The rumors mounted by the hour as Wall Street lunged and lurched through its wildest week. Many of the country's biggest brokerage firms and investment houses were said to be in trouble, even sinking: E.F. Hutton; Merrill Lynch; First Boston; Goldman, Sachs. Speculation swirled so briskly around Hutton that President Robert Rittereiser had to assure employees that the firm's financial resources were "strong and fully adequate." Though similar reassurances echoed up and down Wall Street, they left many doubts. As the stock-trading chaos continued, what would happen to the $50 billion American securities industry?
One Wall Street response was to turn to Madison Avenue. Sober television commercials popped up between World Series innings to reassure investors that their money was safe, and full-page ads appeared in major newspapers. Declared Prudential-Bache in large black type: "Now, especially now, you need an investment firm that is rock solid." That, of course, is exactly what Prudential claimed to be. Shearson Lehman implored readers to "talk with us" because "we share the concerns of every serious investor." Admonished Merrill Lynch: "The worst thing to do right now would be to sell at distressed prices."
While the brokerages tried to talk up investor confidence, the extent of the damage they had sustained was not known. The financial impact of Black Monday was delayed by a New York Stock Exchange rule that allows five working days to pass before traded securities must be paid for. But the 15 biggest U.S. firms clearly had taken huge losses -- by one estimate, anywhere from $50 million to $250 million each -- as they were caught with immense inventories of stocks that they could not sell. For those behemoths, with more than $20 billion in total capital, the bloodletting was serious but not fatal. For at least half a dozen small brokerages, however, the selling pressure was too much to withstand. Some agreed to be swallowed by larger firms to avoid bankruptcy court. Predicted Edward Altman, professor of finance at New York University: "There will be more blood on the Street before this is all over."
Even before Black Monday struck, there were signs that Wall Street's five- year stay in Fat City was ending. Profits were shrinking: during the second quarter of 1987, U.S. brokerages generated $553 million in pretax income, in contrast to $2 billion in the first three months of the year. Retrenchment of some kind was already in the cards. Last week's crash guaranteed that it will be harsher than was previously expected.
There is plenty of shrinking to do, since during the long bull market U.S. securities firms simply grew and grew. Employment in the nationwide industry rose from 273,900 in 1982 to 450,600 last August. Wall Street jobs, which account for one out of every three U.S. securities positions, grew 57% in that time, to 157,000.