CME chose Hill & Knowlton, a firm famous for “crisis management.” In other words, Hill & Knowlton assisted the notorious, including the Teamsters and the Church of Scientology. (As corporate luck would have it, the NYSE was also a client of the New York office of H&K. Of course, the Chicago office of H&K dismissed any possible conflict of interest.)
According to the official history of the CME (Bob Tamarkin’s The Merc: The Emergence of a Global Financial Powerhouse), H&K advised its hapless client to play the repentant sinner — namely, by confessing to an unintentional role in the crash and making an earnest plea for more federal regulation of the futures markets. Being traders, the CME leaders knew how to cut their losses in the market; however, they were not prepared to misrepresent themselves and grovel, even if that strategy would gratify the media’s prejudice.
While (according to Tamarkin) “Merc officials had lost faith in the outside public relations effort,” the exchange still hoped to make itself presentable to the doubting public. CME’s traders generally appeared as howling slobs, but the exchange’s chairman, Jack Sandner, was articulate and dapper. Taking over where H&K left off, CME’s media department booked Sandner on national television, where he could beam a congenial image of the CME across the land. This strategy was sound, but the scheduling was indiscriminate. Jack Sandner thought that he would be appearing on ABC’s Nightline. There was a significant change in format, however, and Sandner found himself on a show with the Muppets.
The Chicago Mercantile Exchange gave up on public relations and resigned itself to being ugly and misunderstood. It would never be as popular or as pampered as the New York Stock Exchange.
But at least the CME stopped being the scapegoat for the October ’87 crash. A presidential task force released the Brady Commission Report in January, 1988, and its harshest criticism was leveled at the New York Stock Exchange. The elegant old club had succumbed to panic: “As with people in a theater when someone yells ‘Fire!’ these sellers all ran for the exit in October, but it was large enough to accommodate only a few,” the report mused. Yet, the media never pilloried the NYSE. And one can see why: With such grandeur, who needs competence?