Friday 22 November 2019

Another Black Monday could be worse than original

Donal O'Donovan

Donal O'Donovan

TWENTY-five years ago the now-veteran chief of Merrion Capital, John Conroy, was new to the market.

He has still never seen anything like the scale of the single-day collapse that happened in 1987 in what quickly came to be known as Black Monday.

Looking back he recalls: "Sheer terror on the faces and in the voices of investors." Dublin was just seeing the beginning of the financial services sector boom when the crash hit the Dublin exchange, along with most other exchanges around the world.

In 1987, the panic was spread across the globe by phone and ticker tape. About $1 trillion in stock market value was erased in four days. It took more than a year to restore it, compared with one week following the retreat in May 2010.

Mike Earlywine (47), a hedge fund trader at Ecofin whose first job was as a clerk at Salomon Brothers in New York, witnessed the magnitude of the plunge in New York's financial district.

"We walked out to the exchange and people were spilling out," Mr Earlywine said. "You're standing there on the sidewalk and people were coming out of the exits and falling over, and guys were literally weeping into guys' shoulders saying, 'It's gone, it's all gone.' One guy with tears streaming down his face is trying to comfort the other, who's also got tears on his face."

The one-day crash came two months after the end of a five-year bull market in which the Dow Jones average tripled.

There were many reasons for the crash but most analysts say it was sparked by concerns that 10-year bond rates, then at about 10pc, would increase and speculation that the US Congress planned to kill tax benefits for leveraged buyouts.

The real panic began when dealers tried to sell shares and found prices collapsing faster than stock could be off-loaded. Unlike the most recent financial crash, the worst losses all happened in just one day.


Mr Conroy says Black Monday "shook people's belief in equities. Life-long investments could be wiped out in a matter of hours."

"There have been many, many shocks over the past 30 year; the Fukishima nuclear disaster, the Gulf War, Lehman Brothers," said Mr Conroy. But for him, Black Monday and the later 9/11 attacks, remain the two that stand out.

"The wider effect of the 9/11 attack was much more pervasive. It was a huge political and emotional shock, so on the financial side, the erosion of wealth had to be seen against a background of the loss of life." While the 9/11 attacks were a one-off, experts fear something like Black Monday's one-day stock crash could happen again.

The 1987 plunge came amid signs of a slowing economy, the threat of higher taxes and concern that trading was rigged for insiders.

Today's investors have pulled $440bn (€338bn) from US equity mutual funds since 2008 and sent trading to the lowest levels in at least four years, retrenching after the worst financial crisis since the Great Depression and the May 2010 stock crash. The protections adopted after Black Monday couldn't stop unharnessed computer trading from erasing almost $900bn of value in less than 20 minutes on May 6, 2010.

'Buzzy' Geduld, who oversaw about 60 equity traders during Black Monday, says crashes happen when investors become convinced they've lost control.

"In 1987, everybody tried to go to the exit at the same time, but the exit door wasn't big enough," Geduld said. "You had literally a panic. Fast forward to 2012. The volumes we can handle are gigantic, but the exit door hasn't changed in size."

Irish Independent

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