Pit Bull

by Martin Schwartz

  The market had been getting jittery around the Columbus Day weekend. On Thursday the eighth, the Dow Jones Industrials were down 35, and down another 34 on Friday the ninth. Monday the twelfth, down 10; Tuesday the thirteenth, up 36. Then on Wednesday the fourteenth, it really headed south, down a record 95. Thursday, down another 58; and then came Black Friday. The Wall Street Journal described Friday’s record drop as follows: “As the Dow Jones Industrial Average fell a record 108.65 points, volume swelled to an unprecedented 338.5 million shares. It was the third major decline in as many days. But several technical analysts said that the big volume accompanying Friday’s session might mean better things ahead.”

  That was how most professionals looked at Friday’s dramatic drop, as the finale to a major correction. “Big market declines always end in a ‘final death rattle,’” claimed Jack Solomon of Bear Stearns. “The market has reached a ‘capitulation point,’” opined Dennis Jarrett of Kidder, Peabody. “Friday’s session is a classic ‘selling climax,’” agreed a number of technical analysts. I too, thought that the market had bottomed out, and even though one of my rules is that a down Friday is usually followed by a down Monday, I started buying. After all, how much lower could it go? Just before the close on Friday the sixteenth I called Debbie. “Get me forty S&Ps at the market.” She did, at 283.50. That wasn’t a big position for me, but my gut told me that it was enough in this market. Then over the weekend, two things happened that made me really nervous.

  Friday night, as usual, I was ready to collapse. I was too tired to go out, so Audrey made me a nice meal and I lay down on my couch to watch Wall Street Week with Louis Rukeyser. When Rukeyser asked Marty Zweig, a money manager and market forecaster who was a regular on the show, what he thought about the 108-point drop, Marty said, “The market’s in danger. I think we can go down another five hundred points from here.”

  Marty lived in my building, so on Sunday I called him. He came down to the apartment and we talked for an hour or so. Bonds were sinking rapidly, and Marty told me that all of his monetary indicators were terribly negative. He reaffirmed his position that the market could go down another five hundred points. Of course, he was saying that it might happen over the next few months. Neither of us ever imagined that it would happen in the next twenty-four hours.

  The other thing that scared me was that over the weekend Treasury Secretary Baker put a chill in the air when he started lambasting the Germans for nudging up short-term interest rates. Baker was trying to reduce the U.S. trade deficit by controlling the price of the dollar, and he felt that this action by Bonn was contrary to an agreement he’d reached with the Germans back in February. This type of tough talk upset the market. When I heard Baker, I knew I was in trouble.

  On Monday I was very, very cautious. Between Zweig’s comments on Wall treet Week and Baker’s jousting with the Germans, I was thinking that the market was in for a rough day. I had “uncle points,” mental stop losses, on just about everything, but now the question was whether I was going to be strong enough to honor them. Having a price in your mind of where you’re going to sell is one thing. Actually selling, for a thumping loss, is something else. Being able to honor your stops is what separates the top dogs from the mongrels on Wall Street.

  At the opening bell, the market jumped out the window. The Dow plunged in a 150-point death spiral in the first fifteen minutes. I sat at my desk in horror as the forty S&Ps, a ton of options, and two tons of stocks crashed through my “uncles.” My positions were being overrun. I couldn’t pull the trigger. I couldn’t react. The marines teach you never to freeze under fire, either go forward or backward, don’t just sit there and get the crap kicked out of you. But they were talking about conventional warfare. I was getting nuked.

  My eyes were darting from screen to screen. Holy shit. All the lines were pointing straight down. Dow Industrials? Down two hundred in half an hour. S&Ps? Down nineteen at the opening and still plummeting. The “knife”? Blown away. The NASDAQ? Medevac’ed. The Chicago options? KIA. I started muttering to myself. “What the fuck? This is unreal. Where’s my support? Rally, baby, you’ve gotta rally.”

  Finally, around 10:30, there was a pause, then a little bounce. I started calling around, doing my reconnaissance, trying to get a handle on my position. “What’s the volume?” “How many on the sell side? How many on the buy?” “New buyers, or are they just covering shorts?” “Shit, can you believe Merck, down 12 to 172? And Digital, down 20 to 152? These are great prices, people GOTTA buy!” In the next twenty minutes the Dow regrouped and rallied one hundred points off the lows, and I went into action.

  I jumped on the horn to Chicago. “Debbie, dump those forty S&Ps. At the market. NOW!” I sold at 267.50, which was a loss of 315 big ones, but it was one of the greatest trades of my life. I pride myself on being a market timer, and I can’t think of any trade I timed any better. I sold the forty S&Ps at just 1.50 off the high for the day. From there, the market started to ooze back downhill and I kept selling, throwing it all overboard. By 11:30, I was out of just about everything except a few options that I’d bought on Columbus Day between the piña coladas. I couldn’t get out of them. They’d just stopped trading altogether, no bids at all.

  The Dow was back down around 150 by noon. I figured that I’d lost about $2 million, which was horrendous, but at least I was out, and I couldn’t lose any more. I was gravely wounded, but I’d stopped the bleeding. According to the U.S. Marine Corps, even a retreat can be an offensive move, because you’re saving yourself for another day. That’s what I was doing, retreating and saving myself for another day.

  The question was, had I retreated far enough? I wondered whether the whole system was about to come down. Was it going to be 1929 all over again? From the recesses of my mind came the image of my father, working two jobs, trying to make ends meet but never able to quite put it together. I started to think about other things I could do to protect my family. That was always my very first rule, protect my family. I left the office and went into the apartment. “Audrey,” I said, “the whole system’s coming down. I’m goin’ for the gold.”

  Audrey started to test my emotions. “Buzzy, do you really think it’s that bad?”

  “The market’s down over 150 points. It’s not good.”

  “Where are you?”

  “I’m out of everything except for some options that have stopped trading.” I could see that Audrey was remembering 1982 when we were out at the beach and I made her go for the gold. Damn, that gold was heavy. I really didn’t want to do that again. “Maybe I’ve done enough.”

  I walked into the bedroom where our son was asleep in his crib. I looked at him lying there sucking his thumb, and I thought to myself, what if everything did go down the tubes and we ended up with bupkas? How could I ever face my children knowing that I hadn’t done everything in my power to protect them? I had to go for the gold.

  I ran to the closet, pulled out an old battered briefcase, and started for the elevator. I was a trader. Above everything else, I trusted my gut, and my gut told me that everything was falling apart. If I was right, Reagan was going to have to declare a bank holiday, like Hoover did in 1929, and I wasn’t having my gold tied up in some bank. I was going to clean out our safe-deposit box.

  “Buzzy, where are you going?”

  “It doesn’t feel right. I’m going for the gold.”

  “Buzzy, if it doesn’t feel right, go for it. But be careful.”

  Our apartment was on the corner of 65th and Park. My bank, the East New York Savings Bank, was on the corner of 64th and Third, down next to our old apartment building. I rushed outside into a beautiful fall day and started off down 65th Street toward Third, the briefcase flopping at my side. David Rockefeller, the chairman of the Chase Manhattan Bank, had a double-wide town house on the south side of 65th, right next to the town house Nixon had before he moved to Saddle River, New Jersey. At about 12:30, I reached Rockefeller’s house and saw half a dozen limousines dou
ble and tripled parked outside. “Uh oh,” I said to myself, “what’s happening here? Must be an emergency meeting of the Tri-Lateral Commission.”

  From there it wasn’t hard for me to convince myself that Vice President Bush, Henry Kissinger, George Shultz, Milton Friedman, Margaret Thatcher, Helmut Kohl, and the ghost of Herbert Hoover were all in Rockefeller’s town house figuring out how they were going to save their own asses, and then the rest of the world’s. I quickened my pace. I had to get to the vault. All these bastards had to do was pick up the phone; one call from 65th Street to the White House and the banks would be shut tighter than Jimmy Hoffa’s coffin.

  The sweat began to drip from my brow as I scribbled my safe-deposit box number onto the bank’s card. I handed it to the security guard and we went into the vault. He unlocked my box with his key and left. I unlocked the box with my key. I yanked out the box and nearly fell to the floor. I’d forgotten how heavy forty pounds was. I started packing the plastic tubes of Krugerrands into my briefcase. There were a bunch of them, at least $250,000 worth. Maybe more; with the world falling apart, the price of gold probably was soaring.

  I cleaned out everything: antique jewelry, my 1925D Saint-Gaudens $20 gold piece from Gramma Schwartz, the deed to the apartment, the whole schmear. The briefcase was bulging, but I was leaving nothing behind. If the system was falling, I wanted everything with me. I locked the box, picked up the briefcase, and called the guard. “You got anything in here, you better get it out,” I mumbled to myself. “You might not be open tomorrow.”

  I walked out onto the street. There were people everywhere, on their lunch break enjoying the Indian summer day. I was sure that they all were staring at me. It felt like the time Carmine the bookie smacked forty hundred-dollar bills into my palm in front of the crowd waiting to see The Godfather, only now I was carrying almost $300,000, not $4,000. I kept crossing the street from corner to corner, trying to hail a cab, but with a forty-pound handicap, I was too slow; I kept getting beaten to the wire by people who were poorer, quicker, and blissfully ignorant of the imminent crash.

  Fuck the cab, I’d walk. I started shuffling down 65th Street, the briefcase pulling me over to one side like Quasimodo. By the time I reached Rockefeller’s house, my shirt was plastered to my body and I was gasping for breath. The leaders of the club might be in there screwing everybody else, but they weren’t going to screw me. I was the chosen one, I was fulfilling my responsibility, I was taking care of my family.

  I stumbled into the apartment and crashed down on the couch. “Buzzy, what’re you doing? Look at your face. You’re as red as a beet,” Audrey said.

  “Gold,” I gasped, pointing to the briefcase. “I got the gold. Put it in the safe in the bedroom. I’ve got to go down to Morgan Guaranty and get some cash.”

  “Buzzy, you’re going to kill yourself. Are you sure it’s worth it?”

  “It’s going down, Audrey. Everything. The whole damn system. I saw the limos. The boys in the club, they’re all meeting at Rockefeller’s.” I got up and wobbled into my office. It was 1:30; the market was down 265 points. Capitalism was crumbling before my eyes. I wanted to change my shirt, but I didn’t have time. That call to the White House from 65th Street could come at any minute.

  “Good afternoon, Mr. Schwartz,” the doorman said. “Going out again. I don’t blame you. It’s a beautiful day.”

  “A cab,” I groaned. “I need a cab. I gotta get my money for the monthly maintenance.”

  Morgan Guaranty kept some branches uptown so the gray-haired bluebloods wouldn’t have to have their chauffeurs drive them all the way downtown. I told the cabbie to take me to the branch at 58th and Madison in the GM building. I wrote a check for $20,000 and went over to one of the desks where a pert young woman in a neatly tailored business suit was sitting trying to look busy. I needed her approval before I could cash the check because in this country, you can’t cash a check for more than $9,999.99 without filling out a form. Anything more than that and they want to make sure that you’re not a drug dealer. The sign on the young woman’s desk identified her as “Kimberly Van Pelt—Ass’t Vice President.”

  “I have an account here and I want to cash this check,” I said handing her the check.

  She looked at the check. “Just a minute, please, Mr. Schwartz.” She tapped on her keyboard and pulled up my record.

  “That will put you below the minimum balance. Are you sure you want that much cash?”

  “You bet I do! The market’s probably down four hundred points by now. You might not be open tomorrow, and I’m not sure the bank’s check’s gonna clear by the end of the week. I want my money. And if I were you, I’d get some of yours, too.”

  When I walked back into my apartment building, I had $20,000 in my breast pocket and a sly smile on my face. I felt like John Dillinger and Willie Sutton rolled into one. “Everything okay, Mr. Schwartz?” the doorman said. “You seemed a little upset when you left.”

  “Everything’s fine, William, just fine,” I said. “By tomorrow, half the people in this building might not be able to pay their monthly maintenance fee, but not me.” I patted my breast pocket. “I’ll show those bastards. The banks will be closed, and I won’t care, ’cause I’ll pay ’em in green.”

  I tucked the cash away in the safe with the gold. It was 2:30. I checked the market. As I’d predicted to Kimberly Van Pelt, Asst. Vice President, the market was down 409 and still falling. I grabbed a phone and called my brother. “Gerry! You’ve got half an hour! Get to the bank! Get some cash! The banks might not be open tomorrow.”

  “Buzzy, I don’t have time to go running to the bank. I’m busy. I’ve got clients.”

  “Gerry, fuck the clients. You gotta listen to me. The banks are in structural meltdown. They’re like Three Mile Island. You gotta get to the bank, NOW!!”

  “Buzzy, you sound hysterical. Like in eighty-two when you went nuts out at the beach. I can’t go running off to the bank. I’ve got too much to do.”

  “Yeah, well, what are ya gonna do if the banks close and you don’t have any money?”

  “I’ll come over and borrow some from you.” Click.

  After the market closed down 508 points, I called Zoellner. “So, Bob, whaddya think?”

  “I don’t know, Marty, but you know what I always say, ‘When it gets so bad that you want to puke, you probably should double your position.’”

  Tuesday morning was like taking a walk on the beach trying to assess the damage after a hurricane. How much was cosmetic and how much was structural? Rumors were flying all over the Street…. The NYSE wasn’t going to open…. The Merc wasn’t going to open…. Nobody was going to open…. And the biggest rumor of all was that Morgan Stanley, the bluest of the blue-chip investment banks, might go belly up. I called Inside Skinny.

  “Motty. The Wasps got it backward,” rasped Skinny. “They had all these arbitrage positions, short stocks, and long S&P futures, but because of the selling panic, they got fucked. The futures’re tradin’ at a forty-point discount and the stocks ain’t tradin’ at all. After goin’ mark-to-market last night, they’re tapioca. They owe the Merc over a billion. They can’t make the margin call.”

  What Inside Skinny was telling me was that anybody who had a long position in futures was screwed, bankrupt, because they’d all had to go mark-to-market at a forty-point discount from the actual value of the S&P index. This meant they had to come up with huge amounts of cash overnight to meet their margin calls, because in commodities, everyone starts the day with a clean slate.

  I called Zoellner. “Greenspan’s thrown open the Fed discount window,” he told me. “I heard that at the very last minute, the biggest losers borrowed enough margin to cover their positions on the S&Ps. If they hadn’t, the Merc wouldn’t have been able to open, and we’d’ve been heading straight into the next Depression.” Wow. My gut had been right again. I was glad I’d gone for the gold. Just an hour or so earlier, we’d been within minutes of the whole financial sys
tem collapsing.

  Just before the Merc was supposed to open, I called Debbie to see how things were going. The Merc was a total madhouse; she’d never seen anything like it. On Monday, the pit committee had been blue in the face from whistling out trades. Traders had been ratting out on orders left and right. Even as we spoke, Leo Melamed was in the S&P pit telling everyone that everything was going to be all right, but nobody believed him. A lot of brokers and traders just hadn’t come in; that way, they wouldn’t have to face the music. Seats were up for sale at fire-sale prices by members who’d pledged them as collateral against margin calls.

  With stocks, a specialist made the market and could “close the book” (suspend trading) if the buy and sell orders got out of whack. And that’s what had happened with a lot of stocks on Monday. But there was no specialist for the S&Ps, which were traded on the open bid outcry system. Orders were thrown into the pit and somebody would always offer to buy or sell something at some price or other. That was why the S&Ps had traded at such a huge discount. With all the sell orders, traders were making bids, but they were way below the last prices listed for the actual index. For the majority of stocks on the NYSE, there weren’t really any prices at all. A lot of the prices used to compute the S&P index were the last available quotes from the close on Monday.

  With the market so out of balance, I decided that I wasn’t going to trade. I’d be crazy to get into the S&Ps. The bigger the fluctuations in the market, the bigger the boys in the pit would screw you. I got screwed on my trades regularly, even in the best of markets. On a day like today, they’d chew me to pieces. All Tuesday morning, I kept my eyes on my screens and my hands in my pockets. Stocks were bouncing around in extremely heavy trading. Debbie called at 11:30. Leo Melamed and Jack Sandner, the chairman of the Merc, had just gone into the S&P pit and called a temporary halt to all trading. They were afraid that the NYSE was going to shut down, and if that happened, the Merc would be left alone for everyone to dump on it. But, just after noon, the Dow Jones news wire began reporting that many blue-chip companies were initiating stock buyback programs. This positive news sent the blue chips soaring and the Merc reopened. The Dow ended the day up 102.27, the largest one-day gain ever. I’d missed the whole run, and for once was content to be on the sidelines. I still had a $6 million profit for the year, my nerves were shot, and my gold was in the safe. It was like after you make a big score in Vegas. I needed a break.