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Wave of Selling Sweeps Across International Borders

By Peter Behr and David A. Vise
Washington Post Staff Writers
Tuesday, October 20, 1987; Page A01

The stock market was devastated by the worst one-day collapse in history yesterday in a pandemonium of panic selling that shattered all records and swamped stock exchanges around the country and overseas.

The best-known market barometer -- the Dow Jones average of 30 industrial stocks -- plummeted 508 points, five times the previous record set last Friday. The Dow closed at 1738, dropping 22.6 percent, or nearly double the 12.8 percent plunge of Oct. 29, 1929, the crash that began the Great Depression.

More than 604 million shares were traded on the New York Stock Exchange and 239 million on the American and over-the-counter markets, shattering previous records.

Investors lost more than $500 billion in stock market value, according to Wilshire Associates of Los Angeles, which publishes an index of some 6,000 publicly traded stocks.

And the losses were mirrored on markets around the world in a sobering demonstration of the electronic and psychological links that now tie the world's investors together.

John Phelan, chairman of the New York Stock Exchange, called the collapse a near "meltdown" caused by a "confluence" of factors: the market's inevitable turnaround after its long climb, heightened anxieties over rising interest rates and future inflation, and the impact of computerized trading maneuvers.

A remark by Securities and Exchange Commission Chairman David S. Ruder, discussing the possibility of a government-imposed halt in trading, added to the binge.

Other observers said fear was the overriding factor yesterday. "This is a financial panic," said Allen Sinai, chief economist with Shearson Lehman Brothers Inc.

"It is the classical mob psychology that takes over," said Burton Siegel, chief investment officer of Drexel Burnham Lambert Inc. "It feeds on itself. What you are dealing with here is a complete change in perception and psychology."

"This is chaos," said Neil Call, executive vice president of D.F. King, an investment services firm in New York. "Every market in the world is in panic or close to it."

Other indexes raced down with the Dow. The New York Stock Exchange composite index, for example, fell 30.51 to 128.62. At the American Stock Exchange, the market value index was down 41.05 at 282.50.

Unlike the 1929 crash, which wiped out millions of investors whose stocks had been bought largely on credit, yesterday's free-fall still preserved billions of dollars in profits for investors who have ridden with the market on its steady climb since 1982, when the Dow was below 800.

At day's end, investors seeking a refuge from the market's chaos were pouring money into the bond market, bidding the price of 30-year Treasury bonds up 1 5/8, or $16.24 for every $1,000 of face value.

Not everyone was selling yesterday. Buyers included speculators looking for bargains and specialists on the floors of major exchanges who were obliged by regulations to keep offering to purchase shares if no other buyers came forward.

The nation's biggest public pension fund entered the market, buying aggressively. "We have a great deal of confidence in the economy and we are long-term investors," said Jed Maxwell, investment officer of the California Public Employee Retirement System.

But the optimists were blotted out yesterday in the stampede by investors of every description to dump their stocks.

Mutual funds reported record redemptions by panicked customers -- primarily small investors -- demanding cash. Complex computerized trading programs dumped huge blocks of stock as the price collapse proceeded. Maurice Mann, chairman of the Pacific Stock Exchange, called it an interaction of "inhuman machines and inexperienced humans."

The market plunged in two distinct waves. The first came under the weight of an unprecedented number of sell orders that confronted traders when the markets opened. The second was accelerated by news reports of the remark by Ruder on the possibility of a trading halt.

While the Dow had fallen 200 points by 11:00 a.m., the market staged a recovery that narrowed the loss to 128 points by noon. By 1:00 p.m., it had widened to 185 points.

Following a speech in Washington, Ruder told reporters, "There is some point, and I don't know what point that is, that I would be interested in talking to the New York Stock Exchange about a temporary, very temporary, halt in trading."

The Reuters news service soon moved a story on its financial wire stating that federal officials were "discussing" a brief trading halt.

The mention of that possibility, even though denied later by the SEC, spooked investors who feared that a trading halt would prevent them from selling. The market dropped about 100 points in the hour after Ruder's remarks and continued to decline for most of the rest of the day.

More than 200 points of the Dow's plunge came in the last hour, following the last week's pattern of panic selling.

According to numerous traders and institutional money managers, one of the key factors that accelerated the market's fall was trading in specialized investments called stock index options and futures.

Such trading, utilized for special purposes by major investors, was used in connection yesterday with sophisticated computerized financial maneuvering, including "program trading" and "portfolio insurance."

Such trading can magnify the direction of the stock market, sending it further down or up, as major investors trade stocks in connection with futures and options. For example, when the level of stock prices differed from the level of stock index futures trading in Chicago yesterday, sophisticated investors locked in profits by selling stocks and buying the futures, a pattern that further depressed the stock market, traders said.

The SEC's Ruder, however, said the evidence of program trading isn't clear.

Traders said one way to eliminate the increased volatility that is a function of the options and futures trading would be to put daily limits on the movement of stock index futures contracts. Such limits exist on many other commodity contracts.

While stock index futures are supposed to enable investors to minimize their risk in the stock market by locking in a future price for their shares, yesterday's drop in stock prices made it increasingly clear that the instruments often increase overall market volatility, traders said.

Financial experts said the casualties are likely to include many small and medium-sized investment firms, especially those that have purchased stocks largely with borrowed money. Small arbitrage houses that speculate in stocks of companies involved in takeovers may find they lack adequate capital to stay in business. Their problems were exacerbated yesterday by heavy borrowing, which forced them to sell stocks at fire-sale prices to meet "margin calls" and repay their loans.

There also was concern about the impact on futures and commodities firms in Chicago, the center of such trading, but the Commodity Futures Trading Commission said it knew of no firms in trouble.

Yesterday afternoon, President Reagan sought to calm the markets, observing that the U.S. economy is fundamentally sound. "Leading indicators are sending a message: steady as she goes," Reagan said at a swearing-in ceremony for new Commerce Secretary C. William Verity.

Robert Ortner, the undersecretary of Commerce for economic affairs, told reporters, "This may be a short, sharp correction in the midst of an expansion or it may be the first signal of the next recession. We never claimed here that the business cycle has been abolished."

He added, "I am willing to wager that this is nothing like 1929."

But apart from their statements of confidence, governmental leaders in the world's economic capitals could only stand by and watch the market work its will.

Treasury Secretary James A. Baker III proceeded yesterday with a scheduled trip to Frankfurt, West Germany, for meetings with key financial officials there. Baker and his counterparts pledged close cooperation in stabilizing exchange rates -- a chief source of stock market anxiety over the past week. He flew on to Stockholm, but decided last night to return at once to Washington.

A conflict between Baker and the West Germans over economic growth and interest rates had been one of the triggers of the stock market slide that began last week.

For weeks, analysts and investors had been watching the market's long upward climb, wondering with increasing anxiety when the turn would come.

Last week, the Commerce Department reported that the U.S. trade deficit had totaled $15.7 billion in August -- evidence that further painful policy decisions involving interest rate increases or a decline in the value of the dollar against other major currencies were in store.

Last week also produced further evidence of a policy deadlock between the White House and the Democratic leadership in Congress over reducing the federal budget deficit. The United States has been forced to rely increasingly on foreign investors to finance the budget deficit, and there are fears that U.S. interest rates would skyrocket if the foreign lenders lost confidence and abandoned the American market.

These fears forced the market into several severe declines last week, including a 108-point drop in the Dow average on Friday.

On Saturday, Baker singled out the West German government for criticism, complaining about its decision to raise interest rates -- a move that would force the United States either to follow suit or to lower the value of the dollar in comparison to the German currency.

Analysts said these signs of policy conflict among the administration and Congress and the West Germans was instrumental in pulling the last props from under the faltering confidence in the stock market.

With the drop in the final hour of trading yesterday exceeding 200 points, there were concerns about what Tuesday's market activity would be like.

However, when fear grips financial markets as it did on Monday, the future course of events is unpredictable. Some investors may see bargains in the new, lower level of stock prices and be eager to buy; others may see the start of a complete financial panic in the United States that could lead to still-lower levels.

A bell will ring to open trading on the NYSE this morning. But where things will go after that is uncertain.

"Nobody rings a bell and says this is bottom," Drexel's Siegel said.

© Copyright 1987 The Washington Post Company

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