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Brian Tora: 25 years on from Black Monday

Twenty five years ago today I was in my garden at home, chainsaw in hand, clearing up the mess left behind by the storm that swept through southern England. The 18thOctober was a Sunday and the hurricane force winds had left their mark the previous Thursday night, continuing into the small hours of Friday. But those of us working in the City remember that weekend for entirely different reasons.

I had stayed in London overnight on Thursday 15 October, 1987, in order to make an early start on the Friday. Well fed and watered, I slept throughout the storm that so devastated south east England, waking to find no electricity in the house in which I was staying.

Hurrying into the City, with strong winds swirling through the canyons between the office blocks, the damage was evident.

Feeling as if I was in an early scene from The Day of the Triffids, there were so few people about, I arrived at my office to discover, unsurprisingly, that my early morning meeting had been cancelled.

Very few people made it into the City that Friday morning, so few, in fact, that the Stock Exchange did not open for trading. Our morning meeting comprised a lone analyst reciting the St Crispin’s Day speech from Henry V – “We few, we happy few…”

Closing the Stock Exchange was not, as it turned out, a good move. Wall Street had fallen sharply on Thursday – a decline that turned into a rout on the Friday. When we reopened for business on Monday 19 October, two difficult days for world equity markets were compressed into a single apocalyptic morning. Red trading screens signalled a one way market, with shares losing a quarter of their value.

At that time I worked for James Capel, one of the most powerful firms on the London market and part of the mighty HSBC.

But if we thought we had it bad in the Square Mile, then you should have seen the chaos out in Hong Kong.

We closed for a single day because insufficient participants in the market made it to their desks to allow proper trading to take place. They closed for a week because it became impossible to reconcile the physical and futures positions in stocks.

An important lesson was learned by market participants in those dark days. It led to the introduction of circuit breakers to allow the unwinding of positions that had a derivatives content. It didn’t prevent market falls, but it did at least slow them up.

But it also encouraged finance ministers to loosen the reins of monetary policy in an effort to head off some form of financial crisis that it was believed the market collapse presaged.

This resulted in a property bubble developing in this country – one that was given added impetus by the then Chancellor, Nigel Lawson, announcing the ending of joint interest relief on mortgages sufficiently in advance to encourage a dash to buy from cohabiting couples.

It is easy to be wise after the event but this looked set to end in tears from the very outset. Cue the recession of the early 1990s, though by and large shares held up well.

Enough of the history lesson.

Suffice it to say that the more governments interfere, the greater the likelihood of unintended consequences coming into play. I still marvel at the apparent lack of distortion generated by the swathes of quantitative easing being ushered in by governments concerned at their re-electability. Reflecting on the events of 25 years ago, I recognise that markets do not always get it right.

With the benefit of hindsight, the great crash of ’87 appears to amount to little more than the coincidence of an overhyped market, itself a consequence of de-regulation, and the growing use of derivative instruments in the hands of those who had little real understanding of how they worked. It felt grim at the time but life went on.

Presently the market is signalling concern over how policymakers might behave and uncertainty over outcomes. In time that will change too.

Brian Tora is an associate with investment managers JM Finn & Co

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