'87 CRASH PAVED PATH FOR BULL RUN OF 1990S.

Byline: Philip Boroff Bloomberg News

The crash of October 1987 erased 30 percent of the U.S. stock market's value in a week. It also paved the way for the greatest bull market in history.

The near-collapse of the global financial system spurred regulators to increase trading capacity, shore up the market-makers and give the New York Stock Exchange the equivalent of its first set of disc brakes. Within two years, almost every average, from the 30-stock Dow Jones Industrials to Standard & Poor's 500, was back in the record books, blessed by the most exuberant shareholders of the century.

``Of course it could happen again,'' said Alan C. Greenberg, chairman of Bear Stearns Cos. ``And if it does, it will be a great opportunity to buy, just as it was the last time.'' He was saying the same Oct. 19, 1987, when he was practicing his golf swing on the trading floor of Bear Stearns.

The Dow Jones Industrial Average quadrupled in the decade after ``Black Monday.'' At the time, though, it wasn't clear whether markets would be left standing.

The financial system ``approached breakdown,'' according to a presidential task force that investigated the crash: ``The ability of securities markets to price equities was in question. The futures and stock markets were disconnected. There were few buyers in either market, and individual stocks ceased to trade. Investors began to question the value of equity assets.''

Only a handful of skeptics saw it coming. The Dow Industrials soared 44 percent through Aug. 25 in 1987. Then, October ushered in the cruelest news: On Tuesday, Oct. 12, headlines said Congress might kill the tax benefits of leveraged buyout takeovers, a pillar of the market's rally; a report Wednesday of an unexpectedly large trade deficit pushed up interest rates; Friday, the market was hit by news of an Iranian attack on a U.S.-flagged oil tanker.

On Black Monday, Japan's Nikkei Index fell 2.5 percent. By midday, stocks in London were down 10 percent. In New York, 11 of the 30 stocks in the Dow Industrials didn't open in the first hour of trading.

The Dow went on to fall 508 points, or 22.6 percent - its biggest decline ever. More than 604 million shares changed hands on the Big Board, double the prior record. The exchange's specialists, who are responsible for maintaining orderly markets, were overwhelmed.

``I literally had tears in my eyes,'' said Ned Collins, head of U.S. equity trading at Daiwa Securities America. ``It was scary.''

And that fright is what prompted the securities industry to build a better marketplace. The Big Board increased its daily trading capacity to about 2.5 billion shares and raised capital requirements for specialists. It shortened the time market participants have to settle trades. Collars now slow trading when the Dow moves more than 50 points, and circuit breakers would halt trading for half an hour if the Dow falls 350 points. (The circuit breaker has never been used.)

Similar controls on the trading of Standard & Poor's 500 Index futures were put in place in the futures pit of the Chicago Mercantile Exchange.

``In 1987, the market could go down with no limit,'' said William Brodsky, chairman and chief executive of the Chicago Board Options Exchange. ``That couldn't happen today.''

Small investors, spooked by their inability to get their brokers on the phone on the day of the crash, gained automatic access to the market through the Small Order Execution System. Individuals in large numbers began placing orders from home on their home computers, in a burgeoning, new electronic market.

These changes bolstered investor confidence. ``Every crisis has benefits,'' said Hans Stoll, director of the Financial Markets Research Center at Vanderbilt University. ``We took stock in our system and institutions, and saw how we can improve them. You can't prevent surprises, but you can improve a market's ability to withstand them, and we've done that.''

Americans are increasingly delegating their investing by putting retirement money into equity mutual funds. At the end of 1987, mutual funds owned 7 percent of the U.S. stock market; today, they own about 15 percent, according to the Federal Reserve Board. Ten years ago, $180 billion was in 846 funds. Today, roughly $2.3 trillion is in some 2,900 funds.

A steady-growing, low-inflation economy underpinned the market's recovery. This year, consumer prices have risen at a pace of 1.6 percent, the slowest in 11 years, and less than half the rate of 1987.

The 30-year Treasury bond yielded 10.18 percent the Friday before the crash; today, it yields 6.35 percent.

Low inflation and low interest rates make stocks more attractive as investments, while boosting corporate profits by cutting borrowing costs. Innovations in software, semiconductors, biotechnology and other businesses helped create new industries and dozens of new billionaires, including Michael Dell and Bill Gates.

``I see a degree of entrepreneurial activity that we haven't seen since the Great Depression,'' said William Freund, the NYSE's chief economist from 1968 to 1986 and now a professor at Pace University. ``Just look at the new companies that have risen, from Amgen to Intel, from Toys `R' Us to Wal-Mart.''