Still, momentum was running out of gas. A bad trade deficit number on Wednesday, October 14, sparked a three-day sell-off of more than 400 points on the Dow. On the next Monday, it fell another 500 plus points.
The next day, Tuesday morning, I was interviewing the head of municipal bonds at Goldman Sachs, which was rumored to have suffered huge trading losses during the previous four days. An underling poked his head in the door to report to his boss that the firm "was just on the tape" announcing that Goldman had announced it would lend hundreds of millions to mutual funds to help them with redemptions. Even in those days, Goldman was worried about the little guys.
Leading savants at the firm were all saying that the federal budget and trade deficits were showing how the U.S. was living so far beyond its means. The crash signaled that the recession had begun, Goldman's wise men proclaimed.
Wrong again. Inflation hawk Volcker had been succeeded by the laissez-faire Alan Greenspan, who flooded the system with liquidity faster than he drank Ayn Rand's Kool Aid as a young man in the 1950s.
A recession wouldn't arrive for almost three years. The economy stabilized in 1988. With stock prices off 35% from their 1987 highs, an M&A boom led by corporate acquirers, not raiders, came back stronger than ever, culminating with the KKR buyout of RJR Nabisco in late 1988.
Some deals were comical. Merv Griffin and Donald Trump engaged in a bidding war for Resorts International. Writing in Barron's, the ubiquitous Ben Stein voiced outrage that both Trump and Griffin were robbing all the poor little public shareholders of Resorts. Trump and Griffin ended up splitting up Resorts and within a few years both defaulted on their LBO debt, prompting some to wonder what Stein was smoking.
Signals everywhere were flashing that all was not well. Many overleveraged LBOs, like Revco and Federated Department Stores, quickly declared bankruptcy barely one year after they sold their junk bonds to complete the deals.
By 1989, the economic recovery that began in 1982 was growing very long in the tooth. Boesky and Milken were headed to the pokey, Giuliani was running unsuccessfully for mayor of New York and the Berlin Wall was falling.
Early in 1990, Drexel Burnham paid about $400 million in bonuses. A week later, they filed for bankruptcy. To paraphrase boxing promoter Don King's favorite line, "Only in America," this could happen only on Wall Street. And remember Wall Street firms are the guys who tell Corporate America how to run their finances.
By year's end, the U.S. economy was in its only recession between 1982 and 2000. Facing a huge budget deficit and a war to reclaim Kuwait from Iraq, President George H. W. Bush went back on his no new taxes pledge and raised income taxes during a recession.