Tuesday, December 09, 2008

The Panic of 1907 (A book review) along with a segment of "In Other News"

Robert F. Bruner, Sean D. Carr, The Panic of 1907: Lessons Learned from the Market’s Perfect Storm (Hoboken, NJ: John Wiley & Sons, 2007), 258 pages, 8 pages of photos.

I’m not sure this is a book I should have read this fall. As the markets were tanking, reading about “the market’s perfect storm,” caused me to draw too many parallels to our current situation. In one instance, the book invaded my sleep and entered my dreams. That said, it is also enlightening to read such a book while the newscasters are talking about our troubled economy. I just don’t know what to make of the fact that this book was an early Christmas present from a financial advisor! Reading a book that begins with the suicide of a president of a bankrupt trust company, while listening to the financial news in the background, isn’t the sanest thing I’ve ever done.

Bruner and Carr, two professors at the University of Virginia, have written about an event that happened a century ago. Although often overlooked by historians who go for the more dramatic economic events (the Depression of 1893, the Crash of 1929, Sage’s investment blunders and so forth), the 1907 crash and panic in the financial sectors led to the creation of the Federal Reserve Bank and fundamental changes in the American economy. These changes were needed as the nation shifted from an agrarian to an industrial society.

The 1907 panic followed an aggressive period of growth for the American economy. Tied to this growth was also a period of consolation as smaller companies and factories joined together to form corporations which were financed by a handful of firms in New York City. In this setting a series of events took place that lead to the panic in the fall of 1907. Starting in 1906, stock prices began to decline. This created problems as much of cooperate financing had been backed by the value of corporate equity. Also challenging corporations at this time was an activist President (Teddy Roosevelt) who sought to regulate and even break up corporations that had monopolistic control on particular sectors of the economy. Another compounding problem was a devastating earthquake in San Francisco which impacted the insurance industry and creating a demand for capital for rebuilding. And then there were a few greedy players in New York, such as the Otto Heinze and Charles Morse. These are some of the ingredients for a “perfect storm” in the financial markets.

In addition to the greedy, there were also those who tried to save the day. The book almost deifies J. P. Morgan, who not only committed large sums of capital to help keep banks liquid, but also raised capital for troubled institutions. Enchanted with Morgan’s work ethic and desire for large orderly corporations that reduce the cost of production, they credit Morgan for helping to calm the crisis. One of the fascinating stories is how Morgan talked the newly formed U. S. Steel into buying Tennessee Coal and Iron (this is also how US Steel moved into Alabama and took over the Birmingham mills). According to the authors, USS was leery of buying TC&I as they already controlled 60% of the steel production and was fearful of an anti-trust lawsuit. Morgan wanting a buyer for TC&I as a way to raise cash and avoid a run on the trust company that held its securities. US Steel was rich in cash, so Morgan agreed to intercede with Roosevelt if USS brought the company at an inflated value.

A squeeze play is not just something in baseball or a move executed by an opportunist old man. One of the interesting stories in the book involved Otto Heinze’s squeeze play, an attempt to corner the copper market. Copper had been in high demand early in the century as electrical wiring was connecting the nation. Thinking there were lots of short-selling involved with United Copper stock and believing he had a significant enough position in the company to control the market, he sought to drive up the price, forcing those who had shorted the stock to settle up. If Heinze was correct in his interpretation, he would have benefitted at the expense of the short-sellers. But Heinze had misread the market and after a brief advance, the stock price collapsed, exposing Otto and his brother who had purchased additional stock on margin in their attempt to drive up the price. They both lost a fortune and brought about the demise of Otto’s brokerage house, Gross and Kleeberg and also the Otto Heinze & Company. This was followed by a collapse of the State Saving Bank in Butte, Montana, which was a correspondent bank for the Mercantile National Bank in New York. Augustus owned the Montana bank and was of Mercantile. This event set off a run on banks, and forced New York financiers to move around money an attempt to increase liquidity.

The Panic of 1907 is very readable and provides an understanding of the macro-events that led to the panic. He also compares what went wrong in 1907 and how it might happen again. The understatement of the book, when speaking of "system-like architecture" of the finanical markets, is: "New credit derivates and other exotic contracts might help to reduce risk, but they have never sustained a live test: No one knows whether they wil dampen or amplify a crisis." (174) I think we now know!!! The book also includes a helpful appendix that defines various terms that get thrown around a lot by the media and economists. If you’re interested in economics, I recommend this book, but to avoid spoiling the holidays, you might wait till the New Year! Follow my lead, I'm giving up serious books for the rest of the month.

In other news… Obama, American’s new Marlboro Man, is going to have to deal with a smoke-free White House. I was surprised to uncover that the White House became smoke free due to the efforts of Hillary Clinton. She was obviously attempting to break Bill’s affection for cigars.
-Nevada Jack reporting


  1. Very interesting book. I've heard our current economy parallels that one and other crashes on many levels. I'm guessing we didn't learn our lessons.

    On the Hillary thing...Ouch!

  2. Greed is always the root of any man-made perfect storm. It was steel and copper in those yesteryears, it's petroleum and grains today, and one day even science will be held hostage because we humans won't know when and how to stop, we are only good at manufacturing and selling greed and excuses. I would probably enjoy that book though.

  3. That book hits too close to home, doesn't it? It sounds like an interesting read, but a little too harsh for the times we're facing, although a little insight and understanding about our economic history wouldn't hurt. I need to read more books like this. Thanks for the review (and the warning).

  4. Ed, we don't learn! As for Hillary, sometimes I just have wicked thoughts!

    MH: greed is supposedly good for capitalism

    Scarlet: Read it in January when you folks down there are suffering with temps only in the mid-60s!

  5. To those of you who have already read the post, I just added a new sentence in the last paragraph on the book review (concerning credit derivates) that you might find interesting.

  6. Shame that Billy just replaced one oral fixation with another. :-) Maybe she should have let him keep his cigars. I had to chuckle when I saw Tom Brokaw ask him that. Of all the things going on, Tom's worried about THAT?!? I like imagining Barack hanging around outside with all the White House employees on a smoke break.

    I'm still reading the 4th (and currently last) book in the Twilight saga. *sigh* I will be sad when it ends. I need more of them. 14 year old Murf is in her glory.

  7. See, the "avoid serious books at Christmas" advice doesn't wash with me.

    That's the only time I have to read them, plus I love books on economics.

    Off to Amazon, I go.


  8. Murf, I have this image of Obama bumming cigarettes... actually, it's good to see he's not so perfect

    Randall, this is a very hectic time of the year for me and especially this year. If you love books on economics, I do recommend this one.

  9. Sounds like a very interesting book. Thank you for sharing it here.

  10. Sounds like a good book for 2009. I just started Walking It Off by Doug Peacock

  11. I'm not exactly up for any read that is or might be the least bit depressing or if it makes me compare a bad past to what might be a bad future, but I know what you mean by getting sucked into a book and then dreaming of it. I'm looking forward to the day I can do a little more than the light-hearted reading I stick to at the moment.

  12. once I loved books like that. Once before this year....didn't realize they shorted then but actually never thought about it

    Yes it's good to know Obama's not perfect. I was sadly happy to find out he smokes though never in the White House

    I'm scared to ask what chicken-bogs are

  13. Thanks Venus

    Diane, Let me know what you think of Peacock's book

    Lisa, lighthearted reading at time is good fo rus

    Pia, a chicken bog is a low country South Carolina meal--where whole chickens and sausage are cooked in a large pot with rice

  14. Oh, the Nevada Jack blurb had me chuckling. Some things never get old.

  15. I just don’t know what to make of the fact that this book was an early Christmas present from a financial advisor!

    There's some irony in there somewhere...

    I like the new profile pic!

  16. Bone, I like Nevada Jack!

    TC, he actually advises a foundation that I sit on, I don't have the kind of money it would take for him to advise me

  17. I'm glad the White House is smoke free as they should set an example to others but on the other hand I imagine with the stress those guys are going to be under I'd have to burn one too. I think I'd even eat my nails to the bone if I had to walk into this mess and try to save the country!

    I have so many books piled on my bedside table and friends just gave me more. I wish I could find the time like I used to or at least stay awake longer to get more read each night.