The article arrives.
All the mail was in a bundle. The envelope itself had taken on a commanding presence in the pile of mail.
I entered the apartment and dropped the keys on the kitchen table. I let the incidental mail drop, everything other than the grey envelope slipped to the tabletop. As I strolled to the second hand couch and cheap wooden coffee table I examined it. Not very heavy. Felt like a bunch of papers stapled together. I would need to smoke something before I opened it, my Dad’s office address was in the upper left hand corner.
Ten minutes later, a bag of chips in my lap, a glass of wine in my hands. I was ready to read.
“A month ago today the New York Stock Exchange died.” The article was dated November 20 1987, “but within an hour or two, it was raised from the dead.” Ahh, my Dad had sent me some light reading, recapping the events of the day after black Monday. But it was more than just a recap. This was a seminal market event. Those participants who would ultimately be responsible for the actions that would chart the course of the day, would set precedent for future generations. There perception of financial meltdowns had been shaped by stories of the great depression. But like many movies the great depression had become a classic. Great to watch but in practicality not relevant. Philosophically one can appreciate the lessons we learn from a classic. But time and progress ultimately limit the value of classics as a relative concept. The great depression was a classic , but the nightmare of ’87, to those who stood strong on that scary Tuesday, still in shell shock from the previous day, was reality. Their experience on that Tuesday would shape them and those they would influence for decades to come.
James Stewart and Daniel Hertzberg wrote the article. Titled: How the stock market almost disintegrated a day after the crash.
Stocks, Options and futures trading all but stopped during a crucial interval on Tuesday” October 20th. This was not some metaphoric statement or exaggeration for dramatic affect, these staff reporters for the wall street journal were stating the fact. “The extension all the world’s financial markets faced one of the worst crises.” The article went on in great detail to describe one of the most frightening days in financial history. As I read it, I was amazed not just as to the events of the day, but the power this Industry held over the world. There were rumors through out the day that the Big board would close. That the powerhouses such as Lehman, (bankrupted), Kidder Peabody (sold at discount after Trading scandal Joe Jett), Morgan Stanley (ravaged by the credit crisis of 08) and Banker Trust (sold to Deuthce Bank after derivatives scandals and severe losses on Russian bank debt.) were rumored to be buying up bankrupt specialists who could not meet their debt obligations and collateralization needs. These same firms had all but stopped extending unsecured credit. The Arbitrage community, the predecessors of the 90’s macro hedge fund community had lost untold fortunes.
Rumors flew that some of them were contacting the SEC to temporarily close the exchange, something that can only be done by the President or the exchange itself. “some big investment banks were facing catastrophic losses if the market panic continued”
The specialist firms are responsible for maintaining liquidity. On that day the New York Stock exchange that can trace its history back to 1792 when traders gathered under a tree in lower Manhattan, faced extinction. The specialist, the last line of defense could no longer support the market. There was no liquidity, just one side of the market was there. Sell. Offers. Sell at marketkt. Not held. Stock to go. Just get me out. Get me the F out.
“The Federal Reserve issued an extraordinary statement affirming its ‘readiness to serve as a source of liquidity to support the economic and financial system.” Sounf familiar? Its chairman Alan Greenspan had been made chairman only 3 months earlier. I had never heard of him. I certainly had never heard of Gerald Corrigan the New York Federal Reserve president trained by yet another foreign name to me, Paul Volcker. How little I understood. It would take nearly two decades for me to understand that these men held all our lives in the balance. That at that moment, the positions they occupied were more powerful than all but the president of the United States. This was no ordinary article and these were not ordinary people. There actions have reverberated for decades. Volcker is still hanging around making a mess of things.
The article went on to describe other key players that day. John J. Phelan was chairman of the Big Board. He was the link to the Fed. It was he who would spread the gospel of the Fed throughout the lines of Wall Street. It was he that would sigh relief as the exchange opened up 200 points regaining nearly 40% of its previous days disaster. And then watch in frightening awe as it gave up all its gains losing an additional 80 points and adding over another 5% of losses to the battered average by noon.
It was Phelanwho would have to explain how the stocks were just not trading and one could not properly value the index which meant one could not accurately value the futures.
Chairman Karsten Mahlmann, also known as “Cash” was the chairman of the Chicago board of trade. His exchange was still trading futures contracts of the MMI, the Major Market Index,
the other leading index of the Day. The MMI was a blue chip indicator of 20 large cap stocks created by the American Stock Exchange in 1983. It was often referred to as the XMI, which was the ticker for the underlying cash index. It included stocks such as General Motors, Coca Cola and General Electric. He listened in astonishment as representatives from the big board alerted him to the possibility of a close for the New York Stock Exchange. They had moments earlier notified Leo Melamed, the chairman of the Chicago mercantile exchange, who at 12:15 halted trading in S&P 500 futures contracts on the MERC. Cash watched as the “relatively little used” futures on MMI dropped to their deepest discount to the cash value of the MMI index in its history, triggered by the news that back in NY on the floor of the American Stock Exchange trading in Index options on the MMI was halted.
His voice was one of authority, he was 46 and perhaps on of the most seasoned veterans on the floor of the Amex. “Trading in MMI related options is temporarily halted, no more orders.” He was Ron Shear and he was the senior specialist for the MMI on the American Stock Exchange. He was a cross between a Jewish Wall Street Godfather and your local old world Italian grocer, who sends you home with an extra bag of fruit and regards to your mother. One shadow casts the guy who sweetly offers up fruit as a gesture from a service to long-standing family customers, the other depicts a gleaming smile, which makes you wonder why your mom spends so much time at the grocery store. Ron Shear is a dichotomy. Objective/subjective, hard as stone/soft as a feather, your greatest friend/your worst enemy.
It was 10 years later that I first met Ron Shear. I would be one of the few who would come to understand him (just a bit), but it would be 16 years before he and I would make a real connection, and in doing so make some money and I would earn a seat at the Big Boy’s table for a little while.
Here, embedded in an article copied from the wall street journal, stapled together, yellow post it on the front, “Read This!” from Dad” was the description of a man that would play a big part in my movie. Coincidence? Fate? Pretty F’n crazy.
He couldn’t sleep the night before. He smoked a fine cigar as he walked the streets at 4 am. Brasserie, a 24-hour French restaurant in midtown was already crowded with other suits whispering to each other as they sipped hot coffee, eyes red, and shirts ruffled. You could hear only a few words from the huddled groups. “Disaster, wiped out, panic, what next?” Shear paid his bill leaving a 15% tip. Not a penny more , not a penny less, that is his way. He perked his lips as he often did before he entered battle. His coat was of fine cashmere, aged but in a vintage sense. He shuffled out the door and hailed a taxi.
By 12:15 as he made his way to the microphone to make his announcement, other traders on the floor turned to him in fear looking for any words of comfort?” Ron, have you heard Merrill was taking over a number of defunct specialist?” and “Ronny, I heard they stopped trading Du Pont, Merck and Eastman Kodak” “Ron, is the SEC closing the exchange?” and “Ron, are we going to be ok?” The floor supervisor approached shear
confirming that over 20% of the underlying MMI stocks had stopped trading, in fact Shear believed nearly half of the underlying stocks had actually stopped trading. After his announcement, shear turned to a number of traders standing beneath the podium, and with a grimace that both exuded confidence as much as it did submission, “It is what it is” he said. With that he sat down and lit another of his small cigars.
The white house chief of staff Howard Baker, pressed Mr. Phelan to keep the exchange open for as long as possible, knowing that the country might not sustain the trauma. The loss of confidence in our financial system would ripple through the globe. Mr. Phelan was heard to have said, “If we close it, we would never open it.” It would be 2 decades before the financial community and the greater world would once again stand on the razors edge, teetering toward the brink of disaster.
“At 12:38 with the closing of the big board seeming immanent and the market in disarray, with virtually all options and futures trading halted, something happened that some later described as a miracle. In the space of about six minutes, the major market Index futures contract, the only viable surrogate for the dow jones industrial average, and the only major index still trading, staged the most powerful rally in its history” (pre ’87). The MMI rose nearly the equivalent of 360 Dow points. The Dow ultimately rebounded nearly 10% from its lows, “setting the stage for the salvation of the worlds markets.”
While conspiracy theories abound, it is believed that a small group of the most powerful firms on Wall Street, banded together and risked it all to save the market. With trading as thin as it was, their buying, together all at once, created an upward thrust in pricing the likes of which many seasoned veterans on the floor had never experienced.
Ron shear was still enjoying the taste of a spicy small cigar as he strolled back on to the battlefield, his instincts were heightened, as he began to feel the commotion on the floor, something was happening. The blood in his body warmed, he felt the thrill of the game and just like that, the defeated army of capitalism experienced a moment of redemption. A seasoned warrior like Shear, smells that moment of opportunity and moves quickly for the kill. Momentum was his weapon and with it he and his cohorts would prevail. He bolted for the loudspeaker and announced that he would open the MMI options market in 15 minutes. I am sure he went on to kill it that day, that is, to make lots of money that day.
As I put down the article, I realized that somewhere about midway through reading, the weed had kicked in and I was baked. I thought, that’s was one F’d up article. I cannot wait to get to that battle. Ahh to be young and naive, what bliss…………In January of 2007, Ron Shear and I sold Carlin Financial Group to the Royal Bank of Canada. My Movie Continues.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.