Black Monday Stock Market Crash – How

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Article 44.078

What – How – Why

 

 Black Monday 1987 Stock Market Crash

 

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There were several contributing factors to the 1987 crash, the first of which was the fact that between April and October of 1987, the Chairman of the Federal Reserve, Alan Greenspan, pushed up interest rates in the United States from 7% to 10%, causing a fall off in value within the bond markets.

 

At this time we also saw the introduction of new legislation and strategies that would create a ‘perfect storm’ for the coming crash.

 

Leading up to the crash we saw the introduction of a new phenomenon called ‘program trading’. In program trading, computers perform rapid stock executions based on external inputs, such as the price of related securities. Common strategies implemented by program trading involve an attempt to engage in ‘arbitrage’ and ‘portfolio insurance’ strategies. The trader Paul Tudor Jones predicted and profited from the crash, attributing it to portfolio insurance strategies which were “an accident waiting to happen” and that the “crash was something that was eminently forecastable”. Once the market started going down, portfolio insurance futures sellers were “forced to sell on every down-tick” so the “selling would actually cascade instead of dry up”.

 

As computer technology became more available, the use of program trading grew dramatically within Wall Street firms. After the crash, many blamed program trading strategies for blindly selling stocks as markets fell, exacerbating the decline.

 

“The internal reasons included innovations with index futures and portfolio insurance. I’ve seen accounts that maybe roughly half the trading on that day was a small number of institutions with portfolio insurance. Big guys were dumping their stock.” – Annelena Lobb

 

The banking giants were able to create a panic within the markets by making it appear that large takeovers were about to happen and also by selling large quantities of their own stock, causing other traders to follow suit.

 

“The 1980s were an era of the leveraged buyout. Corporate raiders would use relatively cheap junk bonds (now called “High Yield” bonds, to make them seem classy) to fund hostile takeovers. The additional leverage would inevitably lead to layoffs or flat-out liquidations of targeted companies — think Gordon Gekko’s effort to chop up Blue Star Airlines.”

 

In response, Singer says the House Ways and Means Committee “floated a trial balloon on making interest on junk bonds non-deductible to protect the management of large companies.” The instant the proposal hit the newswires, stocks thought to be takeover candidates collapsed.”

 

The program trading system, portfolio insurance and a lack of confidence that had been created within the bond markets, compounded the panic and allowed the elite to manufacture the collapse with relative ease.

 

 

Additional Links:

http://finance.yahoo.com/blogs/breakout/black-monday-1987-market-crash-revisited-113951060.html

(Article and video on true causes cause of crash)

 

 

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