How the 1987 (and 1960) share crashes could be repeated

Black Monday occurred on October 19, 1987. That month the Australian market fell 45 per cent, and the US 22 per cent. The conditions were very similar to a crash in 1960 and they could happen just as quickly today.

Today we remember the October 19, 1987 share crash.

Amazing as it may seem, that US driven share crash was a merely re-run of what had happened in Australia 27 years earlier -- the 1960 crash. When you understand what caused each of these share market crashes you realise that it could occur again.

Indeed, the ingredients may already be in place.

People remember what they were doing when they learned that President Kennedy was shot and when they were told of Lady Diana’s death. I know exactly what I was doing when I learned of those events but even more indelibly printed on my mind are my experiences in the 1987 and 1960 crashes. The fact that both crashes were caused by the same combination of events illustrates that generations forget history at their peril.

Let me start with 1960. I was a fresh-faced 19 year old. In those days the stock exchange was conducted via the call system. The caller would announce each stock and stockbrokers sitting in ornate wooden chairs would shout their bids.

The skilled 'callers' would recognise the calls and book the sales. I was working for the Melbourne Age newspaper sitting at the back of the trading floor writing down the final transactions, working out the rises, falls and yields in my head as the trading proceeded. No computers in those days.

Today losses are usually experienced by people in remote locations, so no one sees the emotion. But in 1960 there were about 30 or 40 men on the exchange floor ‘hearing’ share prices fall by staggering amounts. The sickening roar of panicked selling calls and the shattered faces of the brokers, who were big stock holders themselves, is still in my memory.

Go forward those 27 years and this time the action was in New York overnight.

The Australian market the day before was very apprehensive. In those days I was "Alan Kohler without graphs” and I appeared on the ABC TV news most nights talking about the market. There was an old story, still valid today, that when the ‘tea lady' asked what stocks to buy it was time to sell (The term ‘tea lady’ in this context refers to people with no knowledge of the market). By 1987, ladies or men who served tea in offices were on the way out but on the night of the crash an ABC messenger boy drove me back to my Sydney hotel and asked whether he should buy shares.

That night New York collapsed and I had little sleep as I watched the action in my hotel room. Next day I virtually read the first half of the ABC news as I conveyed the drama to TV viewers. After the news I jokingly blamed the messenger boy -- he was the 1987 version of the traditional tea lady.

But what is also still with me is what happened a few days later. It was close to midnight and I was sleep when the phone rang. It was the entrepreneur Robert Holmes a Court, who had been very close to acquiring control of BHP. But that night he was like the scared stock brokers of 1960 -- almost out of control with emotion as he talked about his losses. His shattered voice was so different from the cool calculating person who had caused so much havoc to BHP and who was then on the BHP board.

Holmes a Court was fortunate. His wife, Janet, was strong and pulled him together. The next time I spoke to him he would not even recognise that the emotional midnight conversation took place. The BHP ambition was a memory and his calculating mind was working out how he would come out of the crash with a sizeable albeit greatly reduced fortune.

In both 1960 and 1987 I saw the effect of losses on people in a way I have never forgotten.

The 1960 crash followed rising markets as a series of companies borrowed vast sums from the public for property and other speculative adventures. Reid Murray and Stanhill were among the leaders. Then in November 1960, Treasurer Harold Holt announced interest would no longer be tax deductible. There were no computers but the panic to get out in Australia was like the trading meltdowns of 1987 when the New York Stock Exchange computers could not cope with the volume of selling orders.

Like 1960, in 1987 there had been a boom that preceded the crash. What triggered the 1987 crash? There is no doubt that computer trading, derivative securities, illiquidity, trade and budget deficits, and overvaluation were big causes.

But the US trigger was a re-run of Harold Holt’s Australian actions. Legislation passed the House Ways and Means Committee on October 15 eliminating the deductibility of interest on debt used for corporate takeovers. Amazing.

Today our market regulation is in far worse shape than 1960 and 1987 with regulators in the US and Australia allowing large market rigging pipes to be connected to ‘trading floors’, forcing institutions to avoid the rigged stock exchange trading to move into what are called "dark pools” to avoid the rigging.

In Australia we are not as bad as the US but our sleepy regulators still connected the pipes as they did in the US. Dangerous derivatives operate on a scale not dreamed of in 1987.

All the ingredients are there for a crash but we will need a trigger. It probably will not be a repeat of the Harold Holt interest rate tax mistake. It could be the US fiscal cliff. It could be events in Europe. More likely it is an event we have not thought of.


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