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Stock Market Studies Are Booming Since Crash

December 08, 1987|From the Washington Post

WASHINGTON — Investment banker Nicholas F. Brady is finding it tough to stay dry these days.

Brady publicly admits that he has a problem that has led to this condition: determining the causes of October's stock market collapse and making recommendations to President Reagan for reforms.

"It is sort of like lying down in the river and trying to figure out what makes it go up and down, why it floods and why it gets low," Brady said last week. "You have to stare at it for awhile before you come to a conclusion."

But the former New Jersey senator promised that the presidential commission he is heading will weigh in soon with its conclusions, meeting the 60-day time period specified by the President through a report to be released early in January.

Brady also predicted that the report, which has the potential to spur significant changes in the regulation of the nation's stock, options and futures markets, will not be harmed by the relatively short time allotted for study. "I think you get to the point where you know 88% of the story and the next 12% doesn't change your conclusions," the Dillon Read investment banker said.

Brady has plenty of company in the "study the stock market collapse" business, with more than a half dozen major probes under way. At least four preliminary or final studies--those conducted by the New York Stock Exchange, the Chicago Mercantile Exchange, the Commodity Futures Trading Commission and a group of pension fund managers--are scheduled to be completed early enough to influence the Brady commission, before it submits its final report to the President.

Gathering Market Data

"We have created a new growth industry in Washington with all of these studies," Drexel Burnham Lambert Vice Chairman James Balog joked last week.

Because it is an independent study for the President, rather than an inquiry sponsored by a regulatory agency, a stock exchange or group of investors, the Brady study is viewed by some congressional staff members as the most objective look at what caused Black Monday's 508-point plunge in the Dow Jones industrial index. Staff members of key congressional committees said last week that the elected officials they serve are withholding proposals for reform, including possible legislation, until the Brady study is released.

Brady, four other commission members appointed by the President, and about two dozen staff members operating out of the Federal Reserve Bank in New York are gathering data about the market crash through questionnaires mailed to large, institutional investors; interviews with market professionals by Brady staff members; interviews by Brady and the other commission members, and trading records provided by the major exchanges and regulators.

"I suppose we have had somewhere between 30 and 40 hours of testimony," said Robert Kirby, chairman of Los Angeles-based Capital Guardian Trust Co. and one of the five commission members appointed by the President. "We all get locked in the Federal Reserve Bank from 8:30 in the morning until 7 p.m. at night, and you can't even phone your wife to find out how things are going at home.

"I think we are going to be wise enough (that) if we come up with any suggestions at all they are going to be ones that don't try to change the world overnight," Kirby said. "I think we are increasingly understanding what happened. The hard part is to determine how close you came to risks that didn't occur. If you came within an inch of hitting a train track while a Super Chief was coming thorough, you don't want to do that again even though you didn't get hit."

Securities and Exchange Commission Chairman David S. Ruder said last week that preliminary analysis of the market collapse shows a need for an emergency system to provide additional capital to brokerage and specialists firms during a financial crisis. While specialist firms on the floor of the New York Stock Exchange are obligated to stabilize trading by buying when the public is selling and selling when the public is buying, the selling pressure was so great on Black Monday, and the days that followed, that numerous trading halts and sharp declines in prices occurred. Ruder said many of the specialist firms simply ran out of capital.

In addition to studying the capital adequacy problem, Ruder said other issues to be examined in the SEC study are the role of stock index futures trading, the orderliness of trading on the major exchanges, the financial soundness of investment firms, operational capacity of the markets, the global element of the collapse, stock-price volatility, the role of takeover stocks and brokerage firm treatment of individual versus large institutional investors.

Ruder said the SEC study is expected to be released early next year, about the same time as the Brady report. Richard G. Ketchum, director of the SEC's division of market regulation, said 20 to 25 commission staff members are working on the report.

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