by John Brooks
If the danger to the market from the consequences of margin selling was much less in 1962 than it had been in 1929, the danger from another quarter—selling by mutual funds—was immeasurably greater. Indeed, many Wall Street professionals now say that at the height of the May excitement the mere thought of the mutual-fund situation was enough to make them shudder. As is well known to the millions of Americans who have bought shares in mutual funds over the past two decades or so, they provide a way for small investors to pool their resources under expert management; the small investor buys shares in a fund, and the fund uses the money to buy stocks and stands ready to redeem the investor’s shares at their current asset value whenever he chooses. In a serious stock-market decline, the reasoning went, small investors would want to get their money out of the stock market and would therefore ask for redemption of their shares; in order to raise the cash necessary to meet the redemption demands, the mutual funds would have to sell some of their stocks; these sales would lead to a further stock-market decline, causing more holders of fund shares to demand redemption—and so on down into a more up-to-date version of the bottomless pit. The investment community’s collective shudder at this possibility was intensified by the fact that the mutual funds’ power to magnify a market decline had never been seriously tested; practically nonexistent in 1929, the funds had built up the staggering total of twenty-three billion dollars in assets by the spring of 1962, and never in the interim had the market declined with anything like its present force. Clearly, if twenty-three billion dollars in assets, or any substantial fraction of that figure, were to be tossed onto the market now, it could generate a crash that would make 1929 seem like a stumble. A thoughtful broker named Charles J. Rolo, who was a book reviewer for the Atlantic until he joined Wall Street’s literary coterie in 1960, has recalled that the threat of a fund-induced downward spiral, combined with general ignorance as to whether or not one was already in progress, was “so terrifying that you didn’t even mention the subject.” As a man whose literary sensibilities had up to then survived the well-known crassness of economic life, Rolo was perhaps a good witness on other aspects of the downtown mood at dusk on May 28th. “There was an air of unreality,” he said later. “No one, as far as I knew, had the slightest idea where the bottom would be. The closing Dow-Jones average that day was down almost thirty-five points, to about five hundred and seventy-seven. It’s now considered elegant in Wall Street to deny it, but many leading people were talking about a bottom of four hundred—which would, of course, have been a disaster. One heard the words ‘four hundred’ uttered again and again, although if you ask people now, they tend to tell you they said ‘five hundred.’ And along with the apprehensions there was a profound feeling of depression of a very personal sort among brokers. We knew that our customers—by no means all of them rich—had suffered large losses as a result of our actions. Say what you will, it’s extremely disagreeable to lose other people’s money. Remember that this happened at the end of about twelve years of generally rising stock prices. After more than a decade of more or less constant profits to yourself and your customers, you get to think you’re pretty good. You’re on top of it. You can make money, and that’s that. This break exposed a weakness. It subjected one to a certain loss of self-confidence, from which one was not likely to recover quickly.” The whole thing was enough, apparently, to make a broker wish that he were in a position to adhere to de la Vega’s cardinal rule: “Never give anyone the advice to buy or sell shares, because, where perspicacity is weakened, the most benevolent piece of advice can turn out badly.”
IT was on Tuesday morning that the dimensions of Monday’s debacle became evident. It had by now been calculated that the paper loss in value of all stocks listed on the Exchange amounted to $20,800,000,000. This figure was an all-time record; even on October 28, 1929, the loss had been a mere $9,600,000,000, the key to the apparent inconsistency being the fact that the total value of the stocks listed on the Exchange was far smaller in 1929 than in 1962. The new record also represented a significant slice of our national income—specifically, almost four per cent. In effect, the United States had lost something like two weeks’ worth of products and pay in one day. And, of course, there were repercussions abroad. In Europe, where reactions to Wall Street are delayed a day by the time difference, Tuesday was the day of crisis; by nine o’clock that morning in New York, which was toward the end of the trading day in Europe, almost all the leading European exchanges were experiencing wild selling, with no apparent cause other than Wall Street’s crash. The loss in Milan was the worst in eighteen months. That in Brussels was the worst since 1946, when the Bourse there reopened after the war. That in London was the worst in at least twenty-seven years. In Zurich, there had been a sickening thirty-per-cent selloff earlier in the day, but some of the losses were now being cut as bargain hunters came into the market. And another sort of backlash—less direct, but undoubtedly more serious in human terms—was being felt in some of the poorer countries of the world. For example, the price of copper for July delivery dropped on the New York commodity market by forty-four one-hundredths of a cent per pound. Insignificant as such a loss may sound, it was a vital matter to a small country heavily dependent on its copper exports. In his recent book “The Great Ascent,” Robert L. Heilbroner had cited an estimate that for every cent by which copper prices drop on the New York market the Chilean treasury lost four million dollars; by that standard, Chile’s potential loss on copper alone was $1,760,000.
Yet perhaps worse than the knowledge of what had happened was the fear of what might happen now. The Times began a queasy lead editorial with the statement that “something resembling an earthquake hit the stock market yesterday,” and then took almost half a column to marshal its forces for the reasonably ringing affirmation “Irrespective of the ups and downs of the stock market, we are and will remain the masters of our economic fate.” The Dow-Jones news ticker, after opening up shop at nine o’clock with its customary cheery “Good morning,” lapsed almost immediately into disturbing reports of the market news from abroad, and by 9:45, with the Exchange’s opening still a quarter of an hour away, was asking itself the jittery question “When will the dumping of stocks let up?” Not just yet, it concluded; all the signs seemed to indicate that the selling pressure was “far from satisfied.” Throughout the financial world, ugly rumors were circulating about the imminent failure of various securities firms, increasing the aura of gloom. (“The expectation of an event creates a much deeper impression … than the event itself.”—de la Vega.) The fact that most of these rumors later proved false was no help at the time. Word of the crisis had spread overnight to every town in the land, and the stock market had become the national preoccupation. In brokerage offices, the switchboards were jammed with incoming calls, and the customers’ areas with walk-ins and, in many cases, television crews. As for the Stock Exchange itself, everyone who worked on the floor had got there early, to batten down against the expected storm, and additional hands had been recruited from desk jobs on the upper floors of 11 Wall to help sort out the mountains of orders. The visitors’ gallery was so crowded by opening time that the usual guided tours had to be suspended for the day. One group that squeezed its way onto the gallery that morning was the eighth-grade class of Corpus Christi Parochial School, of West 121st Street; the class’s teacher, Sister Aquin, explained to a reporter that the children had prepared for their visit over the previous two weeks by making hypothetical stock-market investments with an imaginary ten thousand dollars each. “They lost all their money,” said Sister Aquin.
The Exchange’s opening was followed by the blackest ninety minutes in the memory of many veteran dealers, including some survivors of 1929. In the first few minutes, comparatively few stocks were traded, but this inactivity did not reflect calm deliberation; on the contrary, it reflected selling pressure so great that it momentarily paralyzed action. In the interests of minimizing sudden jumps in stock prices, the Exchange requir
es that one of its floor officials must personally grant his permission before any stock can change hands at a price differing from that of the previous sale by one point or more for a stock priced under twenty dollars, or by two points or more for a stock priced above twenty dollars. Now sellers were so plentiful and buyers so scarce that hundreds of stocks would have to open at price changes as great as that or greater, and therefore no trading in them was possible until a floor official could be found in the shouting mob. In the case of some of the key issues, like I.B.M., the disparity between sellers and buyers was so wide that trading in them was impossible even with the permission of an official, and there was nothing to do but wait until the prospect of getting a bargain price lured enough buyers into the market. The Dow-Jones broad tape, stuttering out random prices and fragments of information as if it were in a state of shock, reported at 11:30 that “at least seven” Big Board stocks had still not opened; actually, when the dust had cleared it appeared that the true figure had been much larger than that. Meanwhile, the Dow-Jones average lost 11.09 more points in the first hour, Monday’s loss in stock values had been increased by several billion dollars, and the panic was in full cry.
And along with panic came near chaos. Whatever else may be said about Tuesday, May 29th, it will be long remembered as the day when there was something very close to a complete breakdown of the reticulated, automated, mind-boggling complex of technical facilities that made nationwide stock-trading possible in a huge country where nearly one out of six adults was a stockholder. Many orders were executed at prices far different from the ones agreed to by the customers placing the orders; many others were lost in transmission, or in the snow of scrap paper that covered the Exchange floor, and were never executed at all. Sometimes brokerage firms were prevented from executing orders by simple inability to get in touch with their floor men. As the day progressed, Monday’s heavy-traffic records were not only broken but made to seem paltry; as one index, Tuesday’s closing-time delay in the Exchange tape was two hours and twenty-three minutes, compared to Monday’s hour and nine minutes. By a heaven-sent stroke of prescience, Merrill Lynch, which handled over thirteen per cent of all public trading on the Exchange, had just installed a new 7074 computer—the device that can copy the Telephone Directory in three minutes—and, with its help, managed to keep its accounts fairly straight. Another new Merrill Lynch installation—an automatic teletype switching system that occupied almost half a city block and was intended to expedite communication between the firm’s various offices—also rose to the occasion, though it got so hot that it could not be touched. Other firms were less fortunate, and in a number of them confusion gained the upper hand so thoroughly that some brokers, tired of trying in vain to get the latest quotations on stocks or to reach their partners on the Exchange floor, are said to have simply thrown up their hands and gone out for a drink. Such unprofessional behavior may have saved their customers a great deal of money.
But the crowning irony of the day was surely supplied by the situation of the tape during the lunch hour. Just before noon, stocks reached their lowest levels—down twenty-three points on the Dow-Jones average. (At its nadir, the average reached 553.75—a safe distance above the 500 that the experts now claim was their estimate of the absolute bottom.) Then they abruptly began an extraordinarily vigorous recovery. At 12:45, by which time the recovery had become a mad scramble to buy, the tape was fifty-six minutes late; therefore, apart from fleeting intimations supplied by a few “flash” prices, the ticker was engaged in informing the stock-market community of a selling panic at a moment when what was actually in progress was a buying panic.
THE great turnaround late in the morning took place in a manner that would have appealed to de la Vega’s romantic nature—suddenly and rather melodramatically. The key stock involved was American Telephone & Telegraph, which, just as on the previous day, was being universally watched and was unmistakably influencing the whole market. The key man, by the nature of his job, was George M. L. La Branche, Jr., senior partner in La Branche and Wood & Co., the firm that was acting as floor specialist in Telephone. (Floor specialists are broker-dealers who are responsible for maintaining orderly markets in the particular stocks with which they are charged. In the course of meeting their responsibilities, they often have the curious duty of taking risks with their own money against their own better judgment. Various authorities, seeking to reduce the element of human fallibility in the market, have lately been trying to figure out a way to replace the specialists with machines, but so far without success. One big stumbling block seems to be the question: If the mechanical specialists should lose their shirts, who would pay their losses?) La Branche, at sixty-four, was a short, sharp-featured, dapper, peppery man who was fond of sporting one of the Exchange floor’s comparatively few Phi Beta Kappa keys; he had been a specialist since 1924, and his firm had been the specialist in Telephone since late in 1929. His characteristic habitat—indeed, the spot where he spent some five and a half hours almost every weekday of his life—was immediately in front of Post 15, in the part of the Exchange that is not readily visible from the visitors’ gallery and is commonly called the Garage; there, feet planted firmly apart to fend off any sudden surges of would-be buyers or sellers, he customarily stood with pencil poised in a thoughtful way over an unprepossessing loose-leaf ledger, in which he kept a record of all outstanding orders to buy and sell Telephone stock at various price levels. Not surprisingly, the ledger was known as the Telephone book. La Branche had, of course, been at the center of the excitement all day Monday, when Telephone was leading the market downward. As specialist, he had been rolling with the punch like a fighter—or to adopt his own more picturesque metaphor, bobbing like a cork on ocean combers. “Telephone is kind of like the sea,” La Branche said later. “Generally, it is calm and kindly. Then all of a sudden a great wind comes and whips up a giant wave. The wave sweeps over and deluges everybody; then it sucks back again. You have to give with it. You can’t fight it, any more than King Canute could.” On Tuesday morning, after Monday’s drenching eleven-point drop, the great wave was still rolling; the sheer clerical task of sorting and matching the orders that had come in overnight—not to mention finding a Stock Exchange official and obtaining his permission—took so long that the first trade in Telephone could not be made until almost an hour after the Exchange’s opening. When Telephone did enter the lists, at one minute before eleven, its price was 98½—down 2⅛ from Monday’s closing. Over the next three-quarters of an hour or so, while the financial world watched it the way a sea captain might watch the barometer in a hurricane, Telephone fluctuated between 99, which it reached on momentary minor rallies, and 98⅛, which proved to be its bottom. It touched the lower figure on three separate occasions, with rallies between—a fact that La Branche has spoken of as if it had a magical or mystical significance. And perhaps it had; at any rate, after the third dip buyers of Telephone began to turn up at Post 15, sparse and timid at first, then more numerous and aggressive. At 11:45, the stock sold at 98¾; a few minutes later, at 99; at 11:50, at 99⅜; and finally, at 11:55, it sold at 100.
Many commentators have expressed the opinion that that first sale of Telephone at 100 marked the exact point at which the whole market changed direction. Since Telephone is among the stocks on which the ticker gives flashes during periods of tape delay, the financial community learned of the transaction almost immediately, and at a time when everything else it was hearing was very bad news indeed; the theory goes that the hard fact of Telephone’s recovery of almost two points worked together with a purely fortuitous circumstance—the psychological impact of the good, round number 100—to tip the scales. La Branche, while agreeing that the rise of Telephone did a lot to bring about the general upturn, differs as to precisely which transaction was the crucial one. To him, the first sale at 100 was insufficient proof of lasting recovery, because it involved only a small number of shares (a hundred, as far as he remembers). He knew that in his book he ha
d orders to sell almost twenty thousand shares of Telephone at 100. If the demand for shares at that price were to run out before this two-million-dollar supply was exhausted, then the price of Telephone would drop again, possibly going as low as 98⅛ for a fourth time. And a man like La Branche, given to thinking in nautical terms, may have associated a certain finality with the notion of going down for a fourth time.
It did not happen. Several small transactions at 100 were made in rapid succession, followed by several more, involving larger volume. Altogether, about half the supply of the stock at that price was gone when John J. Cranley, floor partner of Dreyfus & Co., moved unobtrusively into the crowd at Post 15 and bid 100 for ten thousand shares of Telephone—just enough to clear out the supply and thus pave the way for a further rise. Cranley did not say whether he was bidding on behalf of his firm, one of its customers, or the Dreyfus Fund, a mutual fund that Dreyfus & Co. managed through one of its subsidiaries; the size of the order suggests that the principal was the Dreyfus Fund. In any case, La Branche needed only to say “Sold,” and as soon as the two men had made notations of it, the transaction was completed. Where-upon Telephone could no longer be bought for 100.