TIME: Almanac 1993/TIME Almanac 1993.iso/time/103089/10308900.019

Text File | 1992-09-23 | 5.5 KB | 106 lines

                                                                                BUSINESS, Page 74

Soothing the Wild Beast


With a little help from the Fed, the market stages a comeback


    During the unrestful weekend after the stock market plunged
190.5 points on Friday the 13th, top U.S. financial officials
knew it was up to them to help avert a panic the following
Monday. At a pivotal two-hour meeting, Treasury Secretary
Nicholas Brady, a former Wall Streeter, huddled with Alan
Greenspan, chairman of the Federal Reserve Board, and Richard
Breeden, head of the Securities and Exchange Commission. Sifting
through the latest market data, the trio concluded that the Dow
Jones industrial average would fall more than 50 points when the
New York Stock Exchange opened Monday, but then would probably
rebound as buyers began to snap up shares at bargain prices.

    That assessment proved unerring. After a steep drop in
early trading, stocks roared back Monday to post an 88.12-point
gain for the day. Then on Thursday, the anniversary of the 1987
crash, the Government reported that the Consumer Price Index
rose a modest 0.2% in September, propelling the market to a
39.55-point gain. The Dow closed at 2689.14 Friday, up a record
119.88 points for the week. In Tokyo the Nikkei index lost
647.33 points Monday but surged more than 1,000 points in the
next four days to finish the week at 35,486.38.

    In part, the comebacks reflected a rare degree of
cooperation between government leaders and securities markets
around the world. Speaking to bankers last Monday, Greenspan
declared that Federal Reserve officials "have kept in productive
contact with our counterparts abroad" and that "coordination
exists at a detailed level" between the Fed, the Treasury, the
SEC and the Commodity Futures Trading Commission, which
regulates futures markets. Wall Streeters immediately dubbed the
cooperating agencies the "Group of Four."

    Greenspan provided far more than just verbal encouragement.
To ensure that Wall Street had sufficient cash to buy stocks
after the Friday the 13th sell-off, the Fed pumped $2 billion
into the banking system Monday. Earlier, E. Gerald Corrigan,
president of the New York Federal Reserve Bank, urged officials
in Japan and West Germany to support the U.S. dollar to help
restore confidence in American markets. "The U.S. had excellent
crisis management this time," said Heiko Thieme, the
Manhattan-based chief strategist for West Germany's Deutsche
Bank.

    Such coordination is sorely needed because Wall Street has
become an ever more volatile place. Deregulation and the growth
of computerized trading have left the stock market vulnerable
to violent swings. "People have to get used to the idea that at
certain points 5% to 10% declines are possible in today's
highly automated markets," says John Phelan, chairman of the New
York Stock Exchange. Yet even some Wall Street insiders have
had misgivings. Warns Edward Yardeni, chief economist for
Prudential-Bache Securities: "A 7% drop in the Dow Jones index
is destabilizing to individual investors, and we need them in
the market, not just the program-trading boys."

    Many Wall Street leaders say Japan provides a model for
managing securities markets to prevent wide swings. During much
of the postwar era, Tokyo officials urged banks and investment
houses to buy stocks whenever markets began to fall. In recent
months the Tokyo exchange's Nikkei index has been relatively
stable, although many Tokyo stocks trade at astronomical prices,
at least by American standards. But money managers in Tokyo
contend that Japanese firms have been largely freed from
government control in the past few years. "When a market has to
fall, it falls, Japan or no Japan," observes Jayme Garcia dos
Santos, a senior vice president of Chase Manhattan in Tokyo. He
said the gain in Tokyo stocks last week reflected the strength
of the Japanese economy rather than any manipulation by
government authorities.

    In New York City the comeback was fueled in part by a new
breed of go-go traders called "tactical asset allocators."
These aggressive money managers, who command some $57 billion
in resources, use computers to shift funds rapidly between
investments ranging from stocks to real estate. When share
prices fell early last Monday, the allocators saw that stocks
had reached bargain levels and bet heavily on a market upturn
by pouring money into S&P 500 futures contracts, which represent
the stocks in the Standard & Poor's 500 index. Their purchases
gave a big lift to the shares that underlie the index.

    While such trading was helpful this time, many Washington
politicians condemn stock-index futures like the S&P 500, which
can be linked to stocks by computer programs, as a destabilizing
force in the marketplace. The critics include Michigan Democrat
John Dingell, chairman of the House Energy and Commerce
Committee, who declared, "I see no reason for stock-index
futures. I see them in the same place in the divine order of
things as cockroaches."

    For now, the Group of Four's calming message has been
enough to avert a crisis. As trading closed last week on Wall
Street, Treasury Secretary Brady asserted that the lesson of the
Friday the 13th plunge was that the more closely the Government
coordinates its regulation of financial markets, "the better off
we're going to be." But if soothing words fail to moderate the
next big swing, the U.S. may be forced to impose tighter
restrictions on its freewheeling markets.