Chapter 4: The Crash and the Rasputin Market

When the Taiwan Stock Exchange index closed at 12,495 on

February 10, 1990, no one rang a bell to announce that the last
breath of air had been blown into the great Taiwan bubble.
Nothing special happened in that short, two hour Saturday
trading day to cause the market to begin imploding. It simply
seemed to have reached the outer limits of its self propelled
chain reaction, and a small, seemingly insignificant rupture
appeared on the surface of the tightly stretched bubble as the
great deflation began the following Monday morning in slow,
almost imperceptible increments.

The market had closed 1989 at 9,624, down just 10% from its
September peak of 10,773, and very few market players doubted
that there were bigger things to come. In January, the TSE
index recorded one of the market's finest performances ever,
rising by more than 25% in a single month for only the fifth
time since the beginning of the massive bull run three years
earlier. The market was up another 4% by February 10th, and was
now up 144% since year-end 1988, up 433% since year-end 1987,
and up a whopping 1103% since year-end 1986. Market turnover
shot up to over $5 billion on the average day with more than 1.2
billion shares changing hands per three hour trading session.
Taiwan's market capitalization represented over $300 billion in
aggregate wealth spread among the fraternity of the island's
market players, and nearly all of them felt rich and invincible.

This sudden avalanche of wealth had propelled janitors,

retired soldiers, dancehall hostesses, and messengers into
respected personages in the brokerage community, and uneducated
punters without the slightest conception of corporate finance or
the dynamics of markets developed cult-like followings among the
even less knowledgeable players who only months before had
manned assembly lines in grimy industrial districts or bussed
tables in local restaurants.

When the market opened on Monday morning, February 12th,

the index dropped by 3% to 12,126, which was in no way
remarkable, and several days of inconclusive trading followed.
Stock prices rallied 4% to 12,273 on Friday the 16th, off less
than 2% from their peak, and the exchange looked pretty much
like its rambunctious old self. The TSE then lost ground slowly
and steadily, never by as much as 2.5% in a single session, on
four of the last five trading sessions in February, closing the
month at 11,662, off 6.7% from the top, but down only 3.3% for
the month. Market turnover continued to rise and reached the
astonishing average level of $5.6 billion per day. The average
volatility of the market in February was slightly more than 2%
per day, up slightly from January, but about average for recent
months.

The market dropped 2.1% to 11,420 on March 1st, but fell by

2% or more on only five other trading sessions during the month.
The most volatile days were actually a pair of rallies with
increases in stock prices exceeding 4% on each occasion, and
the market closed the month at 10,756, down 7.8% from the
previous month-end and off 14% since the peak.

The back-to-back monthly declines in February and March

were the first experienced by the TSE index since 1986, but
almost no one was sweating it very much at this point. It all
looked like the market was just taking a short rest before
scaling new, uncharted heights as it had done so many times
before, and the armies of punters were being alerted to "buying
opportunities" by their ever optimistic and alert brokers.
Volatility had actually declined to under 2% per day, and it was
common knowledge that the market was "stabilizing" after its
series of dramatic new highs. After all, factoring in the
January rally, the index had actually gained 11.8% for the first
quarter as a whole.

While most players were still heavily into denial, I wrote

my own assessment of the market in the first quarter report to
shareholders of The R.O.C.-Taiwan Fund: "Taiwan's bull market is
showing signs of age. The extremely high prices and levels of
daily trading appear to be unsustainable, and the recent sharp
correction in Japan is evidence that no market is permanently
immune from economic and financial fundamentals." 1

Based on these risks, I had continued selling stocks to

raise cash in our portfolio and insulate our shareholders from
market risks. By quarter end, I had 29% of the portfolio in
cash equivalents, which was near the limit I could go to without
special board approval. Even with this conservative equity
position, our fund's net asset value gained 9% during the
quarter, capturing most of the market's last, wheezing upward
momentum.

The TSE index opened April and the second fiscal quarter of
the year with a 3.4% rally, but dropped nearly 12% in the next
three trading sessions to 9,828, the market's first close under
the mystical 10,000 level since early January. This sudden drop
included a record 612 point or 5.9% fall on April 7th when 192
of the 196 shares that traded that day dropped in price. By
month-end, the index had drifted down to 9,292, off 26% from its
record high, and the "correction" began to take on the
appearance of something more ominous. The average volatility of
share prices edged up to 2.6% per day, and average daily

1
Champion, Steven R., "First Quarter Report," The R.O.C.-Taiwan Fund, Taipei, March 31, 1990.
turnover on the exchange dropped to just under $4 billion, off
29% from February's peak level.

The TSE index plummeted 6% to 8,735 on May 1st, setting

another record and bringing it back to its peak 1988 level. The
market declined 6% or more on seven trading sessions during May,
and experienced nine daily declines in excess of 5%. The index
fell a record 6.7% on May 25th to a monthly low of 6146, and 190
of the 201 shares that traded that day hit their legal trading
floors to set yet another dubious market record.

These sharp drops in stock prices caused underground margin

lenders to demand more cash to shore up their stock financing
loans to market players, and the players either complied if they
could, or they were sold out of their positions, were
"decapitated" in local market slang, by the suddenly not so
friendly black market lenders. 2

One analyst was quoted in the local press lamenting, "We

can't see any positive support. We only see a continuation of
3
the plunge." Other analysts optimistically saw imaginary
"support levels" at either 6,000 or 7,000 on the TSE index. 4 The
market had become an even hotter potato for the government, with
most officials noting that regulation and management of the
stock market simply wasn't in their job description.

A spokesman in the Presidential Palace announced,

"President Lee Teng-hui is quite concerned about the continuous
falls of the stock market, but he won't issue any opinion on how
to counter this because it's the Executive Yuan that should
handle the issue." Lee Huan, the Premier and out-going head of

2
Stock Market Falls Record 6.34% as Investors Cut Their Losses," The China Post, May 19, 1990.
3
"Stock Market Suffers Record Fall of 6.7%," The China Post, May 26, 1990.
4
Ibid., The China Post, May 19, 1990.
the Executive Yuan, quibbled a bit on this, however, noting that
it wasn't actually his department either since he would soon be
replaced in office by General Hao Pei-tsun. "As head of a
caretaker Cabinet, I'm not in a position to introduce any major
policy, which should be up to the next Cabinet leader," Premier
Lee diplomatically demurred. 5

Looking on the brighter side of the market disaster, one

manufacturing executive was quoted as hoping that "the continued
downward trend will prompt workers to return to their original
jobs to ease the labor shortage." 6 This wishful thought proved
to be an accurate prediction of the behavior of many discouraged
small time stock players as thousands of them trooped back into
low level jobs in Taiwan's service industries. The Pearl River
Restaurant, for example, was able to fill seventy positions that
had been vacant since the bull run started, and the Soohang
Castle Restaurant was able to replace all its temporary workers
7
with full time staff who were happy to have a regular job.
Evergreen Marine, one of Taiwan's premier companies, was pleased
to see many seamen return to their jobs after unhappy interludes
in the stock market, and one ship captain returned to the bridge
after he ran through all his life savings. 8

At this point, the Taiwan stock market was down more than
50% from the February peak, but rallied a healthy 19% to 7,290
by May 31st. From the February peak to the late May trough, the
market's decline exceeded that of the 1988 debacle following the
surprise imposition of a capital gains tax on securities
transactions and was in about the same league as Taiwan's

5
Ibid. The China Post, May 26, 1990.
6
Ibid., The China Post, May 26, 1990.
7
"Bourse's Downturn Helps Ease Labor Shortage," The China Post, May 21, 1990.
8
"Stock Market Crash Bolsters Workforce," The China Post, November 17, 1990.
version of the great worldwide market crash of 1987. Average
daily volatility leaped to over 4% per day during May, and daily
trading on the exchange declined sharply to $3.0 billion.

Since the market's peak of only three months before, more

than $150 billion in paper wealth, far more than the country's
foreign exchange reserves, had simply melted away without
leaving a trace. Demand for luxury goods began to decline, the
property market faltered, and business in expensive restaurants
and nightclubs nose-dived. Taiwan's booming demand for luxury
autos stopped dead in its tracks with Mercedes Benz recording a
70% sales drop compared to the prior year. Sixty thousand
unsold cars sat on dealer lots and another sixty thousand piled
up in the Keelung customs warehouse. 9 Real estate speculators
slashed prices by 40% or more on luxury flats they had purchased
only months before in the heady days of the boom in order to
raise badly needed cash 10 , and 150 of the country's 380 licensed
real estate brokers shut their doors for good 11 .

As market players, which is to say nearly everyone on the

island, reacted to these suddenly changed circumstances, the
medical profession noted sharp increases in hyperactive and
melancholic behavior among the populace much of which they
12
attributed to stock market related stress . Psychiatric
patients confined in the Taipei Municipal Sanitarium leaped by
75% compared to the previous year, and out-patient consultations
were up by 19%. Both these increases were linked to the plunging
stock market by mental health professionals 13 .

9
"60,000 Cars Stockpiled in Keelung Warehouse," The China Post, July 9, 1990.
10
"Real Estate Market Losing Its Luster," The China Post, May 6, 1990.
11
"Real Estate Slump Hurts Island's Real Estate Brokers," The China Post, May 12, 1990.
12
"Doctors Warn of Health Risk from Stock Market," The China Post, March 10, 1990.
13
"Rise in Mental Illness May Be Linked to Stock Market Slump," The China Post, July 17, 1990.
 TAIWAN STOCK EXCHANGE INDEX
January, 1987 - December, 1990

14,000

12 ,4 9 5

12,000

10 ,10 6
10,000
8 ,7 9 0

8,000
TSE Index

6,000
4 ,6 7 3
4 ,9 8 1
4,000

2,000 2 ,5 6 0
2 ,2 9 8

0
J an-87 J ul-87 J an-88 J ul-88 J an-89 J ul-89 J an-90 J ul-90

As June trading began on the TSE, the optimists hoped that

the market would rally off its recent lows, and why not? It
always had done so before. They appeared to be right at first
as the market extended its late May rally into June with back-
to-back gains to 7,857 on the index, up nearly 8% from the
previous month-end and up 28% from the recent trough.

On Monday morning, June 4th, however, the bottom seemed to

drop out of the market as it plunged 6.5% during that three hour
session, and then it went into free fall with successive drops
of 3.7%, 6.7%, 2.2% 5.5% and 2.7%, to close off a horrendous
week with a 24% plunge to 5,933. With only the most faint
hearted of intermittent rallies, the market continued its
seemingly unstoppable decline to 5,050 at June 30th, down 31% in
the month, 53% for the quarter, and now 60% below its peak of
only four and a half months ago, representing market losses of
over $185 billion in the aggregate. The stock market's average
daily volatility stayed at the 4% level, and market turnover
continued its decline to a daily average of $2.6 billion.

Almost all shares traded on the TSE suffered in this market

carnage, but the small, speculative stocks and full delivery
shares which had led the market on the way up suffered the most.
Cathay Plastics, a full delivery stock, was down 92% in the
quarter; Nan Gang Rubber was off 83%, and Tay Feng Tire was down
82%. Only two shares recorded gains during the quarter, but the
conservatively managed blue chips fared much better than the
market averages. For example, President Enterprises fell a
relatively modest 33%; Asia Cement fell 34%, and Teco fell 40%.

In my second quarter letter to fund shareholders, I voiced

thoughts that were no longer quite so far out of the mainstream,
noting that "The long awaited market correction hit Taiwan as
stocks declined for the fifth straight month. The effects of
this dramatic decline are now rippling through the (Taiwan)
economy with bounced checks, settlement problems, and financial
crises in parts of the brokerage industry. The extent to which
this will impact the rest of the economy in Taiwan is still
unknown, but there is room for concern that serious consequences
could result in areas exposed to speculative excess." 14 . I had
raised the fund's cash position to 32% at quarter end with the
approval of our board, and due to this cash cushion and to our
policy of investing only in the strongest, blue chip companies,
our losses in the fund for the second quarter were just under
35%, much less than the decline in the market as a whole.

14
Champion, Steven R., "Second Quarter Report," The R.O.C.-Taiwan Fund, Taipei, June 30, 1990.
 Taiwan Market Volatility
January, 1990 - January, 1991

5%
4 .8 %

Standard Deviation of Daily Returns

4%

3%

2%

1%

0%
Jan-90 A pr-90 Jul-90 Oct-90 Jan-91

The precipitous fall continued into July with the index

falling another 10.3% during the month's first two trading
sessions to close at 4,525, but the market had not entirely lost
its animal spirits and rebounded 24% from this trough to 5,618
at month end. Market turnover continued to fall, reaching just
over $2 billion per day, and volatility remained high at 3.8% on
the average day.

The rally extended through the August 1st trading day,

lifting the market to 5,771, but panic selling again hit the
market the next day with the index off 5.6% in three hours of
trading to 5,450. The rout continued over the next seven
trading sessions as Taiwan's stock market reacted emotionally to
the Gulf crisis and the sell-off in the drastically overvalued
Tokyo market with successive daily losses of 5.9%, 2.4%,
6.8%,2.8%, 6.7%, 3.3%, and 5.1%. August 7th's 6.8% drop was yet
another downside record, and 202 of the 207 issues traded that
day hit and stayed at their legal trading floors. When the dust
settled from this debacle, the market had reached 3885, down 33%
from August 1st and 69% over the six months since the February
peak. Average daily turnover fell further during the month to
$1.3 billion, and market volatility in August reached an all
time high of 4.8% on the average day. At this point, $213
billion in the country's aggregate wealth had disappeared into
thin air, and six brokerage houses had already gone under in the
market typhoon.

Among those threatened by the surrounding financial storms

were solid business groups which had only recently been lured
into the securities business by the seemingly effortless profits
there for the asking. This included Ten Ren Enterprises,
Taiwan's largest tea producer and retailer, whose securities
affiliates suffered from embezzlement, unauthorized trading
losses, and unrecoverable, illegal margin loans made to its
customers. These losses threatened the existence of the entire
group, which Chairman Li Rui-he had built from nothing over a
period of thirty years. 15

"Big Tuna" Chuang's Hai Ba Wang Group, which operated a

successful, if somewhat hazardous, chain of seafood restaurants,
and had entered the securities business with similar
motivations. Market rumors that the company's brokerage
subsidiary had embezzled customer funds and engaged in illegal
stock trading prompted the "Big Tuna" to call a press conference
where he beat his chest and proclaimed, "If Hai Ba Wang
embezzled even a single share from customers, I'm willing to
16
face capital punishment." Warming to the subject of the
differences he perceived between the restaurant and securities
businesses, he went on to note, "My family and I have never

15
Liu, Philip, "The Tempest that Escaped the Teapot," Business Taiwan, July 23-29, 1990.
16
"Firm Places Ads Denying Any Financial Problems," The China Post, July 18, 1990.
bought stocks. How is it that you can go to jail for printing
counterfeit money, but not for printing stock certificates?
Stocks are things that can cheat people. I definitely don't
play stocks." 17

One of our company's former junior securities analysts, now

a kingpin at a local brokerage house, commented,
"Psychologically, everyone is uneasy. Whatever buyers there are
cautious, and there is dread of the Middle East situation and of
a collapse here." 18

TAIWAN STOCK EXCHANGE TURNOVER

January, 1987 - Decem ber, 1990

$7

$6 $ 5 .6

$5 $ 4 .8
Average Daily Turnover
US $ Billions

$4

$3

$ 2 .0
$2

$1 $ 0 .7 $ 0 .8

$0
Jan-87 Jan-88 Jan-89 Jan-90
Jul-87 Jul-88 Jul-89 Jul-90

The market opened down nearly 6% in September's first

trading session, and, with brief, intermittent rallies,
continued its full scale, headlong retreat. Trading remained
extremely volatile, averaging just under 4% per day during the
month and with eight sessions seeing changes of more than 5%.

17
王信人, “海霸王證券董事長開記者會展現實力,”聯合報表 1990年 7月 18日. 
18
"Gulf Crisis Deepens Gloom in Taiwan's Weak Stock Market," The China Post, August 11, 1990.
By September 30, the end of the year's third quarter, the market
had fallen to 2,705, a decline of 26% for the month, 46% for the
quarter, and of 78% from the market peak of only seven months
before. Turnover on the TSE continued to fall reaching a
relatively benign $800 million on the typical day, and
volatility remained at the 4% level on average.

During the September rout, a prominent securities analyst

noted, "This is not news anymore," and continued with the
logical absurdity that shares were really selling below their
"market values" whenever the TSE index was under 5,000. Another
highly respected analyst and portfolio manager predicted that
half the existing brokerage houses would face bankruptcy and
went on to note that, "It could be said that investors were not
only got (sic) their fingers burned but also had their arms tore
off. Some of the highly geared investors are on the run to
avoid being caught by creditors. They were simply too greedy or
ignorant and they got badly mauled." 19

The phenomenon of $2.2 billion in "locked funds," or shares

of stock held by local financial institutions in connection with
government orchestrated market support operations, overhung the
market like a black cloud. These institutions, banks, trust
houses, and insurance companies, were afraid to sell and
recognize the securities losses on their income statements, but
no one knew how long they could hold out before they were forced
into further panic sales that could prolong and deepen the
market catastrophe. 20

During the third quarter, I had increased our fund's cash

position even further to 40% with the permission of our board,

19
Chan, Danny, "After the Party," The China News, June 11, 1990.
20
"'Locked Funds' Worry Large Investors," The China Post, September 28, 1990.
and that decision, along with our conservative policy of
investing in relatively strong, blue chip stocks, limited the
fund's losses to 29% for the quarter, again better than the
overall market by a wide margin. In my third quarter letter to
shareholders, I noted, "Although the market has fallen
precipitously from its February peak, we remain cautious due to
the extreme market volatility and the uncertain state of many
corporate balance sheets. As we are better able to access the
likelihood of a major corporate credit crisis, we may
selectively increase the percentage of fund assets invested in
the most liquid, least leveraged, and best managed local
corporations." 21

On October 1st, the TSE index dropped another 5.4% to 2,560

and turnover on the exchange slipped to $450 million, ending one
of the great market routs in history. The index was down a
stunning 80%, representing aggregate losses of $250 billion to
be absorbed by Taiwan's now somewhat humbled congregation of
stock players. To put this financial disaster into historical
perspective, Wall Street had seen a decline of 89% in the Dow
Jones Industrial average from the 1929 peak to the 1933 trough
of the market. More recently, the Hang Seng index in Hong Kong
had declined 91% from its 1972 high to its 1973 low. In both of
these cases of extreme market collapse, the financial
infrastructure was severely impacted, and people lost their
confidence in equity markets for years to come.

The question on everyone's mind in the aftermath of the

Taiwan crash was the extent to which this world scale market
calamity would spread into the country's real economy. The
disaster scenario called for the massive losses in market value
to lead to margin calls, forced panic selling of remaining
21
Champion, Steven R., "Third Quarter Report," The R.O.C.-Taiwan Fund, Taipei, September 30, 1990.
securities positions, failed settlements, bounced checks,
personal and corporate liquidity crises, panicking banks calling
back lines of credit, and frantic depositors creating bank runs
and corporate bankruptcies. Memories of the Cathay crisis were
fresh in many players minds, and there were some indications
that this scenario might just play out. Some settlement
problems occurred in the brokerage industry, and the ratio of
bounced checks edged up to 0.4% of all checks written, a high
point since the tense days of the mid-1980's. The President of
one brokerage house hung himself by a curtain cord in his
bedroom in response to insurmountable business problems 22 , and
rumors of bank runs circulated, but were hard to pin down.

Local corporations were definitely facing financial

difficulties. The Ministry of Economic Affairs estimated that
50% of all small and medium sized businesses on the island were
in serious trouble, 23 and more than 300 firms in such labor
intensive businesses as textiles and footwear ceased operations
between the market peak and late August. 24

Artek Corporation, a medium sized electronics producer,

25
bounced checks worth $800,000 in early October; a highly
regarded footwear exporter, Inter Classico Group, failed for
26
lack of short-term financing, and such listed companies as
Taiwan Pineapple 27 and Tuntex 28 were rumored to be facing severe
financial difficulties. One local investment management company
predicted that ten listed companies would experience a financial
22
"Death of Security Firm Head Thought a Suicide," The China Post, October, 2, 1990.
23
Tseng, Osman, "More Firms Are Suffering Financial Troubles," Taiwan Business, September 10-16, 1990.
24
"Over 300 Labor Intensive Manufacturers Close," United Evening News, October 3, 1990.
25
Mark, Jeremy, "Taiwan Stocks Fail to Shake Losing Streak," The Asian Wall Street Journal, October 11, 1990.
26
"Failure to Get Timely Loan Folds Footwear Firm," The China Post, October 4, 1990.
27
"Taiwan Pineapple in Financial Trouble," The China Post, December 20, 1990.
28
"Tuntex Denies Financial Crisis," The China Post, September 6, 1990.
crisis in a fallout from the market crash after these companies
were reported to be relying on black market financing for
29
survival. About 20% of the firms listed on the TSE were
reported to be losing money 30 , and many companies scrambled to
drastically cut expenses. Aurora Corporation planned to reduce
salary expenses by 30%, and Great Electronics drew up "a plan
whereby all management level officials are required to
'voluntarily reduce' their salaries from 10% to 50%." 31 Luxury
businesses continued to suffer dramatic drops in revenues; real
estate prices were rumored to have dropped 30% - 40% on average,
and over 80,000 imported automobiles were piled up on the docks
in Keelung. 32
33
Six well heeled, "second generation " business leaders
called for the Ministry of Finance to take action to rescue the
market, and, ironically echoing the long-standing complaints of
the foreign financial community in Taiwan, to enforce tighter
quality control over the local accounting profession. Such
senior business leaders as C.F. Koo, the powerful Chairman of
the Chinese National Association of Chambers of Commerce and
Industry, called for government intervention to prop up the
stock market and provide financing to local companies. 34

The signs were very ominous, but Taiwan proved to be too

buoyant and adaptable for the disaster scenario to play very far
out at the macro level. The settlement problems abated without

29
"10 Firms to Suffer if Stock Crash Side-Effect Unremedied," The China Post, August 18, 1990.
30
"Over 1/5 of Taiex Firms in the Red," The China Post, September 6, 1990.
31
"Firms Lay Off Workers, Cut Salaries, Tighten Post Dated Checks as Weak ROC Economy Forces Belt
Tightening," Economic Daily News, September 22, 1990.
32
"Imported Car Sales Down from Slow Economy and Stock Crash," The China Post, November 17, 1990.
33
Second generation businessmen are generally the sons of Taiwan's pioneer industrialists who have taken over their family firms
or started new businesses on their own. They are generally U.S. educated at the graduate level and very sophisticated in their
approaches to technology and international marketing.
34
"Almost No Business Immune to Economic Slump," The China Post, September 24, 1990.
doing much damage; the ratio of bounced checks remained under
control, and there was generally no liquidity crisis in either
banks or businesses. People got back to work, and Taiwan's
economic machine somehow or other powered through a market
crisis that would have poleaxed many other newly industrialized
or developing economies.

To be sure, some players did face their own disaster

scenarios at the micro level. One such unfortunate was my old
friend Driver Lu, nemesis of German shepherds. One afternoon, I
heard a faint knocking, almost scratch-like, sound at my office
door and looked up to see a haggard, deflated version of old Lu,
who appeared to be about thirty pounds slimmer than the last
time I had seen him lounging in a VIP room at one of the more
sordid brokerage houses. Instead of the polyester Hawaiian
shirt that had become his post-retirement trademark, Lu seemed
to be dressed in an old bank driver's uniform, and there was
definitely a shine on his Corfam boondockers.

Lu, with an unaccustomed hangdog look, asked if he could

come in for a moment, and I started to inquire about a trip he
had taken to Las Vegas months before. Lu's heart just wasn't in
the small talk, however, and he quickly changed the subject by
matter of factly stating, "Boss, I lost all my money. I need my
job back."

I suggested that he really meant that he had lost a

considerable portion of his fortune in the market crash, but
that he was still a wealthy man. Lu gave me a somewhat
exasperated look and said, "No, I lost all my money. I had to
borrow cab fare to come see you today from my Tai-Tai."

Driver Lu had bet big on the market and then doubled up his
bets with underground margin loans after it started to drop.
During the market panic, he couldn't meet the margin calls from
his broker, who promptly sold Lu out, leaving him nothing.
Recognizing an obligation to Lu based on our years together on
the mean streets of Taipei, I immediately put him back on the
payroll and began to phase out my current driver, Smilin' Jack,
who, if Lu was a pit bull among drivers, was a personable
Pomeranian. I suppose Driver Lu was lucky; he was able to put
his short, happy life in the fast lane behind him and to return
to his natural habitat without being too much worse for the
wear.

Madam Boom Boom faced even more difficulties than Driver

Lu. I was just polishing off the last remnants of my omelet at
the American Club's Sunday brunch 35 , when I noticed Boom Boom at
a corner table having an animated, high volume discussion in the
Taiwanese dialect with three or four black clad, gold chained,
and tattooed liumang who appeared to be having some sort of
intra-mural cigarette smoking competition. Madam Boom Boom, who
had probably left work only hours before, was dressed in a
rather rumpled and revealing evening gown and peered through the
nicotine clouds from behind dark glasses that doubtlessly hid
very bloodshot eyes. This tableau presented an interesting
contrast to the majority of the club members who were in
attendance in wholesome family groups following morning church
services.

After the meeting rather noisily broke up, Madam Boom Boom
lingered for another cup of coffee and probably her fiftieth
cigarette during the past twenty-four hour period. I sidled up
to pay my respects on my way back for another run through the

35
I happened to be a member of the Admissions Committee of the American Club and was in attendance when Madam Boom
Boom's application for membership sailed through by unanimous vote.
buffet line, and Boom Boom's tale of gloom made Driver Lu seem
like Pollyanna by comparison.
36
She told me that the liumang who had just left were
pressing her hard to repay margin loans but that her own cash
flow situation was far from ideal at the time. Business
entertainment and, therefore, revenues at her nightclub had
dropped off a cliff right along with the stock market, but her
overhead remained very high. She told me that she had no idea
how she would repay her underground lenders, but that there was
actually one bright spot on the horizon if she could just hang
on for a while longer.

That bright spot was the supply side of Madam Boom Boom's
business equation. She told me that many of her most popular,
cash spinning "assistant managers" had gone into early
retirement with their stock winnings or had signed on as the
concubines of market players, but they were now trooping back to
work with somewhat less inflated expectations about their
37
remuneration . Madam Boom Boom, a primary school graduate with
years of supplemental "hands on" experience, was basically
giving me a micro-economic analysis of supply and demand finding
a new equilibrium point through the invisible hand of the price
mechanism as it applied to her niche, nighttime business. At
this new equilibrium, Madam Boom Boom hoped for the cash flow
that could save her from the impatient and bad tempered liumang.

36
A liumang (流氓) is a small-time gangster.

37
See Lehner, Urban C., "Growth Costs Taiwan in Social Dislocations, as the Big Time Looms," The Asian Wall Street Journal,
August 5, 1991. Lehner cites a nightclub hostess named Foong Foong who made tax free monthly income of between $8,000
and $75,000 during the bull market. She noted that she had turned down one offer of $18,500 to spend the night with a
customer. Foong Foong was quoted saying, "The Taiwan attitude is: quick money is best, and if you make it, it doesn't matter
how." An American friend interpreting for Lehner noted as an aside that the same logic had led him to a career in investment
banking.
 As it became clear that the disaster scenario would, in
fact, not generally play out in Taiwan, whatever the pain
endured at the personal level by Lu, Madam Boom Boom, and
countless others, an alternative, more salutary scenario began
to take shape in my mind, which I called the Rasputin model of
the market. The goodness of fit between this model and the
market's actual performance proved to be the salvation of Madam
Boom Boom and many other players who were just able to hang on
for a while without collapsing.

Just to review for a moment, the Siberian monk Rasputin for

various, complicated reasons was not very popular with certain
segments of the Russian aristocracy. To remedy this
unsustainable situation, the very unwholesome Prince Yussupov
invited Rasputin over to his place in St. Petersburg, the Moika
Palace, one evening for a little snack and some light
conversation. A thoughtful host, Yussupov had taken the
precaution of lacing the chocolate cakes and Madeira which he
planned to serve to his guest with approximately enough
potassium cyanide to fell a herd of elephants.

After wolfing down many of the cakes and pouring down glass
after glass of the Madeira, however, Rasputin is said to have
shown few signs of discomfort. In frustration, Yussupov took
out his handy 7.65 millimeter Mossin-Nagant revolver and rather
impolitely started pumping the monk full of lead at very short
range. These shots seemed to no more than mildly irritate
Rasputin, but he was put out enough that he decided to leave the
palace under his own steam. Outside the palace, Yussupov's
fellow conspirators proceeded to continue using the monk for
rife practice, and, what with the wine and all, this finally
began to slow him down a bit. Finally, after performing some
rather unpleasant surgical procedures on the still-alive
Rasputin, Yussupov's pals carted him down to the Neva River
where he finally succumbed in the icy water which soon froze
over him. 38

It dawned on me that the Taiwan market, like Rasputin, was

capable of absorbing unmerciful amounts of punishment and still
coming back for more with the same level of animal spirits as
before. This model began to become clear to at least some
observers after the market finally hit rock bottom in early
October and bounced strongly upward.

TAIWAN STOCK EXCHANGE INDEX

June, 1990 - May, 1991

7,000
6 ,3 0 5

4 ,9 2 6
5,000
TSE Index

3,000

2 ,5 6 0

1,000 4.0
$ 2 .7 b illio n
U.S. $ Billions

$ 2 .1 b illio n
2.0
$ 7 9 5 m illio n

0.0
J un-90 A ug-90 Oc t-90 De c -90 Fe b-91 A pr-91

Non-believers in the Rasputin syndrome erroneously

concluded that the market rally was nothing more than the "dead
cat bounce" experienced in many markets after a collapse. The
operative idea in this alternate model of the market is that,
like a cat thrown off a tall building to the pavement many
stories below, there will be a slight upward bounce following
38
Myles, Douglas, Rasputin: Satyr, Saint, or Satan, Mc Graw- Hill, 1990.
the protracted fall but that gravity will soon prevail once
more. Following this sequence of events, the condition of the
cat is, of course, not good.

Rasputin-like, Taiwan's stock market shot back 92% from its

low of 2560 to 4926 in a period of only six weeks and went on to
close at 6305 the next May, up 146% from the trough. Market
turnover rebounded in a similar manner from under $800 million
on the average day in September to $2.1 billion per day in
November and to $2.7 billion a day by the next April. This
amazing rally after the speculative frenzy and total collapse
that would have killed many equity markets for years to come was
not an isolated instance.

The Rasputin market again reared its head about a year and
a half later after the index drifted back down to 3098 in
January, 1993, only about 20% over its post-crash low. Like
Rasputin ignoring the potassium cyanide and the 7.65 millimeter
slugs, the TSE roared back 57% to 4851 in March with turnover
likewise exploding by nearly a factor of ten from $315 million
to just under $3.1 billion on an average trading day.
 Taiwan Stock Exchange Index
April, 1992 - March,1993

5500

4807 4851

4500

TSE Index

3500

3098

2500 5
$3.1 4

$ Billions
3
$1.4 2
$0.3 1
0
A pr-92 Jun-92 A ug-92 Oct-92 Dec-92 Feb-93

The Rasputin model is probably useful to keep in mind

whenever one seriously evaluates the Taiwan stock market, and it
should be assumed to be able to revive itself and figuratively
crash back through the frozen ice of the Neva River at any
point, not only undead but full of animal vigor and ready to go.
This Rasputin syndrome bailed out most market players who had
more than an ounce of staying power, including Madam Boom Boom,
who was able to pay off her underground lenders and get back to
her core business of providing emotional support and physical
comfort to local gentlemen facing their mid-life crises.

We can describe the market by using the Rasputin analogy,

but trying to understand why the market did not flip into the
disaster scenario is another matter, and explanations are
necessarily tentative and subject to conjecture. Nevertheless,
we can take a stab at it, as follows.

First, the market remained extraordinarily liquid

throughout the crash and the Rasputin phase. Although trading
turnover, the dollar value of shares changing hands, declined
along with the index, this is only an arithmetical certainty.
Trading volume, the number of shares traded rather than their
dollar value, remained at extraordinarily high levels,
indicating that there were matching buyers for the legions of
panic sellers. As shown in the chart below, trading volume
actually reached new highs just after the crash, at a time when
stock market turnover was still in the doldrums. During the
first quarter of 1990, the TSE executed total trades of 60.2
billion shares, five times the New York level and nearly double
39
Japan's total trading. During this period of market
instability, market players could readily sell their shares to
raise needed cash. The banks, corporations, and many
individuals remained relatively liquid, and the country's
monetary policy remained on course and firmly under control.

Taiwan Stock Exchange Volume

January, 1987 - December, 1990

$2,000
Average Daily Trading Volume

1,516
$1,500
1,271
Millions

1,000
$1,000

678

$500 414
344

$0
Jan-87 Jul-87 Jan-88 Jul-88 Jan-89 Jul-89 Jan-90 Jul-90 Jan-91

39
"Taiex Trade Volume Highest in the World," The China Post, April 30, 1990.
 During the crucial period of the crash and the market's
immediate recovery, daily stock trading was subject to only the
relatively loose and liquidity enhancing plus or minus 7%
trading limits, rather than the narrower, liquidity restricting,
limits in place at other times. We will take a more thorough
look at this topic in the next chapter.

The second factor which led to the validation of the

Rasputin model rather than the disaster scenario was the overall
strength of Taiwan's export led economy. As shown in the chart
below, growth in gross national product did slow down during the
market crash, but it remained at levels that would be considered
booming conditions elsewhere in the world and then bounced back
rapidly to even higher, more typical growth rates. Industrial
production, exports, and the international value of the New
Taiwan dollar remained relatively strong and recovered quickly
from small absolute declines; interest rates were stable, and
inflation remained low and well under control throughout the
period. The strength and diversification of the Taiwan's real
economy prevailed over the money games in the stock market, and
the country's economic development kept right on moving with
only minimal interruption.
 Taiwan Gross National Product
1988 - 1991

12%

10%
8 .8 %
8 .4 %
Growth Rate in GNP
8%
6 .6 %
6%

4% 3.6 %

2%

0%
1Q- 88 3Q-88 1Q-89 3Q-89 1Q-90 3Q-90 1Q-91 3Q-91
Sourc e : B aring Se c uritie s, "Taiwan M onthly Re port", Se pte m be r, 1992.

A related third reason for the Rasputin market rather than

the disaster scenario was the emergence of the mainland Chinese
market for Taiwan's exports and investment. Trade with the
mainland had been quietly going on for years with transshipments
made through Hong Kong to circumvent to official ban on direct
trade. By the time the stock market started to crater in early
1991, the China market had become one of Taiwan's most important
export customers, supplementing what had been an overreliance on
the American market.
 Taiwan Exports to Mainland China
1985 - 1991

$ 6.0
$ 5 .0

Taiwan Exports to China

$ 4 .0
$ 4.0 $ 3 .5

$ Billions
$ 2 .7

$ 2.0
$ 1.5
$ 1.1
$ 0 .9

$ 0.0
1985 1986 1987 1988 1989 1990 1991

Taiwan long-standing but quietly conducted trade with the

mainland through Hong Kong finally came out of the closet and
became the "story" for local and international brokers to
attach to many prominent Taiwan companies, which then promptly
became "China plays." While much of this was merely the slick
marketing, there is a certain logic to successful, world class
companies from Taiwan having a competitive advantage in dealing
profitably with their cousins on the mainland.
 Taiwan Exports
1985 and 1991

120%

100%

8 .3 % 16 .3 %

2 2 .6 % United States
80%
2 4 .0 % Japan
Europe
60%
8 .3 %
11.3 % 18 .4 % All Other
China
40%
4 8 .1%
12 .0 %

2 9 .3 %
20%

0%

1985 1991

The fourth, and perhaps most important, factor which

contributed to avoiding a financial meltdown was government
support for the system. During the market's precipitous fall
government officials quietly took steps to increase the demand
side of the equation by taking such actions as loosening rules
governing foreign access of the market, allowing new investment
management companies to form, approving the launch of new funds
by the existing money managers, allowing pension funds to invest
in a higher percentage of their assets in equity instruments,
encouraging government controlled banks to buy shares, allowing
the formation of new, legal margin lenders, and discussing
40
changes to the stock transaction tax. The government also
formed a $1.2 billion "Economic Revitalization Action Group"
under the Ministry of Economic Affairs to funnel loans to cash
strapped companies and to prevent the stock market crisis from

40
"Finance Ministry to Bail Out Market," The China Post, September 22, 1990.
becoming a general liquidity crisis. Variations on these
responses have become standard operating procedure during
periods of stock market stress.

During the rout, some senior government officials stuck

their necks out to "talk up" the rapidly collapsing market.
Incoming Finance Minister Wang Chien-shien commented in early
July with the TSE index still hovering near the 5,000 level that
" the reasonable level for the index should be between 5000 and
7,000 points, and the government will move to maintain
fluctuations of the index in this range." Minister Wang
explained that he believed that this range represented a
"reasonable" level for the market since the index had been at
5,000 when his predecessor Shirley Kuo had taken office, and it
had been at 7,000 when she left office. 41

A few days later, Wang went on to bullishly proclaim to

Chen Shui-bian, a member of the Legislative Yuan, "If I were not
Finance Minister, I would step in to purchase blue chips right
now as a long term investment. I guarantee that you will profit
from the investment. If you lose, I will compensate you. 42 " Led
by the blue chips, the market soared 300 points the following
day. The rally was short lived, however, and Minister Wang was
quick to note that his guarantee only applied to Mr. Chen and
that he only took responsibility for this advice within the
Legislative Chamber. 43

In past market crises, government officials were willing to

directly cooperate with the "big hands" to restore confidence in
the stock market. During the depths of the 1988 crash, for
41
"Gov't Plans Measures to Stabilize Bourse," The China Post, July 2, 1990.
42
"Wang's Comments Push Market Up 300 Points," The China Post, July 11, 1990. Minister Wang actually said, "如果我是老
百姓，我會大量買進。 買進績優股，長期持有，保證賺錢，虧了我賠。 “ according to the local press. See article
noted below.
43
邱文信，“長期投資穩賺﹕官話說的太滿”，工商時報，1990年7月12日。 
example, Premier Yu Guo-hua directed TSE President Chiao Hsiao-
feng to lead official market rescue efforts. As a part of these
efforts Chiao invited seven notorious "big hands," including
"Chili-Pepper" Chiu, "Thunderclap" Lei, and Ahbula, to one of
the restaurants at the Lai Lai Hotel to talk things over. This
meeting received extensive media attention and boosted market
confidence, and the index shot up more than 2000 points in a
little over a month. 44

A final, and perhaps sobering, possibility is that the

market crash and related financial disturbances did do serious
and lasting damage to the economy, but that it would simply take
time for these effects to work their way through the system.
Maybe Rasputin really was dead long before he hit the icy river,
and his convulsive movements were merely caused by misfired
nerve impulses crossing hopelessly damaged synapses. There have
been signs which lend some support to this second alternative
hypothesis, but they have been mostly overshadowed by continuing
industrial upgrading, personal income gains, and general
economic upgrading.

Now, having examined the inflation and subsequent bursting

of the great Taiwan bubble, it's time to take a closer look at
the mechanics of the market and how the players use the markets
peculiarities to ply their trade.

44
"'七大天王力挽股市狂瀾，財訊月刊，1988年12月。