Dow Dives 190 Points; ’87 Crash Recalled : Stock market: The failure of the United Airlines buyout sent the stock market into a sudden plunge, the biggest crash since a drop of more than 500 points in 1987.
A failing airline buyout knocked the stock market off its record-setting pace Friday with a sudden dive that erased more than 190 points from the Dow Jones industrial average and conjured up memories of the 1987 crash.
“It’s total emotional and psychological chaos,” said Eugene Peroni, an analyst with Janney Montgomery Scott in Philadelphia. “People are dumping everything . . . a great deal of money is being lost.”
Nearly $200 billion was wiped out from the paper value of stocks as more than 250 million shares changed hands.
Over 100 million shares were traded in the last hour after an announcement that the employee-led, highly leveraged buyout of United Airlines parent UAL Corp. had come unglued.
The speed of the decline spooked traders in a startling reminder of the worst stock panic ever almost two years ago on Oct. 19. Brokers said computerized selling strategies, which can flood the market with stocks, accelerated the drop--the same scenario that preceded the 1987 crash.
The widely watched Dow Jones average of 30 industrial stocks plunged 190.58 points to 2,569.26, by far the biggest point drop since the crash of 1987. The Dow fell 6.91%, the 12th-worst percentage drop ever. Other stock indices also fell sharply.
“Nobody believes in witchcraft, but we’re seeing the same type of phenomenon that propelled the market down two years ago,” said Washington economist Michael Evans.
Dazed financial workers poured out of their offices into the canyons of Wall Street, assessing the damage and marking comparisons to 1987.
The stock market break triggered panicky trading in the currency markets and sent the dollar’s value sharply lower.
Bond prices rose dramatically as investors sought a safe haven for their money in the credit markets. Interest rates, which decline when bond prices rise, dropped to their lowest levels since April, 1987.
Treasury Secretary Nicholas F. Brady said in a statement that the decline “should be viewed in the context of a 591-point rise since Jan. 1, 1989.” He noted that Friday’s activity “doesn’t signal any fundamental change in the condition of economy. The economy remains well balanced and the outlook is for continued moderate growth.”
The Dow industrials had advanced to five new record highs in October alone.
Securities and Exchange Commission Chairman Richard C. Breeden, who took office last week, had no comment. The Federal Reserve also had no comment.
President Bush, leaving the White House for a weekend at Camp David, ignored shouted questions from reporters about the market plunge.
New York Stock Exchange President Richard A. Grasso noted that safeguards put in place after the 1987 debacle helped soften the blow of Friday’s drop.
“All of the safeguards and the coordination procedures that we developed in the last two years were utilized today and worked exceptionally well,” Grasso said.
Brokers said the drop was sparked primarily by news that a labor-management group had failed to secure financing for the proposed $6.75-billion takeover of UAL. The announcement heightened concerns that the takeover fever supporting stock prices may be over.
UAL is a component of the Dow Transportation index and is one of the biggest airlines in the country. The UAL deal would have relied largely on the sale of high-risk “junk bond” debt securities, commonly used to finance takeovers known as leveraged buyouts.
“The UAL announcement means the problems in the junk-bond market are spreading,” said Hugh Johnson, senior vice president at First Albany Corp.
“It means that it’s going to be difficult--even impossible--to finance acquisitions and leveraged buyouts,” he said. “Leveraged buyouts have been the principal drive to stock prices this year . . . and if that prop gets removed, stocks would have to go down.”
Problems were exacerbated in the junk-bond market last month when Canadian retailing giant Campeau Corp. announced that it was unable to make payments on some of the bonds it issued in its mega-buyouts of Allied Stores Corp. and Federated Department Stores Inc.
Investor appetite for the high-risk issues has declined just as a heavy supply of new junk is scheduled to be sold before the end of the year.
The UAL news “seemed to trigger a selling panic,” said Hildegarde Zagorski, an analyst at Prudential-Bache Securities Inc.
Others said news from the Labor Department that wholesale prices rose sharply in September suggested that inflation was heating up again, reducing the likelihood that the Federal Reserve would act to ease interest rates.
The precipitous decline in the Dow reverberated in Canada, where Toronto stock prices suffered their worst decline in two years.
The fallout could continue, beginning late Sunday, U.S. time, when foreign markets reopen, beginning with New Zealand and Australia, followed by Japan, Hong Kong and European markets.
The U.S. market had been gradually retreating throughout the day on Friday, with the Dow off about 23 points at 2 p.m. EDT. But an overwhelming tailspin pushed the key index down an additional 100 points in little more than an hour.
The drop was eerily reminiscent of a 108-point Dow drop on a Friday exactly two years ago, which proved to be a harbinger of the century’s second stock market disaster. When trading resumed the following Monday--Oct. 19, 1987--the Dow plunged 508 points.
Zagorski said she did not expect the events of 1987 to be repeated. “It’s not going to go down too much further from these levels,” she said shortly before the market closed.
Johnson called the day’s events “a minor financial market panic that was not inspired by the economy falling apart or the outlook for the economy darkening.”
But Janney Montgomery’s Peroni noted that such a severe drop on a Friday is cause for particular concern. “It’s bad because it means that there’s going to be two days for fear to fester” before investors have a chance to trade again. After the 1987 crash, regulators imposed what they called “circuit breakers” on the Dow Jones average that automatically would limit trading if the index rose or fell 50 points. This restriction was later expanded to 250 points as part of a coordinated program with other stock and futures markets.
But confusion over the rule was rampant. “Nobody seems to be clear on where the circuit-breaker is,” Peroni said. “If there is one, it certainly is failing.”
In Chicago, similar circuit breakers went into effect for the first time. The Mercantile Exchange said trading of stock-index futures was halted twice, first when the contract for December delivery of stocks tracked by the Standard & Poor’s 500 index fell 12 points, the limit under that circuit-breaker system.
Trading resumed after the required 30-minute halt.
