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particularly aggressive buying inside a robust decade are common just before most of the crashes.
particularly aggressive buying inside a robust decade are common just before most of the crashes.
Less obvious commonalities also appear, including new financial contraptions that we are (overly) confident we understand, only to learn that they inject uncertainty and leverage into the stock market at its weakest moment.
Less obvious commonalities also appear, including new financial contraptions that we are (overly) confident we understand, only to learn that they inject uncertainty and leverage into the stock market at its weakest moment.
prescient. Why didn’t we listen? Given the commonalities, how do we keep getting ourselves into situations in which we convince ourselves that this time it’s different? Often it’s the nature of the contraption that convinces us that much of the risk has been wrung out of the stock market.
prescient. Why didn’t we listen? Given the commonalities, how do we keep getting ourselves into situations in which we convince ourselves that this time it’s different? Often it’s the nature of the contraption that convinces us that much of the risk has been wrung out of the stock market.
James J. Hill
In 1901, Hill’s roads from the Northwest
much of which paralleled that of E. H. Harriman’s Union Pacific.
Edward Henry Harriman
May 9, 1901, the day Northern Pacific reached its peak, became known as “Blue Thursday” because this action in Northern Pacific sucked all the air out of every other stock and caused the rest of the market to plunge; on May 8 and 9, as Northern Pacific was cresting, the broad stock market lost 10.2 percent of its value, with the Dow closing at 67.38. The headline of the May 10 edition of the New York Times described it as “Disaster and Ruin in Falling Market.”
“Blue Thursday” panic, the Dow closed that day at its highest level of 1901 to date, 76.59, up 8.3 percent for the year.
It’s no accident that J. P. Morgan was the money and the brains behind Northern Securities.
Didn’t he owe them some consideration during his maneuverings?
Morgan was becoming one of the most hated men in America, but he had a bigger problem: Theodore Roosevelt.
Roosevelt had been in office less than five months but he’d found an endeavor that was akin to war, and his enemy would be the monopolies.
conspiracy in restraint of trade.
of Missouri admitted to a grand jury that he had been paid, while in office, $1,000 by the sugar trust for “literary services” and another $750 by the tobacco trust, and had been offered a similar amount by the baking powder trust, the drumbeat got more insistent. With each revelation the outlook for all the trusts darkened, taking the stock market lower, since the trusts signified cooperation and size, both of which led to higher profits. As the Supreme Court sat for arguments on December 14, 1903, the Dow was at 46.70, down 27.4 percent for the year and 25.0 percent since the verdict against
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that the Sherman Antitrust Act meant that “liberty of contract did not involve a right to deprive the public of the advantages of free competition in trade and commerce.”
a “mammoth bull movement” running its course on the New York Stock Exchange.
with stocks at their present high prices—have begun to come in and buy heavily.” This may have been the first real instance of individual investors taking a big stake in the stock market. It would end badly less than two years later.
Every modern stock market crash has an external catalyst at its heart. These external catalysts—some are acts of nature, such as 1906’s earthquake; some are geopolitical, as in 1987 and 2010; some are political, as in 2008; and some are criminal, as in 1929—are not sufficient themselves to start a crash, though they are necessary.
Similarly, as stocks decline in value during a correction, investors begin to recognize value and step in to buy at a discount; greed overcomes fear. During a crash, unique forces align. The decline doesn’t stop as these forces overwhelm the ability to know what value is.
Regardless of the defense, public opinion was against Standard Oil.
The Times may have wanted to highlight an injustice—or to point out a flaw in Roosevelt’s strategy—but investors were spurred to sell their stocks, and the Dow lost 8.3 percent that day to close at 76.23. It had lost 14.9 percent since the trial started just ten days
earlier and was now down more than 19 percent for the year and more than 25 percent below its high point in 1906.
He explained the economic and psychological conditions that had preceded previous stock market panics, and after some prodding by his audience, he admitted that “[a]lmost all the factors that make for a crisis are now actively at work.”
By 9:00 P.M., after taking an hour for dinner and a single round of voting, they had reached a verdict. Standard Oil was guilty on every one of the 1,463 separate counts of violating the Elkins Act that had survived pretrial motions.
The government had created a policy of confiscation. The Dow, which had rallied as Roosevelt’s “predatory men of wealth” speech faded, fell 2.3 percent to 80.61 over the next two days and was now down 14.6 percent for 1907 to date.
people. Nobody can tell where the line is to be drawn or where the ‘trust smashing’ process is to stop.”
In the ten days after Landis imposed his fine, the Dow lost 11.2 percent, and at 70.32 was now down 25.5 percent for 1907.
The market didn’t realize it yet, but most of the important pieces were already in place for the Panic of 1907.
collateral in the form of cash from the Heinze brothers. Conceivably, if the share price of United Copper fell enough, the loans due could consume all the cash Fritz had received from Amalgamated. As October passed, prices continued to fall, and as the pressure increased, Otto and Arthur wondered if the nearly 50 percent drop in the price of United Copper wasn’t due to something other than the weakness in the price of copper or the share price of other copper concerns or the 28 percent year-to-date decline in the broad stock market;
Fritz’s own stock was being used against him.
demand delivery of every stock certificate on deposit.
The simple stock-buying pool Arthur was running at Fritz’s direction was risky. This plan would be an order of magnitude riskier.
Bank, depositors, fearful of his new leadership in the era before deposit insurance, had withdrawn $4 million, a
It became obvious to the brothers that additional margin calls, which were certain to come if the price of
United Copper dropped any further, would wipe out the Heinze liquid reserves and result in the failure of Otto C. Heinze & Company.
The next morning’s Chicago Tribune led its business coverage with the story of the stunning rally in United Copper; a headline reported that the Heinze brothers’ buying “puts big crimp in those who sold stock short.”
With the Mercantile National backing him, Otto sprang his trap and issued calls for all remaining United Copper shares on deposit with the various brokers before the market opened the next day, Tuesday, October 15.
the shares he’d demanded instead started to arrive in his office.
lunch, as every share due was delivered.
Otto, so certain that the short sellers were responsible for the drop in United Copper’s price, so certain that the brokerages wouldn’t be able to deliver the shares due, had gotten it completely wrong. When the brokers for whom
When the market opened on Wednesday, October 16, there was no place for the Heinze brothers to hide. Newspapers would report that copper prices reached an all-time low on this day, and that news crushed any remaining opportunity for Otto’s plan to succeed.
Fritz Heinze, the copper king of Montana, was broke.
Fritz Heinze, who had $12 million in cash at the beginning of the year, was broke, as were the New York Stock Exchange firms of Gross & Kleeberg, which had done Otto’s buying and not gotten paid, and Otto Heinze & Company.
The Dow was now down 35.9 percent for the year and 10.7 percent for the month.
42.6 percent since making its all-time high in January of the previous year.
Fritz was out, and on Saturday, October 19, Morse was soon to be out as well.
