There are many excellent films, depending on your taste, about the unraveling of the world because of events too large and disastrous to comprehend - "The Day The Earth Stood Still," "The Day After," "28 Days Later," and so on. Wall Street has its own set of disastrous days that still haunt the street. These are, of course, the Black Days, and they play a large part in this week in financial history. (Missed last week's article? Check out Wall Street History: Panics, Scandals And Rogue Traders (Oh My!).)
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A Black Week
Last week we looked at Black Thursday, a day in which a record number of shares changed hands in panic selling. October 25, 1929, marks Black Friday. This day was a continuation of Black Thursday with prices sliding down on high volume, but Wall Street managed to break the slide when a group of bankers began placing higher than market bids on large stocks.
On Black Monday, however, the slide resumed and took the market down 13%. Black Tuesday saw another attempt to halt the panic selling by the Rockefeller family and other titans like William C. Durant (founder of GM). Despite the capital inflows, the trend was firmly and sharply downwards. The record trading of Black Thursday was shattered on Black Tuesday when 16.4 million shares traded as investors swamped exchanges with sell orders in an attempt to get out of the market with whatever wealth they could salvage.
Although Black Tuesday marks the last of the black days, the market would eventually shed a full 89% from a peak of 381.17 recorded more than a month earlier on September 3, 1929. Although we've tried to equal it recently, this mark stands as the most severe drop in history.
Cracking the Kiwi
On October 27, 1987, Andrew Krieger, a currency trader at Bankers Trust, allegedly sold short more kiwis than the entire money supply of New Zealand. The kiwi dropped 3.7% in a single day and Krieger banked his profits. Krieger was one of the first currency traders to use options effectively and his trade has become legendary in some circles. As the story goes, government officials called his bank during the big short and personally asked him to stop. Krieger later left the bank and went to work for George Soros. (George Soros spent decades as one of the world's elite investors, and even he didn't always come out on top. But when he did, it was spectacular. Check out George Soros: The Philosophy Of An Elite Investor.)
On October 27, 1997, exchange circuit breakers were triggered when the DJIA dropped 554 points. The dip was worldwide and mostly driven by fears of a contagion from a brewing economic crisis in Asia. Traders were angered by the halt because, although 500 looks like a significant number, it represented less than a 5% drop. The NYSE used the circuit breakers twice that day and even closed the exchange early. Fears of a global meltdown proved unfounded as the market began to climb the very next day.
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Credit Card Horrors
Appropriately on October 31, 1978, the Supreme Court began hearing Marquette National Bank vs. First of Omaha Corp. This argument was over which state laws govern loan agreements. The reason this point was so important is that the laws of states, specifically caps on interest rates known as usury laws. Many credit card companies were truly hurting as inflation raced above their state-mandated interest maximums. The ruling in favor of giving precedence to the laws of the state where the loan originated - essentially the state where companies were headquartered - led to many credit card companies relocating to states with friendly laws. Essentially, this decision allowed card issuers to charge higher interest rates by simply relocating their credit issuing arms to states with friendly usury laws. When inflation rates fell, interest rates on credit cards did not.
That's all for this week. Next week we'll celebrate an important birthday, take a look at an interesting death and much more.
For the latest financial news, see Water Cooler Finance: Ghosts Of Economies Past.