WALL STREET'S DOOMSDAY SCENARIO

By Daniel Kadlec

Even with the Dow Jones Industrial Average flying high over 8000, few on Wall Street say they expect a crash anytime soon. Indeed, the world is a prosperous, friendly place these days, and the coffee-shop buzz is, "How do I get in the market?" not "How do I get out?" But make no mistake, the stock market could crash again. Mechanically, there is nothing in place to guarantee that the Dow won't fall 1000 points by lunch and another 800 points in the afternoon. Get real! An 1,800-point decline today would be the same 23% drop that occurred on Oct. 19, 1987. And that plunge took place after the Dow had already fallen 17% from its speculative peak three months earlier, which was 10 years ago this month. An exact recurrence would put the Dow at 5200 by mid-October.

Of course things are much different. The economy is on a firmer footing. And since that horrendous crash, much has been done to forestall a repeat debacle. For example, brokerage firms and mutual-fund companies have invested billions of dollars in technology so that they can answer all the calls and execute all the trades on the busiest days. The New York Stock Exchange, which has never traded even 1 billion shares in a day, currently has the capacity to trade 3 billion shares. On the computerized Nasdaq stock market, capacity was a mere 250 million shares a day in 1987 and is now 1 billion shares, headed for 1.5 billion shares by the end of the year.

The N.Y.S.E. has adopted a flight of funny-named trading curbs: "collars" prevent certain computerized stock trading when the Dow is up or down 50 points in a day; the "sidecar" rule gives small orders priority when the market is moving briskly; and "circuit breakers" halt trading for 30 minutes when the Dow is down 350 points and for one hour when it is down 550 points. The curbs ensure that investors have time to think. But at the end of the day, if what they think is that they should sell, their brokers, the fund companies and the exchanges are ready to accommodate them--so look out below.

Again, this isn't to be taken as a crash prediction. When the bull market finally ends, which it must, it certainly doesn't have to be in calamity. The more natural turn would be to a slow, grinding bear market, in which stocks fall some 20% to 30% over a year or longer. No panic. Just a lot of selling, most likely hinged to a downturn in the economy.

But it's worth noting that even with all the adjustments since the '87 crash, another meltdown is quite possible. And that hasn't been lost on a number of institutions quietly preparing for the worst. Some of the nation's largest mutual-fund companies, like Vanguard and Fidelity, have detailed battle plans should the market fall apart. Brokerage firms seem less frenetic but no less prepared, as is the government. Maybe these parties aren't as sanguine about the markets as they would have us believe.

In government, the President's Working Group on Financial Markets, formed after the '87 crash, still meets every six weeks for an hour or so to discuss things like bank failures and stock-market crashes. The group is chaired by Treasury Secretary Robert Rubin and includes Federal Reserve Chairman Alan Greenspan, as well the heads of the Securities and Exchange Commission, the Commodity Futures Trading Commission and others. Officials are reluctant to say anything about contingency planning out of concern that it would be misinterpreted as a statement on the market--something they want no part of. Early last week Rubin was asked if he believed stock prices were too high. "Those are the kind of judgments each investor has to make for himself," he demurred.

What is known, though, is that the group is especially concerned about the potential for outflows from mutual funds, which have become swollen with individual's deposits this decade. One of the group's first courses of action during a crash would be to call fund companies to monitor activity. Another virtual given is that the Fed would cut interest rates, as it did in 1987, putting enough money into the economy to ease bottlenecks. That single act--cutting rates--is widely viewed as having greatly limited the carnage in '87.

The overriding belief of the President's group--and this is true of nearly all relevant institutions--is that virtually any market decline would be tolerable so long as it was orderly. The ability to take all calls and get all trades done is paramount. It helps avoid panic, which leads to irrational selling and a stock-market death spin. Says William Johnston, president of the N.Y.S.E.: "We see ourselves as a utility. Our job is to supply enough power at peak times to keep every light burning." Hence the Big Board's vast trading capacity, built at a cost of $1 billion since '87.

Brokerages and fund companies have more complex battle plans. For starters, they have to be able to pick up the phone every time it rings. That was a major problem in the '87 crash. Clients couldn't get through. And not every client who gets through wants to trade. Many just want advice. Merrill Lynch's crisis plan is drawn from the '87 experience. It will depend on its far-flung army of brokers to stay in contact with clients, while management's main task will be to stay in touch with brokers. At the first sign of a meltdown, spokesman Jim Wiggins says, Merrill chairman David Komansky will gather the 13-member management committee in a crisis room on the 32nd floor of the firm's New York City headquarters. The room has video conferencing and a bank of phones. The first task will be to assess the reasons for the crash and decide quickly on a sell, hold or buy strategy to communicate to the branches.

Fund companies probably have the toughest chore, and maybe that's why they seem most concerned with having an emergency plan. They have thousands of clients and often no extensive broker network to hold hands--just an 800 number and a staff of phone operators. "For us the front door is the telephone," says Vanguard president John Brennan. Vanguard, which manages some $300 billion, has what it calls a bear-market task force. In the past few months the company has been taking pains to scale back its clients' expectations for returns and even warning that a bear market is inevitable. To prepare itself, Vanguard has built an off-site "war room" loaded with phones and has a "Swiss army" of about 1,000 telephone representatives that can be deployed almost instantly, doubling the firm's call capacity.

Fidelity Investments, with more than $500 billion in assets, is no less concerned about a crash crush. Steven Akin, who manages Fidelity's electronic systems, says the firm can also double its phone capacity in an emergency, partly by dropping many live phone and computer lines now stored in the cafeteria ceiling. During the past year, Fidelity has paid particular attention to crisis planning. "More dry runs, more computer simulations to make sure equipment is working, information is disseminated quickly, and lines of credit are reconfirmed with our banks," says Robert Pozen, president of Fidelity Management and Research Co.

In varying degrees, fund companies across the country are engaged in such planning, their central concern being the ability to take phone calls. Of course, there is no perfect test of a contingency plan. No one can know exactly where the pressure points lie until it's time to deal with them. The good news is that heads of state and money seem prepared for the worst. Or is that the bad news?

--With reporting by Sam Allis/Boston, Jane Van Tassel/New York and Adam Zagorin/Washington

With reporting by SAM ALLIS/BOSTON, JANE VAN TASSEL/NEW YORK AND ADAM ZAGORIN/WASHINGTON