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5 of 5 people found the following review helpful:
5.0 out of 5 stars
By the skin of our teeth, January 25, 2004
Former Wall Street Journal writer and current financial communications consultant Tim Metz takes you up to and through the stock market crash of October 19 and 20, 1987, by looking into the minds of eyewitnesses and participants closest to the event. He introduces you to specialists on the NYSE, traders in the Chicago pits, government officials who monitor the country's finances, and exchange officers who have responsibility to oversee securities trading, all who played a part in what happened.Although the blame for the mania leading up to the crash, and the crash itself, can be spread around to many contributing factors, especially portfolio insurance (a dumb idea) and program trading (index arbitrage), one clear hero emerges in the person of NYSE chairman John Phelan. Metz assigns him prime responsibility for having the foresight and stamina to keep the exchange open in the face of incredible pressure to close it by practically all others concerned. This brave act probably prevented a worse panic and the resulting loss of confidence in markets in the future.
The main point of Metz's investigation centers around the "second" panic of mid-morning Tuesday, October 20. I was a member of the Pacific Stock Exchange at the time, and Metz is correct in stating that as the market began to roll over after a strong opening, professionals became transfixed with fear that maybe we were really beginning to see the wheels come off for good. As Fred Sanford would have said, "This is the big one, Elizabeth!" We had survived the expected Monday "crash," and Tuesday should have seen some sensibility returning to the action, especially with the Dow having fallen some 37% from 2700 to support at around 1900. But the strong opening quickly gave way to new waves of selling that seemed to have no end. Even those of us who had begun the week short were deluged with so many sell orders that we quickly became net long...and net losers.
The Merc's S&P pit halted trading, as did many Dow stocks in NY. Then, miraculously, out of nowhere, the MMI pit on the CBOT caught a bid. Prices recovered. And that was the bottom - 12:30 in NY, 11:30 in Chicago, 9:30 in San Francisco. Metz implies that "manipulation" (government ?) may have had a hand in the turn, as have many other commentators since then. But it may just as well have been Adam Smith's unseen hand stepping into the momentary void vacated by sold-out sellers. We'll probably never know for sure. Whatever it was, it saved the day. As Metz aptly points out, the market is as much a psychological creature as it is a function of supply and demand, and a heroic gesture at the right moment can turn the tide of battle.
The book is laid out like a shipwreck disaster movie, which begins by introducing a representative cross-section of passengers and crew, then follows them as imminent danger eventually engulfs everyone's lives. Who will survive and who will perish?
It's a good read. But the real enjoyment comes at the end when you realize that so many people you've been following and care about worked in cooperation to keep the market afloat, and that critical decisions made under intense pressure preserved the system we have today.
The market treaded water for the next few years as it repaired the damage, then took off on an eight-year 9800-point Dow rally that would have never been possible except for the brave actions by the people who took charge to preserve the integrity of the market when it was under its most frightening assault.
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