FinermanWorks

Today is the anniversary of the Worst Day in the Stock Market.  At the time, I was a speechwriter at the Chicago Mercantile Exchange and so a witness to a surreal day in the markets. From TheStreet.com, here are my recollections of that dramatic day and its ridiculous aftermath.

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?

copyrighted: TheStreet.com

p.s.  And if you prefer ancient history and elephants, today offers another anniversary:  https://finermanworks.com/your_rda_of_irony/2009/10/19/bc-comics-2/

Our idea of a stock market–the trading of shares in a business–dates back to 17th century Netherlands.  To raise money for commercial ventures, Dutch merchants would sell shares of any profits from the business.  The speculation was whether the venture would prove profitable.  Ships sometimes sank, trade might be disappointing; there was always the unexpected.  And the difference  between the risk and the expectation–the nervous and the optimistic investor– created a market for those stock shares.  One of the Dutch ventures was a fur-trading outpost called New Amsterdam;  so New York City itself  began as a stock.

New Amsterdam was protected by a wooden wall.  Outside the northern boundary the Dutch set up an area for a market.  There, the Native Americans were welcome to trade; they were not trusted within the town itself.  However, it actually was an old European practice to have a market just outside a town’s walls.  Farmers, herders and merchants had room to set up their stalls, and the town did not have to worry about animals and strangers wandering through.  In fact, the word “stock” is derived from this arrangement.  An old English word, stock originally meant “log.”  Many towns and villages of medieval England were protected by wooden walls: a stockade.  Beginning as a slang term, the goods and produce sold outside the stockade came to be known as stock. 

The walls of New Amsterdam could keep out the Native Americans but not the English.  They conquered the colony in 1664 and renamed it for the Duke of York. New York City quickly grew beyond its original boundaries.  Where the northern stockade once stood, there now was an avenue called Wall Street; but it still remained a trading center.  By the 18th century, however, the transactions usually were done by contracts rather than the physical delivery of crops, livestock and merchandise.  If there were to be a market for stock shares, Wall Street would be the logical site.

While 18th century Britain had a stock market, its American colonies did not.  The thirteen colonies were an incongruous assortment.  Some were crown colonies, ruled directly by England.  Other were little more than personal estates; the Penn family ruled Pennsylvania.  Even among the crown colonies, the local governments and financial laws varied and clashed.  There was no common foundation for a national economy.  Ironically, America’s independence only made the incongruities worse.  At least under Britain, the colonies had a common currency.  In the newly independent republic, each state was a semi-independent nation, issuing its own currency and setting up tariffs for trade with the other states.  The Continental Congress, what passed for a central government, also issued currency which traded at one seventh of its face value. 

This economic chaos ended up with the adoption of the U.S. Constitution.  Among the powers of the new Federal Government  were “To coin money and regulate the value thereof….To regulate Commerce…All Duties, Imposts and Excises shall be uniform throughout the United States.”  In 1789 President George Washington entrusted these responsibilities to a 34 year-old New Yorker named Alexander Hamilton.  As the first Secretary of the Treasury,  Hamilton had inherited the debts of the Continental Congress: millions in devalued bonds.  He could have defaulted on them or paid them off at their depreciated market rate.  Instead of that, the Federal government assumed  and paid  all the debts at their face value.   Doing so, Hamilton established the financial reliability of the new government.  (A number of speculators–including friends of Hamilton–had the “foresight” to buy the discounted bonds and make a 600 percent profit.)  Hamilton also sponsored a reliable network for banking, establishing a central bank to regulate and facilitate transactions between regional banks.

Now that America had a sound financial foundation, investors were willing to trade bonds and stocks.  And within two years, America had its first stock market scandal.  The culprit was William Duer (1743-1799)  a New Yorker who attempted to corner the market in bank stocks.  Duer had a long, profitable and disreputable history as a speculator.   His bookkeeping never withstood examination and he was known to cheat his partners.  Yet he never lacked for investors.  In 1791, in his attempted stranglehold of bank stocks, he promised his backers to double their money in six months.  But in his aggressive buying of stocks, he soon ran out of his investors’ money and began taking millions in loans with no collateral other than wishful thinking.  Duer was dangerously overextended and very vulnerable.  In March, 1792, his creditors began to panic and demanded payment.  Of course, he could not.  His losses and debts amounted to five million dollars.  At the time, that was the property value of  New York City itself.  Duer voluntarily went to jail; he was safer there than on the street.  He spent the rest of his life in prison. 

Of course, Duer’s scandal had incriminated the entire stock market.  How could such a fiasco have happened in the first place?  Even Alexander Hamilton, a stalwart friend of capitalism and New York, said “There must be a line of separation between honest Men and knaves, between respectable stockholders…and mere unprincipled Gamblers.”  The stock market had yet to develop any procedures or regulations; in this unfettered environment Duer had first flourished and then bankrupted himself and much of the market.  If the New York investment community hoped to redeem its reputation, it had to establish a  system to monitor the market and enforce some sense of order. 

A buttonwood tree on Wall Street was a common meeting place for stockbrokers to conduct business.  There, on  May 17, 1792,  twenty-four stockbrokers signed an agreement that became the basis for the New York Stock Exchange.  They pledged the following:  “We the Subscribers, Brokers for the Purchase and Sale of the Public Stock, do hereby solemnly promise and pledge ourselves to each other, that we will not buy or sell from this day to any person whatsoever, any kind of Public Stock, at least one quarter of one percent Commission on the specie and that we will give preference to each other in our Negotiations.” 

Historians call it the Buttonwood Agreement.  It is a single sentence, and a cumbersome one at that,  but it meant that they alone–no outsiders–would serve as brokers for the stock market, adhering to a code of conduct and commissions.  They would be the equivalent of a guild, setting and maintaining the standards of the stock market.  Their private association would not even have an official name until 1817, when its now 35 members adopted a more detailed code of business and named themselves the New York Stock and Exchange Board.    

Today, that association has some 1400 members and trades 2700 stocks.  It is the largest stock market in the world, quite a difference from a group that once could meet under a single tree.  But in those intervening centuries, the name of the New York Stock Exchange has barely changed and neither has the location.  The traders still meet at Wall Street, and the felonious spirit of William Duer lingers.