Friday the 13th mini-crash
Encyclopedia
The Friday the 13th mini-crash refers to the stock market crash
that occurred on Friday, October 13, 1989. The crash was apparently caused by a reaction to a news story of the break-down of a $6.75 billion leveraged buyout
deal for UAL Corporation
, the parent company of United Airlines
. When the UAL deal fell through, it helped trigger the collapse of the junk bond
market. The UAL deal unraveled because the Association of Flight Attendants
pulled out of the deal when management, in negotiations over an Employee Stock Ownership Plan (ESOP) designed to fund the leveraged buyout, refused to agree to terms equivalent to those negotiated with other labor groups.
was down 190.58 points, or 6.91 percent, to 2,569.26. The NASDAQ
Composite shed 14.90 points, or 3.09 percent, to 467.30, and the S&P 500
Index fell 21.74 points, or 6.12 percent, to 333.65. The Dow Jones Transportation Average
fell 78.05 (5.26%) on the 13th, and fell another 102.04 (7.26%) on the 16th for a total decline of 12.13%. The major indices had closed at all-time highs as recently as Monday, October 9.
, the author of Irrational Exuberance
, conducted a telephone survey of 101 market professionals in the business days following the crash asking if they had heard about the UAL news before or after the crash; 36% surveyed said they heard about it before the losses set in, and 53% said afterwards.
The market professionals also believed that the UAL story was just an attention grabber, with traders just trying to find a reason to sell. Fifty percent believed that was the reason while 30 percent believed the news would reduce future takeovers.
Stock market crash
A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic as much as by underlying economic factors...
that occurred on Friday, October 13, 1989. The crash was apparently caused by a reaction to a news story of the break-down of a $6.75 billion leveraged buyout
Leveraged buyout
A leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage...
deal for UAL Corporation
UAL Corporation
UAL Corporation is the former name of United Continental Holdings an airline holding company, incorporated in Delaware with headquarters in Chicago, Illinois. UAL held a 100 percent controlling interest in United Air Lines, Inc., one of the world's largest air carriers, and is a founding member of...
, the parent company of United Airlines
United Airlines
United Air Lines, Inc., is the world's largest airline with 86,852 employees United Air Lines, Inc., is the world's largest airline with 86,852 employees United Air Lines, Inc., is the world's largest airline with 86,852 employees (which includes the entire holding company United Continental...
. When the UAL deal fell through, it helped trigger the collapse of the junk bond
High-yield debt
In finance, a high-yield bond is a bond that is rated below investment grade...
market. The UAL deal unraveled because the Association of Flight Attendants
Association of Flight Attendants
The Association of Flight Attendants-CWA is a union representing Flight Attendants in the United States. In 2011, AFA represents nearly 60,000 Flight Attendants at 24 airlines, making it the world's largest Flight Attendant union. Focused 100% on Flight Attendant issues, AFA has been the leader in...
pulled out of the deal when management, in negotiations over an Employee Stock Ownership Plan (ESOP) designed to fund the leveraged buyout, refused to agree to terms equivalent to those negotiated with other labor groups.
The close
Moments after the UAL deal fell through, the indices began their plunge. By the time the closing bell rang, the Dow Jones Industrial AverageDow Jones Industrial Average
The Dow Jones Industrial Average , also called the Industrial Average, the Dow Jones, the Dow 30, or simply the Dow, is a stock market index, and one of several indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow...
was down 190.58 points, or 6.91 percent, to 2,569.26. The NASDAQ
NASDAQ
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...
Composite shed 14.90 points, or 3.09 percent, to 467.30, and the S&P 500
S&P 500
The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock...
Index fell 21.74 points, or 6.12 percent, to 333.65. The Dow Jones Transportation Average
Dow Jones Transportation Average
The Dow Jones Transportation Average is a U.S. stock market index from Dow Jones Indexes of the transportation sector, and is the most widely recognized gauge of the American transportation sector...
fell 78.05 (5.26%) on the 13th, and fell another 102.04 (7.26%) on the 16th for a total decline of 12.13%. The major indices had closed at all-time highs as recently as Monday, October 9.
Survey
Many investors were left stunned. Since most market participants blame the UAL deal as the culprit, survey researcher William Feltus and Robert ShillerRobert Shiller
Robert James "Bob" Shiller is an American economist, academic, and best-selling author. He currently serves as the Arthur M. Okun Professor of Economics at Yale University and is a Fellow at the Yale International Center for Finance, Yale School of Management...
, the author of Irrational Exuberance
Irrational Exuberance (book)
Irrational Exuberance is a March 2000 book written by Yale University professor Robert Shiller, named after Alan Greenspan's "irrational exuberance" quote. Published at the height of the dot-com boom, it put forth several arguments demonstrating how the stock markets were overvalued at the time...
, conducted a telephone survey of 101 market professionals in the business days following the crash asking if they had heard about the UAL news before or after the crash; 36% surveyed said they heard about it before the losses set in, and 53% said afterwards.
The market professionals also believed that the UAL story was just an attention grabber, with traders just trying to find a reason to sell. Fifty percent believed that was the reason while 30 percent believed the news would reduce future takeovers.