Blip that broke a million hearts: Five years on, Gail Counsell argues that the Black Monday crash of '87 was a harbinger of the present recession

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The Independent Online
FIVE years ago today, on 19 October 1987, an earthquake struck stock markets around the world.

On Wall Street the Dow Jones Index fell twice as sharply as during the great crash of 1929. In London investors, market-makers, brokers and politicians watched dumbstruck as the UK's leading shares shed more than a fifth of their value in a week.

It was an event with lasting consequences. Frightened by parallels with 1929, governments relaxed interest rates, ushering in the late 1980s era of high spending and high debt that would end in the crunch of the 1990s.

'With hindsight, the main significance of the crash was the overreaction it produced in terms of policy,' said Adam Cole, an economist at the brokers James Capel. 'Co-ordinated cuts in interest rates led directly to the late 1980s boom when spending got out of hand.'

Debt levels were already a problem, but the rate cuts made them worse.

Yellowing newspaper clippings of the period make the point. Once the smoke had cleared, many commentators were quick to claim the crash had been a 'blip' of no real significance.

But in retrospect it looks more like a harbinger of things to come than a technical adjustment. The sense of wellbeing delivered by low rates was illusory and the day of reckoning merely postponed.

But the crash also meant that the City, and the lives of many who worked and invested there, were never to be the same again.

Admittedly, the London market has since zig-zagged back to a level above its 1987 peak - though by only a few percentage points for the All Share Index.

But the atmosphere has changed utterly; investors have lost their innocence, brokers and dealers have become risk-averse. Volatility has become the norm, even among blue chips, and liquidity has fallen sharply.

Stock Exchange players have seen their profits battered. Member firms, which in the first six months of 1987 had made profits of pounds 333m, lost pounds 309m in the second. Apart from 1989, the picture has looked unimpressive since.

That in turn has led to a shake- out. While the excesses of Big Bang meant that City firms would inevitably have had to slim down, Black Monday made for a more painful process.

The number of those employed by Stock Exchange firms, for instance, which peaked in 1988 at just under 25,000, has now fallen to around 21,000.

Equally, the crash pricked the salary bubble. Before, bond dealers and equity traders were probably on basics of pounds 150,00 with virtually no limit on their bonuses, said Trish Collins, of Exchange Appointments. 'Now people are getting pounds 40,000- pounds 80,000 basic and employers just won't allow high bonuses.'

Risk awareness is now the key, and risk-averse technical and analytical types, not daredevil dealers, get the jobs.

For a number of speculators the effects of Black Monday have run especially deep. For some there has been personal bankruptcy; for a few even the prison door. Christopher Peach, a 15-year-old Derbyshire schoolboy, had been dealing in shares and cost his stockbrokers pounds 20,000 when the market collapsed.

Two years later, Peach was put on probation for running up pounds 500,000 of debts after posing in the US as an international exectutive. He is currently in a young offenders' institution for attempting to swindle the Royal Bank of Scotland.

Then there were the corporate crises, like Blue Arrow. The crash wrought havoc, both at the company and at its banking and broking advisers, after it concealed the fact the group's plunging share price had undermined its pounds 837m rights issue.

The lengthy and, ultimately, failed prosecutions that followed did not do much for the reputation of the Serious Fraud Office either.

But the crash turned into a blessing for some. Parker Pen, in which the management team had bought a 31 per cent stake (at a cost of pounds 300,000) had been due to float on the Stock Exchange, valued at pounds 165m.

Abandonment of the float in the wake of Black Monday meant they had to wait to become seriously rich. It also meant the next five years were spent in a frustrating, and sometimes bitterly disappointing, search for alternatives.

Yet for Parker and its management, the crash was one of the best things that could have happened. They have recently found another buyer in Gilette - and at pounds 265m, the price is far higher than the original flotation value.

Jacques Margry's take is estimated to be pounds 26m, more than half as much again as he could have expected in 1987. 'In retrospect you could say we were very lucky indeed,' Mr Magry said. Looking back he thinks life would have been very different if the float had gone ahead. 'I suspect I would have relaxed a lot. The float's failure kept me on my toes.'

But perhaps the largest group whose lives were changed by Black Monday were the millions of small investors who had climbed on to the bandwagon in the 'heads you win, tails you win' atmosphere of the mid-1980s.

It made them realise that the value of shares could go down as well as up,' said Brian Tora, of the brokers Greg Middleton. 'At the peak there were up to 12 million individual shareholders; since then we've probably lost about 2 million of them.'

The fifth anniversary of the crash has been eagerly awaited by many in the unit trust industry, because their five-year performance figures have looked pretty terrible since October 1987. When the pre-crash boom falls out of the calculations, they will look much healthier. Many hope this will bring back the small investor. But there are doubts, given how badly confidence has suffered. Even the introduction of highly tax-efficient personal equity plans has not helped much; the number of unitholder accounts has never returned to its 1987 peak of 5 million.

Yet not every small investor lost his nerve. The Blacks (not their real name) are a retired couple who did not begin investing in shares until the mid-1980s and who at one point were virtually paper millionaires.

'Yes, Black Monday was a shock,' Mr Black said. 'Especially since on the Friday I had decided things looked overvalued and tried to sell. But my broker never made it into the office because

of the storm the previous night.'

Their portfolio was a catalogue of the frothy equities that have never properly recovered from the crash, like the property trader Dares Estates, (whose share price halved from 70p virtually overnight and which is now a penny share), Blackwood Hodge, and Storehouse - or which, acquired after the crash, were later brought down by the debt overhang, like Lowndes Queensway.

Nevertheless, Mr Black remains positive. 'A lot of the gains before were only paper money. To the extent it changed our lives it was only in terms of feeling rich, not living it.'

His attitude should cheer those who believe there could be another crash.

'Seriously, I think the market's hit bottom. Now's the time to buy,' he said.