(2 of 4)
Ironically, the prospect of a dollar drop was one of the central fears that touched off the market crash, since a weaker currency could rekindle inflation. But the crash itself has now reduced the market's inflation fears, simply by having erased $850 billion in the potential buying power of stockholders. "American households lost the equivalent of six years of savings," says Donald Straszheim, chief economist for Merrill Lynch. "That is a major contraction and a weakening of inflationary pressures."
As the market shook off some fears, it finished digging out of the record- keeping mess left over from the week of Oct. 19, when an unprecedented 2.3 & billion shares changed hands on the New York exchange. Though trading is computerized, the systems became so backed up that thousands of electronically transmitted buy and sell orders were lost in the crunch, and details of other trades remained in dispute. Typically such snafus affect only 1% of trades, but during crash week the level rose to 5%. Clerks at the Big Board worked on weekends, many dressed in blue jeans and with youngsters in tow, to sort out the mess.
As the numbers emerged, Wall Street brokerages began to make estimates of their losses. Even though many investment firms will reap bounteous commissions because of the market's high volume, many others suffered huge trading losses in the crash. The prestigious firm of L.F. Rothschild said it suffered $44 million in net losses for the month, but denied speculation that it might have to merge with a healthier company. Charles Schwab, the largest U.S. discount brokerage, announced a loss of $22 million, mostly attributable to one unidentified freewheeling corporate customer that was unable to cover losses on its account. At least one bank was stung hard: Continental Illinois, which only three years ago was the beneficiary of a $4.5 billion federal bailout. Continental said it will post a loss for the fourth quarter because of a $90 million deficit in customer accounts at a subsidiary, First Options of Chicago, a company that indemnifies traders on the turbulent options and futures exchanges.
No major financial institutions were crippled in the crash, but many small brokerages were less fortunate. Some folded when a few high-rolling customers were unable to cover their margin accounts, in which they had bought stocks by borrowing up to half the cost of a share. As many as 50 firms have closed their doors or sold out to larger companies, according to Perrin Long, who follows the industry for Lipper Analytical Securities. Some 300 more of the industry's 12,000 firms may follow, he said. One casualty last week was First Potomac Securities of Falls Church, Va., which collapsed when two customers failed to meet combined debts of $2.6 million. "There's nothing I can do," said Carole Haynes, a stockbroker who started the company just three years ago. "Everything I own is in this firm."