The day Joe Cool and the gang melted in market inferno
It was 4am when Bruce McFarlane, a gun stockbroker known on the Melbourne exchange as Joe Cool, learned his world had changed forever.
While most of Australia was sleeping, McFarlane was woken by his bedside telephone. On the other end of the line was Ron Dewhurst, a New York-based trader with McCaughan Dyson & Co, a brash new firm that had been riding the bull run on world markets.
“Something big has happened,’’ Dewhurst told him. “You’d better get into the office.’’
Across Melbourne, other telephones started ringing.
When Greg Burns, a senior partner at rival firm McIntosh Hamson Hoare Govett answered his, he thought it was a joke.
Iain Mason, the head of McIntosh’s New York office, had just told him the Dow Jones was 500 points down, at the time the biggest single day’s loss in the history of the index.
Burns quickly changed and made the short drive from his Canterbury home to the firm’s offices in Melbourne’s Rialto building. By 6am, nearly everyone was there. “Nobody really knew what to do,’’ Burns says.
From the New York Stock Exchange to the trading floors of London, Melbourne, Sydney and Hong Kong, smart brokers could see trouble on the way.
For five years a powerful, joyful bull market had rampaged
across the world but the previous week, the Dow had started to show signs of serious stress. On October 14, it shed 95.46 points. The next day it lost 58.
On Friday, October 16, the last trading day before what would become known at Black Monday, concerted selling stripped a record 108 points off the world’s most influential index. For the men of Wall Street, with their slicked hair and suspendered suits, the portents were dark as trading opened on Monday, October 19.
“I know one of our guys was getting very bearish,’’ says Tom “Black Cat’’ Klinger, the McIntosh managing director whose upstart firm had just floated on the stock exchange.
“There was probably enough of us that expected something.’’ No one was expecting this. Peter Hollick was working for McCaughan on Wall Street and bore witness to the carnage. “It was bedlam,’’ he says. “All the leaders were getting slaughtered. All I can remember is seeing the screens down 508. You wake up the next morning and go ‘what the f..k?’”
Mason says: “It was an extraordinary day. All of a sudden we were 100 down, 200 down, 300 down.’’
He had gone to New York three years earlier to give McIntosh a presence in the world’s financial capital. His days were spent jetting around the country, talking to institutional investors in California, Texas and up and down the east coast. One of his clients was George Soros.
About 3am (AEST), Mason started calling the firm’s key people in Australia — chairman John McIntosh, Klinger, head of trading Ian Holman and Burns, then in charge of institutional business. “Nobody could believe what we were saying: basically, that the market was crashing,’’ Mason says.
It was a time when most shares were still bought and sold on the stockmarket floor instead of by computer. If a part of old Melbourne still deferred to the tried and true methods of established firms such as Potters or JBWere, McIntosh and McCaughan had captured the imagination — and business — of the new, entrepreneurial breed. McIntosh served as the house broker for John Elliott’s business empire and Klinger was personally close to Quintex tycoon Christopher Skase.
On the trading floor, the brokers were as colourful as some of their high-flying clients: Robbie “the admiral’’ Nelson; Wayne “Asparagus’’ Aithorne, so named because he had so many tips; David “The Mouthpiece’’ Lauritz and Tony “The Burger’’ Davis, famed for pilfering other people’s trades.
On October 20, Australia’s Black Tuesday, the leader of the pack was Joe Cool. “I can tell you, he was the man on the Melbourne floor,’’ Hollick says. “People still talk in awe of what he did that day.’’
Nearly 30 years later, the image of Black Tuesday that sticks with McFarlane is the public gallery that overlooked Melbourne’s old stock exchange. On a normal trading day, there might be 30 people in the gallery. On this day there were more than 100 investors crammed behind the glass, gripped by rising panic.
“They were belting on the wall and using hand signals to get the boys on the floor to buy and sell,’’ McFarlane says. “There were three or four open lines back to the office. It was a non-stop negotiating period. You just had to keep your cool.’’
A remarkable feature of Black Tuesday is many people did. When the Australian markets opened, the All Ordinaries Index dropped a record 500 points from the previous day’s closing, wiping out 25 per cent of the market’s total value. Yet, influential brokers had already identified the crash for what it was: an overdue market correction but not a bigger, economic crisis. It was not 1929. In fact, it was a good time to buy if you knew where to look.
Saul Eslake was McIntosh’s 29year-old chief economist. On the day New York crashed, he was on holiday in Europe. He remembers being in Barcelona, seeing footage of panicked floor traders screaming at other on the Spanish television news. “I rang the London office of McIntosh securities and asked them whether I still had a job,’’ he says.
Eslake was assured that he did. By the time he returned to Australia, he was convinced that the 1987 crash was essentially a market event that would not have a broader impact on either the US or Australian economies.
“The crash in 1929 happened more than a year after the economy in the US had peaked,’’ Eslake explains. “Hence it exacerbated the slowdown that was already in train. In 1987 the US economy and the Australian economy were picking up. My argument was this was unlikely to derail it.’’
Although Black Tuesday hammered Robert Holmes a Court and set in train a sequence of events that wiped out highly leveraged entrepreneurs such as Laurie Connell and Skase, it didn’t pitch Australia into recession. That came several years later.
On the morning of October 20, after New York had closed and before the Australian markets had opened, Klinger gathered his senior people and told them they were witnessing a valuation crisis, not an economic crisis. This was the line Burns diligently repeated on television that morning. The same message was relayed to McIntosh’s client base.
“Once that got into the market place, people started to think about things differently,’’ Burns says. “We were the dominant stock broker in the Australian market. People listened to what we said.
“All of the stocks globally had gotten so overheated it was a bit like Paul Keating; the correction we needed to have. The key to it was bringing some sort of calm and logic to the client base.’’
“We were the first international market to open after New York. That puts you in a position where you were vulnerable because the one way they could cover their bums was to sell the Australian market as aggressively as they could. People were following exactly what happened in Australia extremely closely.’’
Information moved comparatively slowly 30 years ago. The world wide web had not yet been invented, there were no dedicated financial channels on Australian television. Only a few brokers carried the early, brick-like mobile phones. “There wasn’t the noise around that there is now,’’ Burns says. “What now takes 30 seconds in those days took a couple of days.’’
This helped to reduce the panic in the local market. In one way however, emerging technology fed the selling frenzy.
Only a few months before the New York crash, the Stock Exchange Automated Trading System had been introduced across Australia’s markets. A problem with the system was it kept pushing sell orders even if there were no buyers. This meant the price of some shares was driven down to levels that no responsible broker would have taken.
“There was definitely a glitch in the system,’’ McFarlane says. “Instead of stocks collapsing by 30 per cent they collapsed 60 per cent because the computer drove down the selling price until it found a buyer. The human factor was taken away.’’
Among the worst hit was BHP, down 41 per cent, and Boral, down 60 per cent.
Not long before the crash, McIntosh’s man in London, Peter Halstead, bought a big line of Western Mining share rights for a powerful client, the Kuwait Investment Office. By the end of October 20, the rights were worthless.
“It was a pretty scary time,’’ Halstead says. “If you think of all the crashes we have had since, they all follow a fairly similar pattern. On the day it is shock/horror. Then it gradually dawns on people. That is when the stress becomes quite evident in the markets.’’
When trading opened, McFarlane had clear instructions. Although some clients needed to offload stock, others were looking for bargains. As McFarlane fed information back to the office, Burns kept the lines open to the firm’s big institutional clients. At McCaughan’s, a similar approach was taken. “We came out of it quite well,’’ Hollick says. “Everyone lost a lot of money of course, but you had to grit your teeth and get on with it. In the long term it proved a good buying opportunity.’’
By the time the markets closed, the wound was ugly but the bleeding had stopped. The All Ords was a few points off where it had started the day. Exhausted brokers emerged from the stock exchange like Charlie Sheen in the film Wall Street, their eyes glazed and ties at half-mast. Joe Cool led them across the road to their regular pub, the Fox and Hounds. On this night, there was no need for anyone to embellish what they’d seen and done.
Stockbroker Bruce ‘Joe Cool’ McFarlane in Melbourne yesterday; traders on the Sydney stock exchange floor on October 20, 1987, below, and The Australian’s front page of that day