Streetwise Professor

All the coverage of Alan Greenspan’s recent retirement as Chairman of the Federal Reserve Board reminded me of a story related to me by Leo Melamed, the Chairman Emeritis of the Chicago Mercantile Exchange and one of the giants of the world’s financial markets in the last half of the 20th century.

The story took place early in the morning of October 20, 1987–the day after the ’87 Crash. Along with the leaders of the other major exchanges (including the NYSE and the CBT), Melamed was a party to a phone conversation with Reagan administration officials including Secretary of the Treasury James Baker, Chairman of the President’s Council of Economic Advisors Beryl Sprinkel, and newly appointed Fed Chairman Greenspan. Baker wanted to shut the markets on the 20th in order to prevent a further meltdown. (Perhaps this isn’t surprising–Baker was never a strong free market advocate and comes off as something of a control freak.) Sprinkel would have none of it. When Baker asked for Sprinkel’s opinion, Beryl said: “We’ll close the markets when monkeys fly out of my ass!” Baker, somewhat taken aback, turned to Greenspan for support: “Well, what do you think, Alan.” To which Greenspan replied: “I go with the monkeys.”

The upshot was that the markets opened on the 20th. After a scary morning, there was a major rally in the afternoon. Some ascribe the rally to a mysterious Fed intervention. Regardless of the cause, the rally would never have occurred if Greenspan hadn’t gone with the monkeys–and if Beryl Sprinkel hadn’t had the good sense to smack down James Baker.

Zelig-like, I had some involvement in these events. At the time, I worked for a futures commission merchant, GNP Commodities. On the Friday before the Crash, I had told the company’s founder, the late Brian Monieson, that I was leaving the company because of a dispute with my direct boss. (Now you know the REAL reason for the Crash;-)} ). Brian had tried to talk me out of leaving over the weekend, but those discussions were obviously put on hold in the turmoil of Black Monday. I went into the office early Tuesday the 20th. Upon arriving at the Merc, I went directly to Brian’s office. When I saw him, he looked drawn and haggard. I said, “Brian, you look like hell. Did you get any sleep?” Brian said that he had not, and related the harrowing events of the night before.

A large firm owed the CME clearinghouse a huge sum, which if not received would have resulted in the failure of the clearinghouse. Beryl Sprinkel’s monkeys notwithstanding, such an event would have resulted in the closure of the Merc and undoubtedly the NYSE too–with consequences for the world financial system that are too frightening to contemplate.

Brian and other members of the CME braintrust spent the night trying to make sure that the payment would be made. They were assured by the firm that owed the money (Kidder Peabody, if I recall correctly) that they would make the payment. But they worried whether there would be sufficient funds to make the payment. There was little doubt that the firm was solvent, but there was concern whether they had adequate cash. As Brian put it–“They said the check was in the mail, but we wondered how high it would bounce.” That’s where Greenspan came in. He assured the Merc that the Fed would supply sufficient liquidity to ensure that the firm would have access to enough ready funds to make the payment. That was Greenspan’s first–and arguably greatest–major contribution as Fed Chairman.

Update. My memory failed me–Kidder Peabody wasn’t the firm that owed the big payment. According to Bob Tamarkin’s The Merc Kidder was actually owed money. Tamarkin doesn’t name the firm that owed the clearinghouse.