Soothing The

By John Greenwald

During the unrestful weekend after the stock market plunged 190.5 points on Friday the 13th, top U.S. financial officials knew it was up to them to help avert a panic the following Monday. At a pivotal two-hour meeting, Treasury Secretary Nicholas Brady, a former Wall Streeter, huddled with Alan Greenspan, chairman of the Federal Reserve Board, and Richard Breeden, head of the Securities and Exchange Commission. Sifting through the latest market data, the trio concluded that the Dow Jones industrial average would fall more than 50 points when the New York Stock Exchange opened Monday, but then would probably rebound as buyers began to snap up shares at bargain prices.

That assessment proved unerring. After a steep drop in early trading, stocks roared back Monday to post an 88.12-point gain for the day. Then on Thursday, the anniversary of the 1987 crash, the Government reported that the Consumer Price Index rose a modest 0.2% in September, propelling the market to a 39.55- point gain. The Dow closed at 2689.14 Friday, up a record 119.88 points for the week. In Tokyo the Nikkei index lost 647.33 points Monday but surged more ! than 1,000 points in the next four days to finish the week at 35,486.38.

In part, the comebacks reflected a rare degree of cooperation between government leaders and securities markets around the world. Speaking to bankers last Monday, Greenspan declared that Federal Reserve officials "have kept in productive contact with our counterparts abroad" and that "coordination exists at a detailed level" between the Fed, the Treasury, the SEC and the Commodity Futures Trading Commission, which regulates futures markets. Wall Streeters immediately dubbed the cooperating agencies the "Group of Four."

Greenspan provided far more than just verbal encouragement. To ensure that Wall Street had sufficient cash to buy stocks after the Friday the 13th sell- off, the Fed pumped $2 billion into the banking system Monday. Earlier, E. Gerald Corrigan, president of the New York Federal Reserve Bank, urged officials in Japan and West Germany to support the U.S. dollar to help restore confidence in American markets. "The U.S. had excellent crisis management this time," said Heiko Thieme, the Manhattan-based chief strategist for West Germany's Deutsche Bank.

Such coordination is sorely needed because Wall Street has become an ever more volatile place. Deregulation and the growth of computerized trading have left the stock market vulnerable to violent swings. "People have to get used to the idea that at certain points 5% to 10% declines are possible in today's highly automated markets," says John Phelan, chairman of the New York Stock Exchange. Yet even some Wall Street insiders have had misgivings. Warns Edward Yardeni, chief economist for Prudential-Bache Securities: "A 7% drop in the Dow Jones index is destabilizing to individual investors, and we need them in the market, not just the program-trading boys."

Many Wall Street leaders say Japan provides a model for managing securities markets to prevent wide swings. During much of the postwar era, Tokyo officials urged banks and investment houses to buy stocks whenever markets began to fall. In recent months the Tokyo exchange's Nikkei index has been relatively stable, although many Tokyo stocks trade at astronomical prices, at least by American standards. But money managers in Tokyo contend that Japanese firms have been largely freed from government control in the past few years. "When a market has to fall, it falls, Japan or no Japan," observes Jayme Garcia dos Santos, a senior vice president of Chase Manhattan in Tokyo. He said the gain in Tokyo stocks last week reflected the strength of the Japanese economy rather than any manipulation by government authorities.

In New York City the comeback was fueled in part by a new breed of go-go traders called "tactical asset allocators." These aggressive money managers, who command some $57 billion in resources, use computers to shift funds rapidly between investments ranging from stocks to real estate. When share prices fell early last Monday, the allocators saw that stocks had reached bargain levels and bet heavily on a market upturn by pouring money into S&P 500 futures contracts, which represent the stocks in the Standard & Poor's 500 index. Their purchases gave a big lift to the shares that underlie the index.

While such trading was helpful this time, many Washington politicians condemn stock-index futures like the S&P 500, which can be linked to stocks by computer programs, as a destabilizing force in the marketplace. The critics include Michigan Democrat John Dingell, chairman of the House Energy and Commerce Committee, who declared, "I see no reason for stock-index futures. I see them in the same place in the divine order of things as cockroaches."

For now, the Group of Four's calming message has been enough to avert a crisis. As trading closed last week on Wall Street, Treasury Secretary Brady asserted that the lesson of the Friday the 13th plunge was that the more closely the Government coordinates its regulation of financial markets, "the better off we're going to be." But if soothing words fail to moderate the next big swing, the U.S. may be forced to impose tighter restrictions on its freewheeling markets.

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CAPTION:Tale of two cities: the Tokyo exchange was tense but relatively stable during the stock skid, while Wall Street showed much greater volatility

With reporting by Barry Hillenbrand/Tokyo and Frederick Ungeheuer/New York