The "87 Stock Market Crash" in the United States

On October 19, 1987, Monday, the New York stock market on Wall Street set off a wave of stock crashes, the largest in history. crash event. The Dow Jones Index plummeted 508.32 points in one day, a drop of 22.6%, setting a record for the highest single-day decline since 1941. Within 6.5 hours, the New York stock index lost $500 billion, a value equivalent to 1/8 of the U.S.'s annual gross national product. This stock market crash shocked the entire financial world and had a "domino" effect on stock markets around the world. Stock markets in London, Frankfurt, Tokyo, Sydney, Hong Kong, Singapore and other places were all severely impacted, with stocks falling by more than 10%. The stock market crash caused huge panic among investors in Western countries. Many millionaires became poor overnight, and thousands of people suffered mental breakdowns and committed suicide by jumping off buildings.

This day was called "Black Monday" by the financial community, and the "New York Times" called it "the worst day in the history of Wall Street."

Direct causes

Stock market crash

After the stock market crash, many people put forward different theories. They mainly believed that the causes of the stock market crash included: program trading, excessive stock prices, and liquidity in the market. Inadequacy (illiquidity) and herd mentality. (1) The most widely accepted theory is that the stock market crash was caused by program trading. Program trading uses computer programs to calculate stock price changes and trading strategies in real time. It gradually became popular on Wall Street in the late 1970s. Program trading allows large stock transactions and futures transactions to be bought and sold at the same time. After the stock market crash, many people said that when the computer program saw the stock price drop, it would sell stocks according to the mechanism that had been set in the program, forming a vicious circle that accelerated the decline of stock prices. The falling stock price in turn caused the program to sell stocks in greater quantities. (2) Portfolio insurance is also one of the reasons. The so-called portfolio insurance means that when the market declines, you can stop losses and sell stocks. There is a prerequisite here, that is, there must be potential takers. But on that day, all the takers disappeared, and the way portfolio insurance operated pushed the stock price down quickly. Moreover, portfolio insurance relies on virtually unlimited liquidity, but liquidity is not always available and sometimes dries up. Such an investment strategy is not feasible when everyone wants to sell. (3) Economist Richard Roll believes that market globalization is the main reason, because program trading is only popular in the United States, but the Hong Kong and Australian stock markets, which do not have much program trading, took the lead in falling on October 19. Therefore, it is because of market globalization. Large swings in one major stock market spread across global stock markets in a single day.

Triggering conditions

There are many reasons for the stock market crash, but at least one of the following conditions should be met: (1) A country’s macroeconomic fundamentals have seriously deteriorated, and the listed company The company has operational difficulties; (2) Low-cost direct financing leads to "inefficient" finance and "inefficient" economic development, which greatly promotes bubbles and causes the stock price to be seriously overvalued. (3) There are serious flaws in the listing and trading system of the stock market itself, resulting in the prevalence of speculation and the loss of investment value and resource allocation functions of the stock market. (4) Political, military, natural disasters and other crises have severely damaged the confidence of the securities market, and the securities market has experienced psychological panic and cannot continue to operate normally

327 National Debt Incident

In 1995 , the national macro-control proposed measures to significantly reduce the inflation rate within three years. By the end of 1994 and the beginning of 1995, the inflation rate had been reduced by about 2.5%. As we all know, in the three years from 1991 to 1994 when China's inflation rate remained high, the value-preserving discount rate has been at a level of 7-8%. Based on these data, Guan Jinsheng, the then general manager of Wanguo Securities and known as the godfather of Chinese securities, predicted that the value-preserving discount rate of 327 government bonds is unlikely to increase, and even if it does not decrease, it should be maintained at the level of 8%. According to this calculation, the 327 treasury bonds will be redeemed at a price of 132 yuan. Therefore, when the market price fluctuated between 147 and 148 yuan, Wanguo Securities and Liaoning Guofa Group became the main short sellers in the market. On the other hand, the then China Economic Development Co., Ltd. (referred to as China Economic Development Co., Ltd.) was affiliated with the Ministry of Finance. There is reason to believe that it already knew that the Ministry of Finance would increase the hedging discount rate. Therefore, China Economic Development Bank has become the main bull. On February 23, 1995, the Ministry of Finance issued an announcement stating that the 327 treasury bonds would be redeemed at 148.50 yuan. The short seller's judgment was completely wrong. On that day, China Economic Development Bank led many parties to buy aggressively by taking advantage of the good news, pushing the price to 151.98 yuan. Later, brothers Gaoling and Gaoyuan from Liao Guofa flipped over to long when the situation was extremely unfavorable to the short sellers. They quickly closed their 500,000 short positions and bought 500,000 long positions backhand. 327 treasury bonds were sold within 1 minute. Increased by 2 yuan. This means a heavy blow to Wanguo Securities - a huge loss of 6 billion yuan. In order to protect his own interests, Guan Jinsheng made a crazy move to avoid huge losses eight minutes before the market closed: he sold treasury bond futures overdraft and shorted treasury bonds.

At 4:22 p.m., without enough margin on hand, the short side suddenly took action, first raising the price from 151.30 yuan to 150 yuan with 500,000 lots, then raising the price to 148 yuan, and finally 7.3 million lots. The huge selling order pushed the price to 147.40 yuan. The face value of this 7.3 million oral sale order is 146 billion yuan. All the long positions that opened that day were liquidated, and due to the rush of time, the long parties had no time to react, so this fierce long-short stranglehold finally ended with Wanguo Securities making a profit. On the other hand, the bulls represented by China Economic Development Bank suffered a huge loss of about 4 billion yuan. At 10 o'clock in the evening on February 23, the Shanghai Stock Exchange announced after an emergency meeting that all transactions after 16:22:13 on the 23rd were abnormally invalid. After this adjustment, the treasury bond transaction volume on that day was 540 billion yuan, and 327 types of bonds were traded on that day. The closing price was 151.30 yuan, the last transaction price signed before the violation. This means that all long sell orders within 8 minutes before the close of the day are invalid, and the redemption price of 327 products is determined by the member agreement. This decision by the Shanghai Stock Exchange instantly wiped out the late trading gains of Wanguo Securities. Wanguo lost 5.6 billion yuan and was on the verge of bankruptcy. On February 24, the Shanghai Stock Exchange issued the "Emergency Notice on Strengthening the Supervision of Treasury Bond Futures Trading" and made six regulations on the supervision of Treasury bond futures trading, namely: 1. Starting from February 24, the price limit will be imposed on Treasury futures trading system, 2. Strictly strengthen the management of maximum position contract limits, 3. Effectively establish regulations on customer position limits, 4. Strictly prohibit member companies from borrowing positions from each other, 5. Control the use structure of position limits; 6. Strictly enforce government bond futures Fund usage management. At the same time, in order to maintain market stability, a special session for agreement liquidation was launched.

07 Subprime Crisis

On February 13, 2007, New Century Finance issued a profit warning for the fourth quarter of 2006. HSBC Holdings announced its results and increased its provisions for subprime housing credit in the United States by an additional US$7 billion, totaling US$10.573 billion, an increase of 33.6%. As soon as the news came out, the stock market fell sharply that day, with the Hang Seng Index falling by 777 points, a decrease of 4%. . Faced with a $17.4 billion debt squeeze from Wall Street, New Century Financial Corp, the second largest subprime mortgage company in the United States, announced on April 2, 2007, that it would file for bankruptcy protection and lay off 54% of its employees. On August 2, 2007, Deutsche Bank announced a profit warning, and later estimated a loss of 8.2 billion euros, due to the small participation of one of its 12.7 billion euros "Rhineland Funding" and the bank itself. He suffered huge losses from his business in the U.S. real estate subprime mortgage market. The Bundesbank convened the country's banks to discuss a basket plan to rescue Deutsche Bank. American Home Mortgage Investment Corporation, the tenth largest mortgage lender in the United States, officially filed for bankruptcy protection with the court on August 6, becoming the next large mortgage lender in the United States to file for bankruptcy after New Century Financial Corporation. On August 8, 2007, Bear Stearns, the fifth largest investment bank in the United States, announced the collapse of two of its funds, also due to the subprime mortgage crisis. On August 9, 2007, BNP Paribas, France’s largest bank, announced that it would freeze three of its funds because it also suffered huge losses due to its investment in U.S. subprime mortgage bonds. The move sent European stock markets plunging. On August 13, 2007, Mizuho Group, the parent company of Mizuho Bank, Japan’s second largest bank, announced losses related to U.S. subprime mortgages of 600 million yen. Japanese and Korean banks have already incurred losses due to the U.S. subprime mortgage crisis. UBS Securities Japan estimates that Japan's nine largest banks hold more than 1 trillion yen in U.S. subprime mortgage-backed securities. In addition, five Korean banks, including Woori, invested a total of US$565 million in secured debt obligations (CDOs). Investors are worried that the U.S. subprime mortgage problem will have a strong impact on global financial markets. However, Japanese analysts are convinced that the vast majority of CDOs invested by Japanese banks have the highest credit ratings, and the impact of the subprime mortgage crisis will be limited. Later, Citigroup also announced that losses caused by subprime mortgages in July 2007 amounted to US$700 million. However, for a financial group with an annual profit of US$20 billion, this was only a small amount.