Many people remember the events leading up to October 19, 1987. Unfortunately, very few of them recall the specifics. When many people talk about the dramatic drop in the overall stock market, they either blame a single cause (portfolio insurance) or treat the market fall as if it were something that came from out of the blue. Far from being a lightning strike or an act of God, the crash was a single event caused by a complex series of interconnected events. Hopefully after perusing the timeline we have constructed to review the events leading up to the crash, you will come to the same conclusion.
January 1, 1987
The year opens with bond yields near their lowest levels in nine years. Corporate treasurers have been issuing debt like it is going out of style, coining more than $200 billion in notes during all of 1986 -- two times the level of debt issued in 1985. A healthy market for junk bonds -- bonds issued that are considered below "investment grade" -- has helped tremendously. "With bond rates expected to remain at low levels, investment bankers predict that corporations will continue to flock." (New York Times, Jan. 2, 1987)
January 8, 1987
The Dow Jones Industrial Average closes at 2,002.25, breaking the 2,000 level for the first time. Trading volume swells to 194.5 million shares and most other stock indices set records as well. Optimism abounds that the string of records will bolster investor confidence and bring new investors into the market.
January 22-23, 1987
The Dow Jones Industrial Average leaps 51.60 points to 2145.67 on January 22, making its largest one-day point rise ever. Although well below any record for a percentage gain, the news is taken as another indicator that demand for stocks remains strong. The euphoria is slightly eroded the next day when the Dow plunges 114 points in 71 minutes on January 23. Program trading based on the difference between the value of stock futures and the cash market is blamed for the swing. Treasury Secretary James Baker expresses concern about the "excess" volatility.
February 5, 1987
The Securities Exchange Commission (SEC) announces that it is moving well beyond its initial focus in its investigation of Ivan Boesky. This case, coupled with half-a-dozen others that will break over the next few months, will make insider trading household words. Boesky's investigation hinges on a $5.3 million invoice to Boesky from Drexel Burnham Lambert, the firm that made junk bonds popular. The SEC wants to know why Drexel sent one of its major customers a bill for that amount. The SEC further subpoenas Guy O. Dove, another large junk bond customer of Drexel and continues to gather records on other Drexel customers.
February 9, 1987
Former Lazard Freres & Co. investment banker Robert M. Wilkis is sentenced to two concurrent prison terms for participating in an insider trading scheme with Dennis B. Levine. Wilkis allegedly earned $4 million in two offshore accounts as a result of trading based on inside information. Randall D. Cecola receives a five-year suspended sentence for his role in the scheme.
February 12, 1987
The next round of insider trading allegations taints Goldman, Sachs and Kidder, Peabody. Robert Freeman, Richard Wigton, and Timothy Tabor are all arrested and charged with insider trading violations. Federal prosecutors allege that the three have made millions of dollars based on insider information.
February 13, 1987
Prominent investment banker Martin Siegel pleads guilty to a number of tax and securities charges. Siegel coughs up $9 million in fines, faces up to ten years in prison, and admits that he was the informant who fingered Freeman, Wigton, and Tabor. Siegel also narcs on Boesky, stating he got $700,000 after he supplied information about ongoing corporate takeovers he was privy to as a result of his job at Kidder, Peabody. Siegel worked at Kidder, Peabody for 15 years before moving to Drexel Burnham in February of 1986. Some pundits question whether or not the takeover boom can continue due to the investment banking profession being tainted by these alleged improprieties.
February 17, 1987
A Virginia grand jury indicts 16 followers of paranoid politico Lyndon LaRouche on charges of securities fraud and a host of other felonies. As a result of these charges, the LaRouche organization is almost completely shut down.
February 18, 1987
Robert Prechter, an Elliott Wave guru who is currently peddling a book forecasting a crash, states that he thinks the Dow Jones Industrial Average will hit somewhere between 3,600 and 3,700 in 1988. The actual high for the year is 2193.75 in December.
February 21, 1987
The ever-controversial Andy Warhol dies of complications relating to a surgery he was undergoing. Famous for popularizing Pop Art, Warhol is probably best known for his offhand quip that in the future, everyone will enjoy 15 minutes of fame.
March 5, 1987
The investigation into Drexel Burham Lambert heats up after the government subpoenas more than a dozen of its clients. The probe has obviously expanded beyond Boesky and Drexel's basic practices in the junk bond and investment banking arena. Based on interviews, journalists conclude the government is looking for systematic violations in insider trading laws. Drexel is now officially under siege by U.S. prosecutors.
March 11, 1987
The ever-vigilant SEC snares Merrill Lynch's Nahum Vaskevitch in its growing inside trading web. The agency alleges that Vaskevitch fed information to Israel-based David Sofer about as many as twelve mergers or acquisitions that he was privy to in his role as head of international mergers and acquisitions.
March 12, 1987
PaineWebber broker Gary Eder and a number of other PaineWebber employees are indicted for tax evasion. Although unrelated to the flurry of insider trading allegations, the fact that they were helping clients to filter money out of their accounts in ways that avoided reporting gains to the IRS does nothing to help Wall Street's increasingly tarnished image.
March 16, 1987
No one is safe from the long arm of the SEC. Takeover master Carl Icahn announces that he is under investigation for possible violations of securities laws. Although the specific takeover under scrutiny was not specified, the Chairman of TransWorld Airlines appears unperturbed by the news.
March 19, 1987
The Boesky probe brings down West Coast broker Boyd Jefferies. Jefferies agrees to plead guilty to two felony charges related to manipulating stock prices. Jefferies is forced to resign as president of Jeffries & Co. and is barred from the securities business for at least five years. The firm agrees to a permanent injunction against breaches of securities law and to censure.
March 21, 1987
The fall of Jefferies & Co. quickly sucks American Express Shearson Lehman Brothers and Salomon Brothers into the inquiry. Both firms are subpoenaed as part of the investigation of stock manipulation, focusing on the firms underwriting practices, as well as those of the American Express majority-owned Fireman's Fund unit.
March 30, 1987
Wall Street's first quarter ends with a bang. Stock prices worldwide have surged 22% after netting out the dollar's decline. Companies took advantage of this by issuing more stock and bonds. IDD Information Services estimated that companies issued $87.7 billion in the first quarter alone, up 27% year-over-year. Unfortunately for stockholders, it is here at the end of the first quarter that the dollar's continued decline started to hurt stock and bond holders. The Dow Jones Industrial Average slumps 57.39 to 2,278.41 and bond prices fall to their lowest levels since last fall.
March 31, 1997
Leslie Roberts gets 15 years in prison for ripping off his uncle Robert Gory. Roberts allegedly ported millions of dollars from Gory's brokerage account at EF Hutton & Co., where Roberts was employed as a broker.
April 9, 1987
A former director of a Federal Reserve bank becomes embroiled in the insider trading mess. Robert Rough is accused by a number of witnesses of leaking market-sensitive information to Bevill, Bresler & Schulman. In an unrelated charge, the former president of the brokerage, Gilbert Schulman, is accused of participating in a scam involving Treasury bonds to cover up the firm's losses. Against this backdrop, Treasury bonds rise to above 8.0% for the first time in 13 months.
April 16, 1987
As if the opinion of Wall Street could not get lower, 15 employees of various Wall Street firms are arrested by Federal agents and charged with selling cocaine. Furthermore, they are charged with trading drugs for information, stock, and lists of preferred clients. To emphasize the amount of drugs flowing to Wall Street, the New York City Police Department states that 114 people were arrested for buying and selling cocaine on the streets and in parks around the financial district so far in 1987. Two undercover agents who were part of the Federal bust state that cocaine is either used or accepted by 90% of the people on Wall Street.
April 23, 1987
Bond fund redemptions accelerate as the prices of bonds continue to plunge. Many are concerned that the falling dollar could revive inflation. Prices of bonds are off as much as 10% since the end of March after rising nearly 100 basis points. Ivan Boesky pleads guilty to conspiracy to lie to the government. Boesky is released without bail and his sentencing is scheduled for August 21. The same day, Guinness PLC takes a $206 million charge partially related to the firm's relationship with Boesky.
April 26, 1987
Wall Street law firm Davis, Polk & Wardwell reveals that it has discovered a cocaine ring operating in its office. One of the principals was tipped off by a custodian with a beeper who offered to help him sell drugs.
April 27, 1987
The Drexel Burnham Lambert probe is now focusing on the Beverly Hills office of Michael Milken, the man behind the company's high-yield bond operation. The government is being helped along by Charles Thurnher, a Drexel executive with intimate knowledge of the company's operations.
April 29, 1987
The dollar and bond prices both plummet after the House of Representatives passes an amendment to take measures to reduce the trade surpluses held by many Asian nations. Many fear that foreign investors, particularly the Japanese, now will not participate in the Treasury's quarterly funding auction. Representative Dick Gephardt is behind the legislation.
May 6, 1987
The Assemblies of God votes to strip the Reverend Jim Bakker of his ordination. Bakker has been embroiled in a sex and money scandal since last year, when he admitted that he had a "sexual encounter" in 1980 and has been blackmailed ever since. Jerry Falwell takes over Bakker's PTL ministry.
May 16, 1987
Speculative companies with little more to offer than interesting stories account for many of the year's best performing stocks. Among them are: AT&E Corp.,a company developing a wristwatch-based paging system; Copytele, a company that makes flat-panel video display products; Carrington Labs, up on speculation that a drug it has can reduce AIDS symptoms. Analyst Evelyn Geller of Blair & Co. says of AT&E, "The thing could trade anywhere -- up to 30 times earnings. So you're talking about $1,000 a share.... You can't put a price on this -- you can't. You don't know where it is going to go. You are buying a dream, a dream that is being realized." Although Geller speaks specifically of AT&E, her comments can be taken as a general indicator of the type of analysis that has caused these price eruptions. AT&E, for its part, no longer trades.
May 17, 1987
An article in the New York Times discusses the many investment banks that are considering cutting personnel due to impending bad times. Rising inflation, a widening insider trading scandal, and rising bond yields are blamed for the pessimistic outlook.
May 19, 1987
Besieged Drexel Burnham Lambert publishes a study it conducted of 23,000 U.S.-based companies with sales of at least $25 million and pointed out that less than 800 qualified for investment grade bond ratings. This is a transparent attempt to shore up public opinion regarding the company's junk bond operations, which have come under scrutiny due to the expanding insider trading investigations.
June 4, 1987
Kidder Peabody pays a record $25.3 million to settle outstanding insider trading charges against the firm. One of the charges settled was that the 80% General Electric-owned brokerage conspired with a small firm led by Ivan Boesky to illegally trade stocks.
June 20, 1987
A 17-year-old high school student named Daniel Stein becomes the youngest broker in the United States. Despite the mounting insider trading charges, young Stein's enthusiasm for Wall Street has not been dampened one bit. With the markets racing ever higher, the public's enthusiasm has not waned either. Four days later, U.S. Attorney Rudolph Guliani tries to expand the number of lawyers assigned to investigate Wall Street.
Lieutenant Colonel Oliver North achieves notoriety as he tells his version of the Iran-Contra story to a spellbound Congressional investigating committee. North's testimony is broadcast on live television and is seen by millions of Americans. A Time magazine poll finds that 60% of Americans sympathized with the Marine, while on 51% found him to be "truthful." The hearings mark the most significant investigation into activities in the Executive branch since the Watergate investigation in 1973.
July 17, 1987
Crude oil prices hit $22.39 per barrel, up from only $16.40 in March and the high $17 range at the beginning of the year. Although prices would fall back to the $20 range in August and stick there until the crash, the 11% increase in crude oil prices from the beginning of the year created a lot of anxiety over inflation. It was inflation anxiety in part that drove yields on the 30-year government bonds higher and higher.
July 22, 1987
Treasury bond markets stand in disarray as government bond yields continue to climb. The 30-year bond touches 8.79%, its highest level since early June and well up from 8.5% on July 14. This jump marks the beginning of a massive bond swoon that will carry the yield as high as 10.22% on August 15.
August 24, 1987
Standard & Poor's reports that 158 companies listed on the New York Stock Exchange have split their stock so far in 1987. Most anticipate the year will be a record for stock splits and Standard & Poor's forecasts a total of 250 by the end of the year. The yield on the 30-year government bond hits 8.98%. The next day, the Dow Jones Industrials hit 2722.4 -- a high that will not be breached until exactly two years later on August 24, 1989.
September 6, 1987
Former professional gambler Jack Keller decides to trade in his poker chips for a seat on the Chicago Board Options Exchange. Keller snagged 25 major poker titles during his stint as a professional gambler, including the winning spot at 1984's "World Series of Poker." Keller states he quit poker "because it had no more to offer me." He cites "regular hours" as one of the principal attractions of the options pit, as he has two sons.
September 11, 1987
Dan Rather walks off the set of the CBS Evening News as a result of a disagreement with management. CBS goes to black for five minutes.
September 29, 1987
The 30-year Treasury hits 9.77%, its highest level since December of 1985. Traders describe a discouraging environment where everyone has Treasuries to sell but no one is buying. The Dow Jones Industrial Average has already fallen to 2590.6, 4.8% below the all-time high hit the month before.
October 1, 1987
Television talk show host Johnny Carson celebrates his 25th anniversary on the air as host of the evergreen Tonight Show.
October 6, 1987
A rally in bond prices since the Sept. 29 fizzles and equity prices begin to feel the downward pull of the long bond's gravity for real. The Dow Jones Industrial Average drops 3.47% to 2548.63 on volume of 175.6 million shares. Waves of computerized selling make it difficult for the market to maintain equilibrium. Many pundits blame portfolio insurance for the accelerated decline. Two days later long bond yields stand at 9.91%.
October 12, 1987
Confidence among the major investment banks begins to deteriorate. Salomon will dismiss 12% of its municipal bond workforce and will re-examine how much space it needs in New York City. The volatile, downward market in bonds has caused profits at the nation's largest investment bank to plummet. Sources say that 800 employees will get the axe. The next day Kidder Peabody announces that it will cut its municipal bond trading operations by 35%.
October 14, 1987
The Dow Jones Industrial Average drops a record 95.46 points to 2412.70. The Dow will tumble another 58 points the next day, taking the venerable index down more than 12% from its all-time high hit on August 25. Pundits blame a widening foreign trade deficit that is fueling the dollar's descent and consequently weighing on bonds. The Japanese yen and the Swiss franc have both risen substantially in the past two months. Computerized trading, possibly a result of portfolio insurance, has led the downward charge.
October 16, 1987
Iranian missiles hit a U.S.-flagged tanker off of the coast of Kuwait. Only five months before, an Iraqi missile hit the U.S. frigate Stark, killing 37 sailors. Fears of heightened tensions as a result of the inevitable U.S. retaliation drive the Dow Jones Industrial Average down 108.35 points to close at 2246.74 on record volume. The yield on the 30-year bond stands at 10.12%. Treasury Secretary James Baker voices concern about plunging stock prices, although he states that they have dropped "from a very high level." Many economists take the dramatic rise in bond yields that have precipitated the tumble in stocks as a sign that the Federal deficit and the balance of trade both need to be addressed.
October 17-18, 1987
The weekend before the crash, millions brood over what is perceived to be a worsening economic picture and become increasingly concerned about tensions in the Middle East. With the risk-free yield on a 30-year bond at 10.12%, only a hair below the long-term annual return from the stock market of 10.60%, many must be wondering why they are in stocks at all. Government officials decry bond yields as "needlessly high" and based on "exaggerated fears of inflation."
October 19, 1987
In the early morning, two U.S. warships shell an Iranian oil platform in the Persian Gulf. Combined with a myriad of economic factors, this helps to set off an unprecedented 508 point downpour in the Dow Jones Industrial Average, leaving it at 1738.74. The 22.6% deluge is the worst one-day beating the index has taken since hostilities were initiated in World War I and causes the 12.8% decline of October 28, 1929 to pale in comparison. The Dow is down 983.66 points since August 25, a 36.1% decline. Chaos reigns on the trading floor as many specialists simply give up, flooded with orders. Volume hits 604.3 million shares, almost twice the prior record of 338.5 million set on October 16. Many economists cast dire predictions, noting the 1929 crash preceded the Great Depression.
Although investors stand about today, white-knuckled and awaiting the next crash, it remains obvious that many of the principal drivers leading to the 1987 crash are not present today. The rise in bond yields, crude oil prices, and the trade deficit combined with the collapse of the dollar and general investor confidence all provided the context for the collapse in stocks. Although valuations were near all-time highs prior to the crash, the valuations themselves did not drive the crash -- it was the exogenous events that muddled economic forecasts and that in the end wrecked havoc with bond prices that provoked the cataclysm. Like a closed room filling with gas from a leaking pipe, it is hard to blame the resulting explosion completely on the poor soul who struck a match.
In 1987, bond yields went from 7.28% to 10.22% in nine months. If a similar move in yields were to begin today, yields on 30-year Treasuries would have to increase to 9.0% by July of 1998. What institutional money manager in late 1987 would think twice about nabbing bonds yielding 10.22%, very close to the historical average return from stocks? Not very many. This swelling in the yield of the average bond was driven by increasing fears of inflation, the falling dollar, the widening trade deficit, and rising oil prices -- all culminating in mid-October when tensions in the Persian Gulf increased after the attack on the U.S. frigate Stark. Volatility in the stock market had been exacerbated for months leading up to October 19th because of all these factors -- the crash was the culmination of all these factors, not some natural disaster or force of God.
Looking over the historical record, the collapse of confidence in Wall Street also appears critical to the collapse in equity prices. With Milken, Boesky, Siegel, and Freeman all were pulled into court, this was a strike at the elite of arbitrage and mergers and acquisitions. The level of corruption and unfair practices that was revealed as routine on Wall Street in the ten months leading up to the crash can compare only with the systematic abuses recorded in the late 1920s that led to the Securities Act of 1933, the Securities Exchange Act of 1934, and formation of the Securities and Exchange Commission. Although it is hard to say with any certainty that this was a crucial pre-existing factor, it seems clear in retrospect that as more saw Wall Street as a rigged game, they were less likely to remain confident in the face of mounting anxiety.
Certainly concrete things like program trading and portfolio insurance also had a role in the sudden, spectacular collapse on October 19th. However, a muddied economic picture that drove bond yields up nearly 3.0% and diminished confidence in Wall Street created a backdrop that made a fall almost inevitable. Perhaps the reason so many can claim they "called" the crash was because even at the time this backdrop of rising yields and increased skepticism was clear. Although over the past few years we have seen short, sharp drops in the market driven by increased uncertainty about the economy or various industries, it seems impossible when one looks at the historical record to come to any other conclusion -- crashes occur after bond yields explode and confidence begins to waver, not before. People who talk of stock market crashes, major drops on the scale of 1987, as if they just happen are ignoring the facts.
Next Article: In Defense of Gen X