Let's take this to the next level
By March 19, 2023– Published on
On the morning of Thursday, October 18, 1907, the third-largest trust in New York City experienced a curious increase in withdrawals.
Trusts, at the time, were like banks, except far less regulated. They only had to hold 5% of their depositor funds in the bank - they were free to speculate with the rest. Built for “sophisticated investors,” they mainly served the New York financial and social elite.
On Friday, October 19th, the curious increase had become a surge.
By Monday morning, the Knickerbocker Trust was in a full bank run. Crowds clamoured overtop of each other, fighting to get inside the building.
"As fast as a depositor went out of the place ten people and more came asking for their money. Police were asked to send some men to keep order”. - The New York Times, October 23, 1907.
By noon, the Knickerbocker Trust barred its doors. They had run out of cash.
One week earlier, a failed takeover attempt of United Copper Company had spooked Wall Street. A small group of speculators had tried to corner the market and rapidly acquire shares. They bid up the price for a week but miscalculated and ran out of capital. Short sellers crashed the share price, and the hopeful speculators went bankrupt. United Copper collapsed from the selling pressure.
The Knickerbocker Trust had nothing to do with this failed takeover - except that the President of the Trust, Charles T. Barney, was a known associate of the speculators. They had approached him to finance their takeover, but he had declined.
Despite his abstinence from the deal, his relationship with the would-be raiders was enough to cause panic among his clients.
When the Knickerbocker collapsed, fear hit the streets. Wall Street became shoulder to shoulder with frantic depositors chasing their savings. By October 24, eight more New York banks and trusts had gone bust. The New York Stock Exchange plummeted to a ten-year low.
But while the world was focused on bank runs, stock collapses, and a flailing federal intervention, John Pierpont Morgan quietly became the sole proprietor of America’s steel industry.
In 1907, there was no Federal Reserve. President Roosevelt had sent his Treasury Secretary, George B. Cortelyou, to consult with the bankers, but real power on Wall Street consolidated in the office of JP Morgan. Nicknamed Jupiter, or Zeus, for his outsized influence, Morgan’s library became a revolving door of bankers, brokers and stock exchange officials looking for bail-outs.
To stem the panic, Morgan, Cortelyou, and his team reviewed the balance sheets of the shuttering trusts, dismissing any that looked insolvent or beyond repair. After examining over a dozen they deemed deserving of failure, they landed on the Trust Company of America - a Trust that was solvent and responsibly run, but a victim of panic in the market.
Morgan told his team, “This is the place to stop the trouble, then.”
They got to work liquidating the company's assets, raising money, and making the depositors whole.
But the trouble did not end there. Brokers had been trading on single-day loans from the banks. With lending activities halted, market liquidity vanished, and the New York Exchange was collapsing. At 1:30 pm on October 24, Ransom Thomas, the President of the Exchange, ran on foot to Morgan's house to tell him the exchange would need to shut its doors early.
Morgan knew this would only increase the panic on the street. By 2:00 pm, he had gathered the Presidents of the city's banks and told them they had ten minutes to raise $25 million or the Exchange was finished. Ten minutes later, he had $23.6 million in hand. They took to the market, started buying shares and kept the exchange alive until the 3:00 pm closing bell.
That weekend, Morgan gathered 120 bank and trust officials in his library. They had survived the week, but the crisis was not over. The runs on cash had not stopped, and many more institutions would face bankruptcy on Monday morning.
Standing before 120 bank officials, he demanded that the industry bail itself out - the solvent must finance the insolvent. The bankers were outraged. Morgan quietly exited the room, locked the door and pocketed the key.
He kept them locked in his library until 4:30 am when an agreement had been signed. They were then allowed to return home.
Morgan called similar meetings with the clergymen and the media, instructing them that they were to preach and report that confidence and stability had returned to the banking sector.
Typically a recluse, Morgan made a media statement, “If people keep their money in the banks, everything will be all right.”
Over the last ten days, Morgan had established himself as the saviour of Wall Street. During the fray, President Roosevelt - a typical adversary of Wall Street capitalism- sent him $25 million to assist with bailouts. The note attached had read, “Please save us.”
But while everyone focused on their survival, JP Morgan made his Power Play.
Moore & Schley was one of New York's largest brokerage firms. They had borrowed heavily from the city's banks, using their shares of Tennessee Coal, Iron and Railroad Company (TC&I) as collateral.
TC&I was a significant player in the steel business, but their share price had crashed in the market turmoil, and Moore & Schley’s loans were likely to be called on Monday morning. If so, the firm would collapse.
Morgan proposed a solution - he was willing to buy TC&I outright, at their depressed price, giving confidence to the banks that the firm was sound and no loans would need to be called.
He already controlled the US Steel Company - a firm under scrutiny by antitrust laws for controlling over 60% of America’s steel trade.
This acquisition would give Morgan a virtual monopoly on America’s steel industry. On any other day, the purchase would never have received government approval.
But the clock was ticking. If Moore & Schley went bankrupt, Wall Street would fall back into panic all over again. On Sunday night, two of Morgan’s associates caught an overnight train to Washington to meet with the President. Less than one hour before the opening bell on Monday morning, Roosevelt authorized the acquisition, sent news to Wall Street, and the market opened with a rally.
The banks and trusts had covered each other's losses. The clergymen had calmed the public. And the acquisition of TC&I had put confidence back in the market.
Jupiter had done his work. And he was now the sole proprietor of America's steel industry.
Roosevelt, in a later interview, would describe the meeting in the early hours of that Monday morning,
"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”
Over the last two weeks, similar events have occurred in the United States. Panic and bank runs become the cause of more panic and bank runs. Contagion becomes its own contagion. The media feeds on the frenzy and amplifies the fear.
The systemically important banks (SIBs) are not at risk. They have implicit guarantees on deposits. But per the 2020 FDIC community banking study, 4750 community banks in the US lack these guarantees. There seems to be a competition among journalists to throw out the direst forecast for this group - I have seen numbers ranging from 150 to 600 “expected failures.”
Who is rolling up their sleeves today?
In 1907, JP Morgan met with treasurer Cortelyou. Together they analyzed the balance sheets of the failing trusts and decided to intervene with the Trust Company of America. Then they pooled the city's bankers for capital and got to work.
Last week, JP Morgan's present-day CEO, Jamie Dimon, met with Treasurer Janet Yellen. He didn’t have a library door to lock, but he spent the next two days twisting the arms of the country's biggest bankers. He secured $30 billion in loans from 11 banks to provide First Republic Bank with a lifeline.
Bill Ackman, CEO of Pershing Square, commented with an echo of JP Morgan from 115 years earlier,
“FRB (First Republic Bank) is no SVB (Silicon Valley Bank). It is a well-managed, well-capitalized, high-service bank with good assets that is beloved by its clients. It is caught up in a bank run due to no fault of its own. It does not deserve to fail.”
Does any of this matter?
The media will obsess over the bank-run-musical chairs. The Twitter community will lose their mind over the Fed’s $165 billion (so far) new loans to banks. Financial pundits will report as the market bounces off the 24-hour news cycle.
But none of these threads matter. We won’t be talking about them in six months.
The only thing that matters is the Power Play.
A good crisis is never left to waste by those who are prepared. While the world focuses on the noise, someone will make their power play.
Jamie Dimon is no John Peirpont Morgan. He is not the undisputed leader of Wall Street. But alongside his peers at Bank of America, Wells Fargo and Citigroup, his firm has been raking in deposits from rattled customers at smaller, regional banks. Consolidation is happening fast.
If you were waiting for an opportunity to consolidate the banking industry massively, this would be it. However, the real action will be where nobody is looking. In 1907, everyone was worried about bank insolvencies. Only one person was thinking about steel.
I guarantee the conversations that changed America's steel industry on that fateful weekend in 1907 are occurring again.
Ignore the noise.
Watch for the Power Play.
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