Financial History Issue 124 (Winter 2018) | Page 25
• • •
In a foggy rain, John O’Brien, one of
three partners in LOR Associates, the firm
to that index. Specialists downstairs on the
NYSE trading floor were struggling to find
a price at which they could open trading in
their blue-chip stocks, a task that suddenly
had become as difficult as dealing with a
deluge of closing bell orders.
Phelan connected with Melamed and
briefed him on the viciously lopsided orders
piling up in the DOT system. “We’re seeing
‘sell’ orders like never before,” Phelan said,
adding, “It looks like a very bad market.”
And then, he said, “Everyone loves a free
market, but we need to slow volatility on
the down side. If no action is taken, the
industry st ands to lose something it wants.”
It’s not clear what Phelan thought
Melamed could do about the market’s
wild swings. The portfolio insurers — giant
institutional investors who used futures
contracts to hedge against falling stock
prices — were going to sell, no matter what
the local traders did in the S&P 500 futures
pit. And if such selling made the futures
contracts in Chicago cheaper than the cash
market for the stocks on the NYSE, the
index arbitrageurs would keep dumping
stocks and buying futures.
Neither Melamed nor Phelan could
prevent that from happening so long as
these two linked markets were open. Then
Phelan checked his calendar: a young
White House aide was scheduled to visit
that day, and Phelan planned to show
him around; he expected to be back in his
office around noon.
Many of the other men who would have
to cope with the day’s developments, some
of them still new to their regulatory duties,
were scattered from Sweden to Venezuela.
Federal Reserve Chairman Alan Greens-
pan was at his Washington office on Mon-
day, but was packed for a midday flight to
Dallas. David Ruder, chairman of the Secu-
rities and Exchange Commission, also was
in his Washington office, but he had been in
it for barely ten weeks, and his more expe-
rienced aide, Trading and Markets Director
Rick Ketchum, had taken a 6:45 am shuttle
to New York. Treasury Secretary James A.
Baker III was on a flight to Stockholm, by
way of Frankfurt. White House chief of staff
Howard Baker had never before dealt with
a financial crisis from the Oval Office. And
New York Federal Reserve Bank President
E. Gerald Corrigan was in Caracas.
Front page of The New York Times on the day following Black Monday, October 20, 1987.
that had first devised and marketed the
portfolio insurance hedging strategy, fol-
lowed the curves of Route 18 out of the
mountains north of San Bernardino. It
was around 7 am, Pacific time, on Monday,
October 19. He had spent the weekend
helping his wife unpack at their new home
at Lake Arrowhead. About halfway down
the mountain, he turned on the car radio
for the news. The stock market had opened
sharply lower, and was still falling. Feeling
a jolt of concern, he pulled up to a roadside
restaurant and called the office from its
pay phone. He recalled later being told the
market was off 200 points; there were lots
of calls from worried clients. He got back
in the car, speeding south and west toward
Los Angeles, still an hour away.
The market had not yet opened in
New York when Berkeley professor Hayne
Leland, one of O’Brien’s two partners,
boarded a 6:30 am flight to Los Ange-
les. Before the plane took off, a flight
attendant announced that the market was
down 60 points—“serious, but less than
catastrophic,” Leland thought. When he
landed, he got in a cab and asked the
driver to turn the radio to the stock report.
The market was down hundreds of points
by then. “Oh God,” Leland said. The taxi
wove through the growing traffic to the
First Interstate Tower.
Up north in Marin County, the third
LOR partner, Berkeley professor Mark
Rubinstein, called a taxi when the market
decline hit 200 points, and headed for
the airport. He got to the LOR offices in
Los Angeles around 10 am (1 pm in New
York), just as the stock market was chew-
ing up the last of a fragile hour-long rally.
Leland was already there, hovering anx-
iously around the firm’s harried trader,
who had telephone receivers in both
hands and a computer monitor in front
of him showing the growing disaster. In
Chicago, he and other portfolio insurers
had been selling for the last hour in larger
volumes than they had all morning.
Around 11 am (2 pm in New York), the
trader looked up at Hayne Leland. “I’m
getting behind,” he said. He still needed
to sell even more heavily in Chicago to
carry out the hedging strategy, he added,
“but I think the market would go to zero
if I did that.”
Shocked, Leland instantly replied, “No!
Don’t do that!”
• • •
Alerted by his staff to the morning’s sell-
off, New York Fed president Jerry Cor-
rigan immediately booked a seat on an
earlier flight home from Caracas, and
spent the time before he left for the airport
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