Friday, October 18, 2013

Panic of 1907 Begins October 19

37 Wall Street, once the Trust Company of America building.
A crash is a sudden collapse or fail, as in that of a financial enterprise.

A panic is “a sudden fright with or without cause” that produces hysterical or irrational behavior, and that often spreads quickly through a group of persons or animals. It may occur in asset markets and involve a rush to convert to more liquid assets (cash).

Financial crises may involve one or both of the above, and it can be in any order.

In this series of posts, we will commemorate the Panic of 1907 by blogging stories of the Panic as they occurred over roughly two weeks in October.

In 1907, J. P. Morgan was very much like today's Warren Buffet. People looked at him for leadership. The 1907 Panic found J. P. at an Episcopal Church Convention in Richmond, Virginia. During the conference, his office kept him abreast of what was happening on Wall Street. Even thought JP was needed, his partners feared a premature return to New York might in itself touch off a panic.
J. P. Morgan

By Saturday October 19th, he decided to rush back to New York by private railroad car. Within two weeks he had saved several trust companies, a leading brokerage house, bailed out New York City and rescued the New York Stock Exchange.

37 Wall Street is the original home of the Trust Company of America, one of the distressed banks rescued by J. P. Morgan during the Panic of 1907. The panic was blamed on many factors – tight money and excessive speculation in copper, mining and railroad stocks. The immediate weakness came from the recklessness of the trust companies.

In the early 1900s, national and most state chartered banks couldn’t take trust accounts (wills, estates and so on) but directed customers to trusts. Traditionally they were synonymous with safe investment.

By 1907 they had exploited every loophole in the law and became highly speculative. To draw money to speculative ventures, they paid exorbitant interest rates. They loaned out so much against stocks and bonds that by October 1907 almost 50% of bank loans in New York were backed by securities as collateral, giving them an extremely shaky base. The trusts also did not keep the high cash reserves of commercial banks and were vulnerable to sudden runs.

Our next post will discuss the fallout from the panic on October 19th.

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