Clearinghouse settlement failure alone could have triggered a cascade of 1987 bankruptcies

Evidence

Although it was the price falls on Monday October 19, 1987 that hit the headlines, the hours of greatest systemic danger came that night and on Tuesday morning. The events with which I began this book were not public knowledge at the time, but enough leaked out for “rumors about the financial viability” of the Mercantile Exchange’s clearinghouse to sweep the markets on the Tuesday morning (Brady Commission 1988, p. 40). Since the clearinghouse stood behind all the billions of dollars of futures traded by the Mere, it was a central part of the financial infrastructure of the United States, and the possibility of its failure was a source of deep alarm. — Donald MacKenzie, An Engine, Not a Camera, 833 (#corroborates, via linked claim)

As alarming as the size of the crash were the breakdowns in markets that accompanied it. The printers at the specialists’ booths on the New York Stock Exchange could not keep up with the waves of sell orders arriving through the semi-automated DOT (Designated Order Turnaround) system, and there were also serious network delays and software problems (Brady Commission 1988, pp. 48 and VI-47). — Donald MacKenzie, An Engine, Not a Camera, 820 (#expands, via linked claim)

Falling profits depress the capacity of firms to invest in new capital, consequently limiting future surplus value. At some point, the weakest firms go bankrupt. The workers fired as a result reduce their consumption which, subsequently, depresses further the profit of firms that just managed to hang on – some of which also go bankrupt thus precipitating a doom-loop, a domino effect of bankruptcies causing, and being amplified by, related financial and real estate sector slumps. — Yanis Varoufakis, Technofeudalism, 824 (#expands, via linked claim)

Categorization

• XREF: connects to: Clearinghouse mutualization makes a single member’s failure a system-wide contagion risk.; The 1987 crash exposed how fragile the options clearing system was to extreme prices. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 164; The greatest systemic danger of 1987 came after the crash, from the clearinghouse’s solvency. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 833 (+5 more)

Related

• The greatest systemic danger of 1987 came after the crash, from the clearinghouse’s solvency. (similarity 0.92)
• Clearinghouse settlement failure threatened to close the Merc and cascade into widespread bankruptcy. (similarity 0.90)
• Market infrastructure itself failed under the 1987 crash’s order flow (similarity 0.84)
• The 1987 crash created unprecedented clearing obligations twenty times normal daily settlement (similarity 0.84)
• The 1987 crash exposed how fragile the options clearing system was to extreme prices. (similarity 0.84)
• Clearinghouse interdependence made a single default able to collapse the whole exchange (similarity 0.83)
• The 1987 crash exposed limits of arbitrage as a mechanism linking markets (similarity 0.79)
• Clearinghouse mutualization makes a single member’s failure a system-wide contagion risk. (similarity 0.79)

Broader Connections

• The greatest systemic danger of 1987 came after the crash, from the clearinghouse’s solvency. #corroborates (0.88) — Donald MacKenzie, An Engine, Not a Camera, 833
• Market infrastructure itself failed under the 1987 crash’s order flow #expands (0.80) — Donald MacKenzie, An Engine, Not a Camera, 820
• Falling profits trigger a self-reinforcing bankruptcy cascade #expands (0.72) — Yanis Varoufakis, Technofeudalism, 824