|
PureBytes Links
Trading Reference Links
|
A friend sent this to me. Says he found it on one of the usenet newsgroups. Sounds like
a great story. Anyone know if the book ("Leo Melamed: Escape to the Futures.") is any
good?
JW
abprosys@xxxxxxx
>
> It is conventional wisdom that the futures markets always
> remain financially sound, because for every buyer there is
> a seller, and margin requirements protect everyone from
> default. However, things aren't always so simple under
> extreme market conditions.
>
> Leo Melamed, chairman emeritus of the CME, described
> what happened at the Merc on Black Monday and the following
> night in his book, "Leo Melamed: Escape to the Futures."
>
> ---------------
>
> The Dow had fallen 108 points the previous Friday. In
> overseas markets, the Nikkei had fallen 2.5% and the
> Hang Seng index dropped 133 points in the first 40
> minutes. The FTSE index was down 10% by midday.
> So, Melamed knew Monday would be a very long day. Long
> before the opening, sell orders were piled up at both
> the CME and NYSE. This so overwhelmed the NYSE
> "specialists" that they either couldn't or wouldn't make
> a market. There were no prices on most stocks!
>
> The CME opened on time, and prices on the SPZ were
> instantly established: down 20.75 points from Friday's
> close. That morning, a special intraday call for
> settlement money was made on 13 clearing members
> for $290 million.
>
> Unknown to Melamed, Ronald Reagan's staff were meeting
> in emergency session. Richard Darmen, assistant Treasury
> secretary, wanted to close the financial markets. Beryl
> Sprinkel, chairman of the Council of Economic Advisors,
> vehemently argued against it. Alan Greenspan backed
> Sprinkel up. The markets remained open.
>
> At 1:15PM, the SPZ was down 5,125 points. A second
> intraday call for settlement would be made later in the
> day for $670 million.
>
> Because of the breakdown of the NYSE's trading system,
> the futures markets were completely cut loose from the cash
> markets: nobody in the world could accurately gauge the
> Dow or the S&P500 Index on which the tutures prices
> were based. By the end of the day, the SPZ was down
> 80.75. More than $500 billion -- then equal to the entire
> GNP of France -- had vanished in one day.
>
> Alan Greenspan spoke to Melamed around midnight. His
> main question: "Will you open tomorrow morning?"
>
> The CME's clearinghouse chief reported that the settlement
> sum was $2.53 billion, compared to $120 million on an
> average day. In other words, the longs owed the shorts
> two and a half BILLION dollars. No one had ever thought
> such a day was possible. If the money didn't come in,
> the Merc could not open the following morning! This would
> lead to people wondering whether a major institutional
> trader had gone broke, resulting in financial gridlock, where
> institutional players hesitated to pay each other for fear
> they would not get paid themselves.
>
> Melamed told Greenspan in a hoarse whisper, "I don't think
> we have a problem, but to tell you the truth, it's too early
> to tell."
>
> Greenspan said the Fed was doing everything possible to
> guarantee the liquidity of the financial system. By the
> morning, rumors of huge losses were everywhere and the
> banks were reluctant to provide credit to anyone. The
> president of the FRB-NY persuaded the banks not to
> withhold credit.
>
> Melamed asked Greenspan to keep the Fed wire open all
> night. If the Merc was going to have a chance of getting
> $2.5 billion by opening time, the inter-bank wire system
> had to remain open all night. Greenspan agreed.
>
> Melamed camped out in the clearinghouse that night. Barry
> Lind was chairman of the Clearinghouse committee. He
> told Melamed, "I don't know [if we'll open in the morning],
> but if we don't open tomorrow morning, all bets are off!"
>
> Wall Street's major investment bankers had been among the
> biggest players that day. The Merc owed $670 million to
> Goldman Sachs and $917 million to Kidder Peabody. But
> Morgan Stanley owed the Merc about $1 billion. This
> became a source of major anxiety for the clearing operation.
> It wasn't that Morgan Stanley wasn't good for it, but could
> they pay by 7:20 the following morning? With such huge
> amounts on the line, settlement banks became extremely
> cautious and slowed the credit approval process significantly.
> The Merc's banks were reluctant to pay the Merc's obligations
> until they had received confirmation from the New York banks
> that the Merc had received its funds from them.
>
> At 3:00AM, Melamed learned that Morgan Stanley's $1 billion
> might be delayed. Melamed said, "It scared me half to death."
> The head of the clearinghouse called the president of Morgan
> Stanley at home. [Now, THAT'S a margin call: "you owe us
> a billion dollars, and you have four hours to send us the money!"]
>
> Melamed said that he never doubted Morgan Stanley was good for
> the money, but that all hell would break loose if they caused a
> delay in the Merc's opening.
>
> Just before 7:00AM, Melamed called Wilma Smelcer, Continental
> Bank's officer in charge of the Merc's account. He had to know
> the answer to Greenspan's question: would the Merc open. If
> the news was bad, he'd have to call Greenspan. Smelcer said
> the Merc was still short $400 million.
>
> "Wilma, you mean we're down to $400 million from $2.5
> billion? That's pretty damned good."
>
> "Yes, Leo, but not good enough."
>
> Melamed responded, "Wioma, I am certain your customer is
> good for it. You're not going to let a stinking couuple of
> hundred million dollars cause the Merc to go down the tubes,
> are you?"
>
> "Leo, my hands are tied."
>
> "Please listen, Wilma, you have to take it upon yourself to
> guarantee the balance because if you don't, I've got to call
> Alan Greenspan, and we're going to cause the next depression!"
>
> There was silence on the other end of the line as Wilma
> hesitated. She didn't feel she had the authority to
> underwrite that kind of money, expecially under the current
> dangerous circumstances. Suddenly, fate intervened.
>
> "Hold it a minute, Leo," she shouted into the phone. "Tom
> Theobald just walked in." Theobald was the chairman of the
> bank.
>
> A couple of minutes later, Wilma was back on the phone.
> "Leo, we're okay. Tom said to go ahead. You've got your
> money."
>
> Melamed looked at the time: 7:17 AM. Three minutes
> before the currency markets were scheduled to open.
>
> Melamed writes, "The world never knew how close we came
> to a serious problem. The money from Morgan Stanley
> actually came in to Continental about 20 minutes later."
|