Shadows of Black Monday Felt on Campus

J. Kent Smith ’88 still remembers the fear and tension he and his friends felt when stock markets around the world plummeted on October 19, 1987, a day also known as “Black Monday.”

Smith and his friends were huddled silently around a transistor radio in Dunster House, listening to news that the Dow Jones Industrial Average had recorded its largest single-day percentage loss.

“It was the first time this had happened in modern history,” Smith said. The last time the Dow had posted a record single-day loss was in 1929, and the crash had plunged the nation into the Great Depression.

But the Black Monday crash dwarfed the 12 percent drop of 1929, with a 22.61 percent decline in prices.

As policymakers and economists around the world sought to find explanations for the crisis, Smith and other students at Harvard watched nervously from the sidelines.

For juniors and seniors considering a career in finance, October’s crash was particularly alarming, as students prepared to enter the job market in the midst of unprecedented market turmoil.

CRASH LANDING

“It was definitely a big-impact day,” said Smith, now an executive director at UBS Investment Bank.

“Nobody knew quite what to make of it and how it could have happened.”

Most analysts today agree that the rise of computerized trading techniques led to the sudden collapse in stock prices.

With new strategies such as portfolio insurance and program trading, much of the buying and selling of securities on Wall Street was conducted by automated programs.

“In retrospect, we have a pretty good idea of why it happened,” said Smith.

But Smith also noted how unexpected market behavior can quickly lead to disaster, even when investors are equipped with the best predictors and financial models.

“When you have a systemic shock to the system, which is what we had in 1987 and again [in] the housing market crash, the rest of the markets don’t behave rationally,” Smith said. “The size of the shocks are sufficiently large to ripple across the entire economy.”

Smith remembers that even on Harvard’s campus, the effects of the crisis felt very real.

“I was sitting with a friend who is and was quite wealthy, and I was imagining the impact on him as we were listening to all this happen,” Smith said.

AN UNCLEAR FUTURE

The uncertainty immediately after the financial downturn led some students to reconsider their post-graduate plans.

According to a Crimson article in December of that year, many students interested in investment banking were considering a shift to the fields of consulting and commercial banking.

The article reported that investment banking information sessions that fall were sparsely populated, while those for consulting and commercial banking were packed with interested undergraduates.

However, some former students believe that the crisis had a greater impact on those who had already graduated, compared to those who were still in college.

“I had heard it might potentially hurt my friends who had graduated and were in training classes,” said Robert O. L. Lynn ’88, a consultant at Morgan Stanley.

And although students interested in the financial services industry may have been rattled by news of the crisis shortly after it happened, Lynn said that the recruitment process—which occurred later in the year—was not significantly affected by that fall’s stock market crash.

“By the time interviewing season rolled around... [the investment banks] went back to business as usual,” Lynn said. The trouble in the markets did not ultimately stop students in Class of 1988 from seeking employment from the same prestigious firms that garner much attention on campus today, according to Smith. “The hottest tickets on campus were to get Goldman Sachs and Morgan Stanley,” he said.

Smith said that despite the severity of the 1987 crash, the long-term economic impact was limited. In fact, graduates today may actually face a more difficult job market than the one in 1988, he added.

“I see much more impact today than in the crash of 1987.

“[Black Monday was] exciting, but we recovered quickly,” Smith said. “[Now, we are in] year eight of what is a very long down cycle.”

—Staff writer David W. Kaufman can be reached at davidkaufman@college.harvard.edu. Follow him on Twitter at @DKauf.