Foreigners and Mutual Funds Suffer Most in Wall St. Carnage

NEW YORK — When the mauling finally ended Monday, “there were bloody investors everywhere; almost no one was spared, and particularly not the mutual funds and foreign investors,” observed market analyst Jay Goldinger of Beverly Hills.

Monday’s blood bath on Wall Street wasn’t selective. From the smallest to the largest, investors lost dizzying sums of money as the Dow Jones industrial average tumbled a mind-boggling 508.00 points, giving up a record 22.61% of its value in the process.

But nowhere was the carnage worse than among foreign shareholders and mutual-fund investors, who together controlled more than $400 billion worth of stock in U.S. companies before the market plunge began. It was their panic selling that touched off the collapse.

“It all started at the opening bell with a huge number of redemptions by mutual-fund investors,” said Dale Tills, manager of institutional equities for Charles Schwab & Co. in San Francisco. “Then, the funds started selling (stocks) to raise cash to meet their redemption orders and the market took an even bigger hit.”

The Boston-based Fidelity Group of Mutual Funds took more than 200,000 investor phone calls Monday, compared to the 110,000 it takes on a typical October day. And although spokeswoman Karen Ernst said the firm hasn’t yet calculated how much investor money was withdrawn from its mutual funds Monday, the number of orders was so “extraordinary” that redemptions won’t be credited to investor accounts for seven days, she said. They usually are credited the day after an order is placed.

Foreign investors, whipsawed by both investment and currency fears, also were believed to have dumped billions of dollars worth of stock at huge losses.

Worry Over Fallout

“The Japanese especially were pretty heavy-duty sellers this morning,” said Merrill Lynch senior market specialist Walter Murphy. But investors all over the world bailed out of U.S. stocks in the aftermath of last Friday’s market battering and remarks by Treasury Secretary James A. Baker III over the weekend that indicated the United States may allow the dollar to fall against the West German mark.

As the dollar slides against foreign currencies, foreign investors are more inclined to walk away from the U.S. stock market because currency translation losses begin to offset their gains on securities trading.

The actual losses won’t be tallied for days. But many market analysts and economists are already worrying over the possible fallout.

“The risk here is that the Japanese market becomes unhinged by (the U.S. market collapse) and the currency situation and then that further hurts things here,” said Michael J. Howe, director of research for Butcher & Singer, a regional investment firm in Philadelphia.

No one knows the extent to which financial firms themselves were stung by Monday’s price collapse.

“Why don’t you talk to the NYSE?” one trader groused. “You’re going to see brokerages, traders and market makers go broke because no one had the guts to halt trading.”

New York Stock Exchange Chairman John Phelan, fielding questions at a press conference, said that while a trading halt was discussed among various government officials, they decided such action could be more harmful than beneficial.

Big Investors Bloodied

While the market collapse was “the nearest thing to a (financial) meltdown I ever want to see,” Phelan also said he knows of “no significant firm” that emerged from the rubble unable to meet its obligations.

Market analysts said most of the larger, more sophisticated investors were bloodied last week and watched Monday’s action from the sidelines.

“You can be sure they lost more money just watching, but their biggest hits were last Wednesday, Thursday and Friday,” said Tills of Charles Schwab.

Analysts were less certain about the effect on arbitrageurs and big pension funds and insurance companies, largely because many hedge their bets with so-called portfolio insurance that automatically hedges investments when markets reach certain levels.

But many were betting with Hugh Johnson, chief investment officer for First Albany, that even the most sophisticated pension fund managers “did not protect themselves against this hurricane.”

Nor was there more than a trickle of futures-related hedging activity Monday.

“We aren’t doing any and we hear that nobody else is either,” said Eric Seff, investment manager at Chase Manhattan’s Chase Investors Management Corp. “The (Big Board composite trade) tape is so late that none of us know where the indexes are.” Such indexes are used in the sophisticated hedging of bets known as arbitrage.

At one point late Monday, the trading volume was so heavy that the tape that records all transactions was more than two hours late.