Efficient Markets

Rob Schaap rws at comedu.canberra.edu.au
Sun Jan 21 07:36:55 PST 2001


'The Sentence that saved Capitalism'; thus is headed the *Australian Financial Review's* lead article this weekend - a cut from Bob Woodward's *Maestro*.

Only it seems it probably wasn't.

The sentence in question is the one Greenspan released at 8.41 on the morning of October 20, 1987: "The Federal Reserve, consistent with its responsibilities as the nation's cantral bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.' And for the rest of the day Corrigan and Greenspan are in all the bankers' ears - hinting (coz you're not allowed to order 'em to be irrational in their lending, borrowing and paying practices) that they simply must lend out and pay up, whatever the portents.

Only no-one seems to listen; Wall St is still heading south, IBM stock is taken off the boards, and the NYSE is about to close its doors 3 hours early.

And who'd dare open 'em again after that?

Then, at about 12.35 and in apparently perfect concert, a bunch of companies begin to buy back their own stock. Twenty minutes later $60 million's worth of futures are bought, and the biggest rally in history proceeds.

Writes Woodward: "Corrigan never figured the whole thing out, and part of him didn't want to know ... several people ot firms might have operated in concert to manipulate the market. That was technically a scheme ... And if someone in the government or the Fed had given tacit approval or even just a wink, that would make it worse. Corrigan decided that he didn't want to pursue the matter."

The choice and timing of the excerpt is of interest in a finance paper, of course, but interesting, too, is Woodward's reluctance to opine as to what did happen. He just leaves us with this cop-out: 'that wonderful nebulous space between the free markets of capitalism and regulations of government was the land of the unknown.'

Anyone wanna share some thoughts as to what did go on in that 'space'? And how regularly stuff might be obliged to happen there?

Cheers, Rob.



More information about the lbo-talk mailing list