Economic Disconnect: Bank Panic of 1907

Tuesday, April 6, 2010

Bank Panic of 1907

Short on time after the usual workout so a little stroll through history instead.

Bank Panic of 1907
As is my standard procedure, I get stuck reading Wikipedia articles for serious amounts of time. That site is addictive and I need an intervention!

Tonight let's take a stroll back in history, without Delorean Assistance I am afraid, and see what caused the United States to move ahead with establishing the Central Bank that we all know and love today. All information lifted from Wiki and the pictures come from there or a Yahoo image search.

Panic of 1907
All the usual suspects were aligned for calamity. A planned short squeeze (in United Copper) went badly for the instigator Otto Heinze and this was the start of the contagion. The creep up the banking chain was fast and the first bank to go belly up was Otto's Brother's (F. Augustus Heinze) bank in Butte Montana.

The problem was in the old days reputation meant not just something, but everything. F. Augustus Heinze was involved heavily is several large banks and the word that he was involved in such a play spooked depositors and trading partners. He was forced to resign all banking interests to stave off a panic. Poor fellow, he should have been born later when losing money is not exactly a problem for Bankers anymore!

Next up, The Knickerbocker Trust Company:

From Wiki:
The panic quickly spread to two other large trusts, Trust Company of America and Lincoln Trust Company. By Thursday, October 24, a chain of failures littered the street: Twelfth Ward Bank, Empire City Savings Bank, Hamilton Bank of New York, First National Bank of Brooklyn, International Trust Company of New York, Williamsburg Trust Company of Brooklyn, Borough Bank of Brooklyn, Jenkins Trust Company of Brooklyn and the Union Trust Company of Providence

The whole thing was falling apart when the original JP Morgan stepped in:

What is great about this picture is note his left hand (on your right!). He is holding the arm of the chair but the light makes an illusion of a knife pointed outward! Scary!

You can read the whole thing for all the gory details, but safe to say things got bad. Very bad.

Not quite tanks in the street, but Wall Street was a swarm of scared traders:

Every bankers nightmare, people want their actual money and line up to wait for it:

The ending of the panic was forced by JP Morgan strong arming banks that had money to lend to those that were facing runs. Mergers were rushed through (sound familiar?) and even the President was pushed by the good old "Systemic Risk" play:
On Sunday afternoon and into the evening, Morgan, Perkins, Baker and Stillman, along with U.S. Steel's Gary and Henry Clay Frick, worked at the library to finalize the deal for U.S. Steel to buy TC&I and by Sunday night had a plan for acquisition. But, one obstacle remained: the anti-trust crusading President Theodore Roosevelt, who had made breaking up monopolies a focus of his presidency.

Frick and Gary traveled overnight by train to the White House to implore Roosevelt to set aside the principles of the Sherman Antitrust Act and allow—before the market opened—a company that already had a 60% market share to make a massive acquisition. Roosevelt's secretary refused to see them, yet Frick and Gary convinced James Rudolph Garfield, the Secretary of the Interior, to bypass the secretary and allow them to go directly to the president. With less than an hour before markets opened, Roosevelt and Secretary of State Elihu Root began to review the proposed takeover and absorb the news of a potential crash if the merger was not approved. Roosevelt relented, and he later recalled of the meeting, "It was necessary for me to decide on the instant before the Stock Exchange opened, for the situation in New York was such that any hour might be vital. I do not believe that anyone could justly criticize me for saying that I would not feel like objecting to the purchase under those circumstances". When news reached New York, confidence soared. The Commercial & Financial Chronicle reported that "the relief furnished by this transaction was instant and far-reaching". The final crisis of the panic had been averted.

Now here is where things get interesting and I make my point of this exercise (there is one):
The frequency of crises and the severity of the 1907 panic added to concern about the outsized role of J.P. Morgan which led to renewed impetus toward a national debate on reform. In May 1908, Congress passed the Aldrich–Vreeland Act that established the National Monetary Commission to investigate the panic and to propose legislation to regulate banking. Senator Nelson Aldrich (R–RI), the chairman of the National Monetary Commission, went to Europe for almost two years to study that continent's banking systems.
Wow, Congress members actually tried to learn stuff back then? Amazing.

This of course led to the formation of the US Federal Reserve Bank, which came online in 1913.

In a hearing for the Pujo Committee there was this famous exchange between JP Morgan and a Lawyer:
Although suffering ill health, J.P. Morgan testified before the Pujo Committee and faced several days of questioning from Samuel Untermyer. Untermyer and Morgan's famous exchange on the fundamentally psychological nature of banking—that it is an industry built on trust—is often quoted in business articles:

Untermyer: Is not commercial credit based primarily upon money or property?
Morgan: No, sir. The first thing is character.
Untermyer: Before money or property?
Morgan: Before money or anything else. Money cannot buy it ... a man I do not trust could not get money from me on all the bonds in Christendom.

Ok so what is my point?

The FED was created to stop this kind of panic. The idea that large banks could have direct control over policy was not liked and the central bank was seen as a way to take this power away from the large banks.

Forget the FED's stated mission of stable prices and full employment, they have been total failures on that score for all time. The FED was created to prevent big banks from destroying the country.

The FED's original reason for being is also another colossal failure. The big banks still call the shots and the office of the Treasury is usually headed by a Goldman Sachs CEO. The FED is a willing partner. In 1907 people were furious the big banks could risk their savings, the FED saw a way to hold this power for themselves. Nothing has changed but the dancing partners after all this time.

Have a good night.


S. Gompers said...

Great post.

You are doing your research, look up the Bankers Manifesto of 1892...

GawainsGhost said...

Interesting. Here's another must read.

Dave in Denver said...

I'm glad you clarified - I was wondering where you were going with the history lesson.

I thought about you today when I was reading CR and he was spewing on about how he expected the economy to slowly improve or some b.s. like that. I wanted to reach thru the screen and strangle the guy.

EconomicDisconnect said...

I will check it out.

his wording is "choppy, slow growth" or some such amorphous thing. Look I love the guy and the site was one of the earliest sources for real info, but now he seems so apologetic for the FED/Treasury actions and it rankles me. I thought the aim was real reform and seeing reality not closing our eyes and pretending trillions in bailouts/backstops/etc are making a real recovery.

TomOfTheNorth said...

Well said, connected!

I must admit to suffering a major case of 'ire fatigue'. I've been sooo pissed off for sooo long, almost nothing gets my dander up anymore. Nothing crisis-related surprises me anymore. Maiden Lane is holding toxic waste? BFD. The Treas, The Fed, The Pres and Congress all lied? Oh well, waddaya gonna do. My property lost value yet my property tax spiked? That's funny....

TomOfTheNorth said...

Well said, connected!

I must admit to suffering a major case of 'ire fatigue'. I've been sooo pissed off for sooo long, almost nothing gets my dander up anymore. Nothing crisis-related surprises me anymore. Maiden Lane is holding toxic waste? BFD. The Treas, The Fed, The Pres and Congress all lied? Oh well, waddaya gonna do. My property lost value yet my property tax spiked? That's funny....

GawainsGhost said...

Well, I stopped reading CR months ago. He went from being an analyst to being an apologist. I have no stomach for that.

Anyway, that's a great article, GYC. It's long, about 30 pages, detailed and involved, but also very pertinent. Of course, things are very different these days than they were in the early 1920s. Although the author's salient point that the 1920-21 recession bears a much closer resemblance to this one than the Great Depression should not be overlooked. However, it is also true that any administration that tried to deal with this recession in the way the Harding administration dealt with theirs would be committing political suicide. That doesn't mean it wouldn't be the right thing to do though.

Today was repo day. There were probably, oh I don't know, 500 foreclosure sales on the courthouse steps. So we should be getting a lot of new assignments over the next few days. What fun that will be.

Want to know what I did this afternoon? Well, we got a request for a full interior price opinion and repair addendum on a repossessed home listed with another company. The company is thinking of transferring it to us because it hasn't sold. Current list price, $175,000.

Now, this house happens to be in one the nicer, established neighborhoods in north McAllen. Great location, good schools, easy access to main roads and shopping. 5 bedrooms, 4 baths, 3500+ sf, wood fence, in-ground pool. So I went over there to check it out.

Oh, my God. It's been completely stripped! All the lights, all the interior doors are gone. So are the appliances, the a/c unit and the pool equipment. The granite counters in the kitchen are ripped out, and all the cabinet doors are gone. Same for the built-ins and bathroom vanities. But this is what really gets me. They took all the drawers too.

Drawers? Why would you steal drawers? I mean, it's not like you can just slide them into another cabinet. You'd have to build new cabinets specifically to fit the drawers! It doesn't make any sense.

If there's one thing I hate more than a thief, it's a stupid thief.

So, I'm looking at about $35,000 in repairs at least. A typical homebuyer cannot purchase this house. It's not fit to live in. Only a professional investor with a lot of capital can buy something like this.

Calling all flippers, calling all flippers. Oh, sorry, I was having a flashback.

David said...

I first came about to the Panic of 1907 around the time lehman collapsed - very interesting.

At that time, Morgan called together the masters of the universe, locked them in the room and basically told them which ones would live and which ones would die. It worked and the US was able to kick the can down the road for another 21 years til it all blew up in their faces.

Dave in Denver said...

DANGIT gyc, now i can't pull up CR without cracking up thinking about your recent (and warranted) tirades.

EconomicDisconnect said...

Glad everyone liked the old story. Seems like it never really goes away.

about CR, HA! On his "mortgage rates when set by the private market and not the FED will not move!" call I offer Housing Wires take:
"What is clear is that the first round of private securitizations aren’t likely to cause wild celbrations on the Street. For one, mortgages need to be originated at roughly 6% at least to get any sort of capital flow; this was the case in previous securitization efforts, and it’s likely true now as well. The current (impossibly?) low mortgage rates do not quite hit that sort of watermark.'
"A huge potential investor in private RMBS issuances suggested to me that his firm wouldn’t invest until rates on the long-end start rising. “We need to see a 100bps jump in coupon for this to be profitable for just the issuer,” the investor, who asked not to be named, said."

Only the US government can make mortgages that lose money going forward. QE2 is not just a ship!!!

EconomicDisconnect said...

One for you Mustang drivers/lovers:
A Turbo Diesel Mustang?

S. Gompers said...

GYC and everyone, you might want to check this out as well...

Hi Tom!

watchtower said...

"A Turbo Diesel Mustang?"


regularly scheduled programming said...

Gawains, Almost spit coffee on the screen.

They took the DRAWERS too. Too funny.

GawainsGhost said...

Yeah, well, Regularly Scheduled, you might think it's funny, but it's not. It's lunacy.

I see this all the time. Here's how the scam works.

No credit? No problem! You too can buy a house. No down payment? No problem! We can give you a 0% down, interest-only ARM, and roll over the closing costs. It will cost you practically nothing.

Oh, and you'll need furniture. No money? No problem! You can completely furnish your new house with no down payment and no interest for a year.

So what these people do is fill out some paperwork. They can even lie bald faced, since no one really cares. They move into the house and furnish it. They do not make a single payment. What does it cost them? Utilities and food for a few months.

Then, when they get the first default notice, they just rent a moving truck, load up the furniture, strip the house, and disappear.

Great way to rennovate and refurnish a house in Mexico, where you cannot be prosecuted since the crime occurred in America.

You guys have no idea what I deal with. And frankly, to tell you the God's honest truth, I'm more than disgusted.

Two years ago I got this assignment on a ranch house out in the middle of nowhere. It had been completely gutted of course, but here's the thing. They left the back door open and the goats got in and shit all over the house!

And I have to walk through this mess, while taking pictures and making notes.

Then I get this phone call from a contractor who wants to get into the business of cleaning repossessed homes. Oh, really? You want to clean a home? I got a home for you to clean.

After he had shovelled all the goat shit out of the house, it was a four-foot mound in the front yard that had to be hauled off.

Needless to say, he never called me for another cleaning again.

regularly scheduled programming said...

>They left the back door open and the goats got in and shit all over the house!

Ya did it to me again dude. It's an involuntary thing you know. I mean, I feel for you man, but that shit is funny. Seriously, maybe you should think about writing a book.

GawainsGhost said...

Ha ha ha, he he he, ho ho ho. Let me know when I can entertain you with my tales of misery and woe.

EconomicDisconnect said...

I am going to excerpt some of the comments here in tonights post, great stuff.

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