The year 1987 stands as a pivotal moment in the annals of American financial and cultural history, a period where the booming speculative markets and the ethos of aggressive wealth accumulation found both their cinematic reflection and a stark, jarring reality check. As the decade progressed, a new generation of business leaders emerged, comfortable with challenging the established order. The cultural currents of the time, often dubbed the “Me Generation,” saw a turn away from political idealism toward the fervent pursuit of money, with the accumulation and flaunting of wealth publicly celebrated. This environment set the stage for both the critical lens of Hollywood and the real-world financial tremors that would eventually shake the system to its core, and whose roots would later be seen as directly connected to the later crisis of 2008.
Oliver Stone’s Wall Street, released in 1987, served as a powerful cinematic probe into the “suspect moral scruples” of the nation’s financial capital during this bull market. The film, a morality tale, depicted the evolving, often ruthless, relationship between the corporate raider Gordon Gekko and his young protégé, Bud Fox. Gekko, famously paraphrasing real-life stockbroker Ivan Boesky, delivered the rallying cry that “Greed, for want of a better word, is good,” touting not only free-market ideology but outright avarice as beneficial. The movie’s release coincided uncannily with a real-life insider trading scandal involving the very Gekko-like Ivan Boesky, and the burst of the stock market bubble that led to the 1987 crash. Stone’s film meticulously captured the “manic, electrifying pace” of Wall Street, filled with “endless computer terminals and telephones bursting like rockets everywhere,” offering a titillating glimpse into the opulent world of the rich and powerful, even as it “scathingly” indicted the financial elite and the broader acquisitive mentality of the decade. The film’s authenticity was enhanced by the involvement of investment banker Kenneth Lipper as a technical advisor.
This cinematic portrayal of a market on the edge foreshadowed the real-world events of October 1987. John Kenneth Galbraith, a sharp observer of speculative trends, had warned of an inevitable crash in an article published in The Atlantic in early 1987, noting the “classically euphoric moods” of the markets, though his prescient warnings were largely dismissed before the event. On October 19, 1987, “black Monday,” panic indeed struck Wall Street, with the Dow Jones industrial average plummeting more than 500 points, representing a staggering 23.6 percent of its total value, or $500 billion. This collapse had a global reach, with stocks rising, crashing, and rebounding in synchronization across Tokyo, Hong Kong, New York, London, Paris, and Zurich, highlighting how financial deregulation had “interlaced markets” and “exaggerated movements in both directions”. Economists at the time debated the causes, with many blaming the federal deficit. Crucially, the Federal Reserve System, acting as the lender of last resort, stepped in immediately to ease the crisis, satisfying the demand for liquid assets and preventing the devastating secondary effects seen after the 1929 stock market drop. This intervention, a clear example of “big government doing its job,” showcased the Fed’s critical role in maintaining financial stability. The 1987 crash would later, ironically, contribute to the undoing of the Glass-Steagall Act, as the big securities houses were perceived as a “cozy cartel” protected by the very act intended to bust up concentrated Wall Street power. Financial innovations of the 1980s, such as leveraged buyouts (LBOs), were seen as a dangerous form of leverage, rivaling the pyramidal holding companies of the 1920s. The environment of “paper entrepreneurialism,” where it was cheaper to buy companies than invest in physical assets, characterized this era.
Fast forward twenty years, and the financial landscape, though profoundly transformed by the ideas that “hatched in 1985”, began to show cracks again in August 2007. This period, termed “The Long Quiet” by some, saw credit markets begin to seize up. A significant early warning sign came on August 9, 2007, when France’s largest bank, BNP Paribas, announced it was halting withdrawals from three money market funds. The reason was stark: the market for certain assets, particularly those backed by American mortgage loans, had “essentially dried up,” making their valuation impossible. This was a “chilling sign” that mortgage-related assets were being treated as “radioactive,” unfit to buy at any price.
Against this backdrop, American International Group (AIG), a colossal insurance company, and its financial products unit (AIG FP), became a focal point. Despite the escalating crisis, Joseph Cassano, who headed AIG FP, and Martin Sullivan, AIG’s boss, expressed “little concern” and even “little worry”. Cassano famously told investors that it was “hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any of those transactions,” with Sullivan concurring that it allowed him to sleep “a little bit easier at night”. This confidence stemmed from the belief in AIG’s invulnerability, buttressed by its massive balance sheet of over $1 trillion and minimal debt, leading to the perception that it was “simply too big to fail”.
AIG FP’s perceived “foolproof” strategy revolved around writing credit default swaps, an instrument they concluded was safe based on computer models and historical data that showed the odds of a simultaneous wave of defaults were “remote, short of another Great Depression”. The unit’s success was heavily reliant on AIG’s triple-A credit rating, which significantly lowered its cost of capital, allowing it to take on more risk at a lower cost. Ironically, AIG had already ceased insuring securities with subprime tranches by late 2005, ostensibly avoiding the most toxic CDOs issued in the subsequent two years. However, this didn’t fully insulate them, as Goldman Sachs, one of AIG’s biggest clients, began demanding billions in additional collateral in 2007, revealing a significant divergence in how AIG valued its “super-senior” credit derivatives compared to the market. Cassano, in a moment reflecting his Brooklyn roots, dismissed Goldman’s concerns, stating, “It means the market’s a little screwed up”. Internal voices, like Gene Park, eventually recognized the increasing subprime concentration in AIG FP’s insured consumer loan piles and the potential for catastrophe if defaults surged, leading Cassano to agree to stop insuring new deals, though the existing ones remained. This hubris and lack of preparedness for a systemic downturn, despite warnings and the clear financial interconnectedness of Wall Street firms, would prove devastating, as the “glue that holds the entire arrangement together,” old-fashioned trust, began to vanish. The complex financial instruments created by Wall Street, initially pitched to “redistribute the risk,” were now being used to “hide the risk by complicating it,” turning “lead into gold” for traders who were incentivized to make the market less efficient.
In retrospect, both 1987 and 2007 highlight recurring patterns of unchecked speculation, the rapid evolution of complex financial products designed to obscure risk, and a cultural embrace of wealth accumulation. The seemingly contained “panic” of 1987, and the Fed’s timely intervention, may have inadvertently fostered a sense of invulnerability that allowed even greater risks to accumulate over the subsequent two decades, culminating in the more systemic crisis of 2007-2008, where the “long quiet” ultimately gave way to a deafening roar of financial collapse. The financial 1980s, indeed, proved to be the “umbilical cord” connecting to the later crisis.