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No institution or system can be pronounced entirely safe which has not been
‘tried by fire’ in a financial crisis, and the trust company system, as now conducted, has not been thus tried.” Three weeks later, the Knickerbocker Trust would be tried by fire and would fail.
Just as every modern stock market crash has an external catalyst, each collapse has been fueled by a new, poorly understood financial contraption that introduces lev...
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the trust companies worked beautifully when the sun was shining, but once storm clouds formed and a gale started to blow, the trust companies weren’t able to drop their sails. Instead the leverage inherent in their unreserved structure meant that they became more exposed as the storm worsened.
Once they were assembled, he said what they all knew: the problem was a trust company problem and the trust companies would have to solve it.
themselves and reduce their risk by calling in loans. The result was to completely absorb the available money supply.
the cost of short-term borrowing—already at obscene levels as the banks called in loans—reached 100 percent.
The result was that any shares purchased with borrowed money
prices were going to weaken further, some because they simply had to.
Morgan knew that once a bank or trust company closed its doors early and told depositors it didn’t have their money, the institution could never reopen.
TCA would pay out $34 million of its $64 million in deposits, a staggering percentage that was survived only because of the ability and standing of J. P. Morgan.
15, down 43.8
Maybe that was because people saw him as the “biggest man” among Wall Street’s speculators. He would make between $5 million and $20 million that year. But the 1929 crash would hit him hard, and seven years later, the market would break him mentally.
Matched sales, the large sales at ever-higher prices between accounts controlled by a manipulator, and the kind of stock pool Meehan excelled at, had been perfectly legal until 1934. This sort of dealing had helped push the stock market up 255 percent from the end of 1919 to its height in 1929, and then back down 48 percent in the next fifty-six trading days.
specialist. A specialist is given a lucrative near monopoly over dealings in a particular stock in exchange for a commitment to maintain an orderly market, even if it meant trading for his own account at a loss. By 1929 his brokerage firm, M. J. Meehan & Company,
a loss of 23.5 percent since its previous close in July. But the war turned out to be a boon for American business, because the European combatants needed to buy nearly everything America’s businesses made or its farmers grew. It became nearly impossible to not make money during the war years, and as the United States resolutely avoided direct involvement in the conflict, the stock market surged higher. The
The Federal Reserve System was part of the country’s response to the Panic of 1907, when a single man, J. P. Morgan, with access to only private resources, stepped in to stop the chaos. The Federal Reserve Board in Washington, D.C., and the twelve regional Fed banks were expected to control credit
Instead of realizing that a more moderate course of rate increases could safely temper an exuberant economy—the sort of economy they would face later in the decade—they believed that raising interest rates resulted in collapsing prices and a painful recession, not seeing that the pace at which they raised interest rates was crucial.
on a course of rate cuts as wild as the hikes they’d instituted at the end of 1919 and throughout 1920. The first cut, to 6.5 percent, came on May 5, 1921, followed quickly by another to 6 percent in June, then to 5.5 percent in July and to
they had the accelerator to the floor. In response to this spasm of interest rate cuts, the Dow rallied 17.0 percent in less than fourteen months in an amazing recovery given 1921’s downward momentum. Surprised by the damage they had
and lowered rates in the United States, even though money was plentiful and the economy was robust; they did so to help Strong’s friend in London, knowing that they risked creating a speculative bubble.
“From that date, according to all the evidence, the situation got completely out of control.”
and this expansion in call money would fuel a legendary stock market rally.
As the stock market continued making new highs, another 140 investment trusts were created in 1927 alone.
Like crypto
was how leverage came to the formerly sober world of investment trusts.
just as the United Copper stock Otto Heinze bought at Fritz’s direction had served as collateral for those loans. The financial alchemy was intoxicating. If the pool’s value doubled, the value of an investor’s stake would increase sixfold.
Few brokerage firms failed during the crash of 1929, an indication that lax margin requirements weren’t the cause of the bubble. Although speculators were
In expectation of an increase in rates, the stock market lost 4.2 percent on May 22, but then, just when the Fed was expected to act, they did nothing. Despite the market having prepared itself for a rate increase that was desperately needed, the Fed abstained.
Meehan wasn’t alone in bringing the broker to the speculator.
There was now almost no place in the world where a speculator couldn’t play the market. And why not?
The Dow closed that Tuesday at 381.17, up 0.2 percent for the day and up 27.1 percent for the year. It had more than doubled since the end of 1926, just thirty-two months before. It had nearly quadrupled during the 1920s. Nobody knew it yet, but this was the top. After a drop of 1.56 points the next day, it would take twenty-five years to regain the level reached on September 3, 1929.
“Fair weather cannot always continue. . . . More people are borrowing and speculating today than ever in our history.
Radio stations getting the news interrupted their programming to share news of Babson’s prediction, again without context. More than two million shares traded in that final hour, and the Dow lost 2.6 percent on what had been a quiet day until the Babson story hit. It would become known as the “Babson Break.” While one paper described Babson as one “to whom Wall Street has not in past years paid any particular attention,” it pointed out
In total, the fraud reached £20 million, and the news reached Wall Street on September 20, 1929, when the Dow lost 2.1 percent.
September had begun with the Babson Break and ended with the Hatry turmoil. Predictably, it was a horrible month; the Dow lost 9.7 percent to close at 343.45.
Many of the investors taking this ride were new to the game. The same day newspapers were reporting the chancellor’s remarks, the Wall Street Journal was pointing out that nearly fifty investment trusts had been launched during the three-month period ending that September, and the total invested in these companies neared $1 billion.
Massachusetts Department of Public Utilities was giving shareholders of the Edison Electric Illuminating Company
as if we fix a price higher than $215 a share,
The state of Massachusetts had decreed that Boston Edison was worth just $215 a share. It had closed the day before at $375. Boston Edison and all the utilities saw their stock punished. Boston Edison lost 4.0 percent that day, to close at $360. The next day it opened at $330, down another 8.3 percent, and closed at $325 after trading as low as $299. American Power and Light fell 14.7 percent from October 10, before the board’s decision was made public, to October 16. American Superpower fell 12.0 percent, and Electric Bond and Share, the company supplying so much capital to the call loan
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the market by stating plainly that it was too high. The crash was now inevitable.
The value of all stocks traded on the NYSE fell by $4 billion, and the Dow was now 19.8 percent below its high from the previous month.
an 11.0 percent loss for the day
Monday, October 28, was a disaster. The Dow lost 38.33 points to close at 260.64, a loss of 12.8 percent, and this time stocks didn’t bounce back, because the Whitney brothers were unable to muster the sort of support the market needed.
All those times the stock market had bounced back previously had imbued the wrong lesson; the market wouldn’t always bounce back, no matter how regular the recoveries of the past. Those looking for good news on Tuesday, October 29, found it
2010—liquidity, that ability to sell sizable holdings without driving down the price precipitously, evaporates when it is most desired.
on October 29, 1929. The five-man
The Dow had lost 23.0 percent in just two days, and it was 39.6 percent below the high reached less than two months before. The rout was complete.
Boston Edison closed at $250.
The Dow, which had been up as much as 27.1 percent, closed 1929 down 17.2 percent.
Though the Dow would gain 8.0 percent from the close on October 29 to the end of the year, it would lose 33.8 percent in 1930, 52.7 percent in 1931, and 23.1 percent in 1932.
