Stock Market Crash Of 1987

Categories: Stocks, Econ

Compared with The Big One, the one in '29...and The Second Big One, the one in '08/'09...the '87 Crash was really a...Crash Lite. (See: Junk Bonds.)

The cause of the mini-crash? Yeah, a lot like the '29 crash. Cheap and easy credit. High yield bonds, which notionally promised to pay back returns before common stock, appeared to investors to carry vastly less risk than did equity investments. And, in fact, they carried about the same. Tons of companies had over-borrowed and over-leveraged, and even the professionals and banks got suckered in.

So then an alarm went off. Shareholders sold. Then automatic-sell orders followed (yes, it was the early days of articial intelligence-driven black box investing). And, all of a sudden, there was a much higher supply of shares than there was demand for them.

Air pockets of market drop followed. A number of banks failed (albeit a small number). Fingers were pointed. Greed was the culprit. Fear was the winner.

For a few months. The market quickly recovered, and investors "bet on America again" (great Warren Buffet phrase). So for all you Nervous Nellies who keep betting against America, we hear there's some nice land in Cuba for you. Knock yourself out.

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Finance: What was the Market Crash of 19...1 Views

00:00

and finance Allah shmoop What was the market crash of

00:05

1929 aren't people while there was cheap and easy credit

00:12

and that's what the crash was really about Greed and

00:14

a big bad bear market nobody could have imagined happening

00:18

at the time right Nonprofessional retail investors were allowed to

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borrow some 90% of their investment portfolio to go buy

00:26

new stocks beyond the stocks they already owned So quick

00:29

Math If someone invested $1000 of their own hard earned

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savings and the stock tripled like it did in the

00:34

mid twenties for a lot of easy money yeah well

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then that $1000 would have become $3000 in a very

00:40

short period of time Great but in fact margin rules

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were almost non existent in era it was coming to

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allow investors to have 334 even five times they're invested

00:52

equity as borrowed margin or set another way on an

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initial $1000 invested Many investors were stupidly allowed to buy

00:59

$5000 worth of stocks So really volatile right If things

01:04

go the wrong way it hurts But let's take a

01:06

simpler approach If an investor had been allowed to margin

01:08

there account up to 90% of its value like 50%

01:12

is generally the maximum today that you could borrow Then

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that investor on $1000 of their own invested capital could

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have purchased $1900 worth of that stock that tripled So

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doing the math three times 1900 gets you What is

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that $5700 You pay back the $900 of margin that

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you borrowed against yourself and you'll have netted something like

01:31

$4800 in profits albeit a little bit last because you'll

01:35

have paid interest to the brokerage's that allowed you to

01:37

borrow money in this manner That's a margin interests So

01:40

in the margin case while the $1000 ofyour invested capital

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maybe 4.8 times your money rather of any paltry three

01:46

times your money had you not been leveraged and that's

01:49

way more dough to crow about right And in those

01:51

days well that extra $1800 would have bought you like

01:54

a house So everything was great 90 50 1926 27

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28 when the market mostly generally went up and provided

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easy money for the well heeled invest who could play

02:03

the game and everyone was incentivized to keep the party

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rolling Yes that's a flapper girl Brokerages could charge fat

02:09

commissions on transactions and nobody complained Why Well because the

02:13

markets rise more than eight for those commissions Brokerages could

02:18

also charge big interest rates on borrowed margin because the

02:21

markets rise Masked all those costs and everything ended up

02:25

sweet and beautiful is the prince married the princess and

02:27

they went off to their castle in the clouds Oh

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but wait Then reality struck One day a not so

02:33

kindly old woman offered Snow White the apple she bit

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and the market went down down down Such that panic

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selling ensued and more or less Everyone who was on

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the hook to pay back borrowed money in the form

02:45

of margin had their loans called immediately by the kindly

02:48

smiling brokerages as they more or less lost while mohr

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than everything meaning that not only did the investors lose

02:55

all of their investments but the brokerages who had underwritten

02:58

those loans themselves went bankrupt because the stocks went down

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so far that even the margin limit covenants were violated

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That is on the stock purchased $4000 with the $900

03:09

a margin That $1000 worth of stock ended up being

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worth well $500 or maybe a lot less so even

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if the brokerages sold every share of that original $1000

03:19

investment now worth only $500 While the $500 in original

03:23

value remaining didn't even come close to covering the $900

03:27

in margin the brokerages clients took out in loans in

03:30

the first place So yeah it sounds like the crazy

03:32

maddening crowds at work and the crowds back then were

03:36

mad Everyone was buying on margin and if you weren't

03:39

well then sucker you were just yet another sucker hauling

03:42

bricks or ice or railroad ties for a living Life

03:46

was way easier when you could just phone in a

03:48

stop order in you know play golf all day So

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this was bad and 1/2 and it's part of the

03:53

process of investors panicking They lost trust in the financial

03:56

system of America Many investors then wanted to sleep on

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a pile of their hard earned saved $20 bills so

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they ran to the bank on Mass and asked for

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their money back They wanted to withdraw all their money

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from the banks And guess what The banks didn't have

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the money sitting around because they loaned it out for

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mortgages and car loans and horse loans or over the

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head back then So the frame then was a failed

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stock market Lack of trust in the banking system in

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America no credit then offered Teo Well pretty much anyone

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You can imagine what America would be like if we

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didn't have credit cards alive and well and no adult

04:29

supervision to get this country out of the deep financial

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hole that I dug well along came FDR With the

04:35

New Deal he primed the pump and creating federal guarantees

04:39

for banking deposits upto a little certain amount like FBI

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see limits of 100 grand and change today He also

04:45

enforced vastly stricter regulations on banks brokerages and pretty much

04:49

anything financial such that going forward this country ran a

04:52

dramatically Mohr conservative balance sheets and investment people had to

04:57

disclose well pretty much everything The result Well gradually greed

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came to overtake fear again and in mid thirties or

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so the market slowly trundled northward again It's what I

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look like And then everything gave rise Teo Well this

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really beautiful sight Welcome to America

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