In 1987, America is riding one of the greatest bull markets in history—until it all comes to an abrupt end on Black Monday, October 19th 1987. Portfolio insurance, a fragile strategy built on unrealistic market assumptions, helps turn a selloff into the single worst day in stock market history.
Ross Johnson, the CEO of RJR Nabisco, watches as his stock price gets cut in half in a day… even though the business and the economy are fine.
Over the next year, he tries everything from asset sales to share buybacks to convince the market there’s a lot more value at RJR Nabisco than they’re giving him credit for. Nothing works.
Meanwhile, leveraged buyouts are hot on Wall Street but that’s the one solution Ross Johnson isn’t willing to try. He’s a brilliant political operator who can manage board members, who loves perks, and hates constraints. But above all, he can’t stand that the market keeps pricing RJR Nabisco like a doomed tobacco company. That frustration overcomes his aversion to LBOs, and he makes his move on October 19th, 1988—exactly one year after Black Monday.
Chapters
(00:43) Welcome + recap: from junk bonds to the LBO era
(03:35) 1987 at the top: bull market euphoria, Berlin Wall optimism, Fed hikes
(05:24) Portfolio insurance: Black-Scholes in the wild and the “mechanical” selling logic
(09:58) Black Monday: the crash day and why it shocked everyone
(11:35) RJR’s stock collapse: the bargain that changes the story
(11:45) Meet Ross Johnson: perks, power, and the 80s CEO archetype
(28:17) LBOs 101: the mortgage analogy + why leverage can create value
(31:54) ERISA & pensions: Prudent Man Rule clarification unleashes institutional capital
(41:22) KKR’s rise: Henry Kravis, fund economics, and the LBO machine
(52:03) Ross’s playbook: buybacks, tobacco overhang, and the $75/share MBO spark
References
Barbarians at the Gate: The Inside Story of America’s Most Notorious Corporate Takeover by Bryan Burrough, John Helyar (link)
RJR Nabisco: A Case Study of a Complex Leveraged Buyout, Financial Analysts Journal, 1991 (link)
Junk Bonds: How High Yield Securities Restructured Corporate America by Glenn Yago (link)
Dangerous Dreamers: The Financial Innovators from Charles Merrill to Michael Milken by Robert Sobel (link)
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Note: this show is for informational purposes only and isn’t investment advice. Backtest hosts and guests may have investments in the companies discussed.
