The 1987 sharemarket crash

The crash followed a boom built on deregulation. When Labour came to power in 1984, the finance minister Roger Douglas began a deregulatory programme that brokers welcomed. In David Grant's account in Te Ara, deregulation, sustained high interest rates, a newly floated dollar and booming overseas markets were 'a potent recipe for a market explosion'. Global finance was now available, and corporate raiders such as Brierley and Chase had little trouble raising money for takeover bids. Financial institutions suddenly had far more freedom to lend, though little experience in doing so, and commercial property prices rose sharply alongside shares. Margin trading, buying shares on credit, became common. Insider trading, which was not yet a criminal offence in New Zealand, was rampant. In March 1986 the Auckland exchange moved to new premises on the corner of Queen and Victoria streets, and cut-price 'no frills' brokers undercut the established firms.

By July 1987 more than 40 percent of adult New Zealanders owned shares, and trading was four times the level of a year earlier. Broking houses took on inexperienced staff to keep up, and errors and missed transactions multiplied. Share prices reached an all-time high on 18 September 1987, when 309 companies were listed, far more than ever before. Since 1982 the New Zealand market had risen about 600 percent, compared with 250 percent in the United States and 400 percent in Australia. Then, after a dramatic fall on Wall Street, the New Zealand market collapsed on 20 October, a day that became known as 'Black Tuesday'. Share values fell by $5.7 billion in four hours as thousands of investors fled the market. Wikipedia gives a fall of nearly 15 percent on the first day.

The fall went on for months. Te Ara says values halved over the next 10 months; Wikipedia says that by the low point in February 1988 the market had lost 60 percent of its value. In the year after the crash New Zealand's market performed worse than any other in the world: it stood 50 percent below its peak, while Sydney was 32.7 percent down, New York 21.6 percent and Tokyo 3.6 percent. Shares in Judge Corporation that had once traded at $9.20 were worth 6 cents. Investment companies and property developers began selling property in a hurry, partly to offset their share losses; as property values collapsed, lenders that had taken property as security for loans were damaged. Many investors lost everything as over-extended companies went bust, and small 'mum and dad' investors were burned too. Between 1988 and 1991 many listed companies failed, wiping out shareholders' funds. Bankruptcies rose to almost 2,000 in 1989, and that year there were almost 3,000 company insolvencies. In 1990 the government spent $620 million recapitalising the Bank of New Zealand. Most broking firms downsized drastically and many collapsed, and by 1993 only 140 companies remained listed. Allan Hawkins, founder of the investment company Equiticorp, was later jailed for fraud along with other directors after the company collapsed.

The crash changed how the market was run. From 1988 the exchange doubled the minimum capital its member firms had to hold, to $1 million, and replaced its regional inspectors with accountants who demanded monthly reports. The Securities Amendment Act 1988 allowed civil action against insider trading and required shareholders holding 5 percent or more of a listed company to declare their interest. The final stage of a new computer trading system went live in June 1988, and within months transactions were being completed within 15 days. Accounts differ on the crash's wider effect. Wikipedia describes it spilling over into the real economy and contributing to a long recession, made worse because the Reserve Bank declined to loosen monetary policy. Brian Easton, writing in Te Ara, argues that the crash was not the cause of that recession, because other countries that had a crash did not stagnate as New Zealand did. NZHistory notes that to people who had already suffered in the name of economic reform, the collapse seemed like a case of 'reaping what you sow'.