Two days that shook the world
October 13, 2007 12:00am
IT WAS late morning on Tuesday, October 20, 1987. Top Melbourne stockbroker Bruce Teele was in a private jet high above the emptiness of the outback returning from a visit to Perth.
It was a smooth flight and he was encased in his comfortable executive class seat. But in his head everything was whirling.
Only hours earlier his plans were upended by a phone call from JBWere colleague Terry Campbell telling him Wall Street had gone into meltdown.
Two questions kept spinning through his mind: How could the Dow Jones have dropped 22.5 per cent in a single day? And what was going to happen next?
Across the other side of the world, US Federal Reserve chairman Alan Greenspan was pondering those same questions as he worked the phones trying to calm the panicking titans of Wall Street after the Dow Jones' 508 point crash.
That dive wiped 516 points off the Australian stock market.
A plunge of this proportion today would wipe more than 3000 points off the Dow and hack 1500 points off the Australian benchmark S&P/ASX 200 index. Wall Street's fall on October 19, 1987, was even bigger than the Black Friday 1929 plunge that sparked the Great Depression.
Next week is the 20th anniversary of the '87 crash, but it is still seared into the former JBWere boss's brain.
Teele says the one thing he and the other passengers on the jet knew for certain was that the entrepreneurial era that had been driven by greed and supported by cheap cash was over.
On the other side of the world panic and fear were washing across global stock markets as they opened in the aftermath of Wall Street's collapse.
The New York Times' front page asked:"Does 1987 Equal 1929?"
As it turned out, the answer was "No". Some investors were badly caught out and forced to sell houses, businesses, boats, anything to pay back debts, but the consequent damage was nowhere near as bad as in 1929.
Teele says the doom and gloom eventually gave way to a more pragmatic outlook and provided investors with a series of valuable lessons about managing greed.
"It was a period of rampant inflation and the fiscal management at the time was reckless, with money freely available and people were being sucked into the market by all the get-rich-quick stories," Teele recalls.
The high-flying Australian entrepreneurial cowboy culture, empitomised by Alan Bond, Christopher Skase and Robert Holmes a Court, was also a major factor in what is now regarded as the classic bubble syndrome.
"But cowboys only get away with it if people ride in their posse. Once you build up a culture that this is the way to make money lots of people want to join in," Teele says.
After the first panicked selling on Wall Street, the Australian stock market plummeted 25 per cent.
But retrospectively, the tell-tale signs were there for all to see ahead of the crash.
In the previous week, overvalued stocks had been reassessed after tax changes in the US Congress limited the number of likely takeover targets on the stock market, the US dollar was trending down and expectations had increased the Fed would lift interest rates.
The week before the '87 crash had seen Wall Street stocks drop 9 per cent in its largest weekly decline for more than 20 years.
The scene was perfectly set for the bloodbath.
Economists who have studied the 1987 crash say the uncertainty caused by an absence of concrete information and herd behaviour were also major contributors.
Even the uber-cool former Fed chairman Alan Greenspan admits that after 36 hours going from phone to phone in a hotel room in Dallas trying to calm frayed nerves he "felt like a seven-armed paperhanger".
In his recent book, The Age of Turbulence Greenspan recounts that early the next morning White House Chief of Staff Howard Baker called and said just one word, "Help!" Baker organised for the Fed chairman to return to Washington on a military jet.
It was a one sentence statement from the Fed before trading opened in New York on October 20 that is credited with easing the credit squeeze and getting the markets back on the road to recovery.
"The Federal Reserve, consistent with its responsibilities as the Nation's central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system," said the Fed.
The underlying message to the banking system was: Make sure companies don't run out of money and whatever you need just ask and you will get it.
Greenspan says, however, the corner was only turned a few days later when Goldman Sachs, after an initial reluctance, was persuaded to complete a $US700 million payment to a key bank.
"Had Goldman withheld such a large sum, it would have set off a cascade of defaults across the market," Greenspan says in his book.
The Australian stock market took a much bigger pounding and was slower to recover.
By the end of 1987, Australian shares had collapsed 50 per cent from their pre-crash high, while US markets were down 35 per cent.
AMP Capital Investors chief economist Shane Oliver said it took the US stock market just over two years to rise above its pre-crash highs.
"But Australian shares did not rise above their August 1987 high until February 1994," he says.
The stock market correction this year sparked by the meltdown of the sub-prime mortgage sector in the US sent the Australian market down 11.7 per cent.
But the market rebounded and went past its previous record high within five weeks. Despite the two-month long correction, the benchmark S&P/ASX 200 index is up 28 per cent this year.
The major difference, according to market watchers, is that 1987 was a classic boom but today's boom is more part of a global super cycle being driven by China.
Despite numerous academic studies of the 1987 crash we still don't know much more about what caused it than we did when it happened.
But in the four major financial crisis since 1987 - the 1997 Asian crisis, the dot-com crash of April 2000, failure of the Long Term Capital hedge fund in 1998 and the recent sub-prime mortgages collapse - global markets have managed to avoid full-fledged panic.
Nobody knows where or when the next financial crisis will appear, but investors and financial institutions now seem better able to manage the fallout and, most importantly, stop the panic spreading out of control.