on October 1, 2007
Edwin Lefevre's anecdotal account of the cash crunch of October 1907 in his timelessly street smart REMINISCENCES OF A STOCK OPERATOR (1923) has always begged for further commentary. His colorful recollection of how J.P. Morgan "saved" the New York Stock Exchange - "A day I shall never forget, October 24, 1907" - is in this current history placed in the larger context of a more general U.S. monetary crisis. Contributing events included the sudden, unexpected demand for capital following the San Francisco earthquake (1906), a Bank of England decision to slow the flow of gold to the U.S., a recklessly leveraged stock scheme hatched on Wall Street, and the absence of a central banking authority. Plunging asset values, impaired loan collateral values, a general loss of confidence, bank runs, financial ruin, and personal tragedy were the consequences of a "panic" that gripped the markets in that year. Even as one private individual, J.P. Morgan, provided the leadership and liquidity to the banking system, the City of New York, and the New York Stock Exchange, the events of 1907 dramatically underscored the need for a central bank to watch over the monetary needs of the country. The U.S. Federal Reserve as a lender of last resort was created in 1913.
The authors summarize the lessons of 1907 in a final chapter. I'm not sure that new ground is broken here, and the "perfect storm" cliche' is overdone these days, but it can be forgiven in this highly readable account. The point is that multiple contributing causes are in evidence in a financial crisis. Among those causes that stand out are an economy growing strongly where potential risks are marginalized (e.g. the recent mortgage meltdown), financial structures so interlinked or complex that no adequate overview can anticipate the impact of a failure (e.g. the size and opacity of the hedge fund industry), an exogenous shock (e.g. terrorist attacks of 2001), and a financial accident (e.g. a major bank or hedge fund collapse) that crystallizes the risks for the public. Market transparency, coordinated leadership, and adequate regulation are seen as critical elements in slowing the spread of contagion.
The authors don't go out of their way to look for these contemporary parallels, but the links are unavoidable. The strength of this book is that it is a page-turning, 'great read' with the added benefit of providing some useful, cautionary measures to help spot the next financial crisis.
This is a very short book about a fairly complex event. While it is accessable to the general reader, the book comes alive only when describing the recovery efforts of a group of private financiers led by J. Pierpont Morgan. More focus is needed to show how the problem developed and to help explain the dynamics of investor panic contagion. Further, government officials are given short shrift as either creators of the problem (President Roosevelt) or as Morgan's lackeys (Secretary of the Treasury Cortelyou).
The authors portray Morgan as a giant among dwarves. He almost singlehandedly ends the panic with visionary, unselfish, decisive and commanding presence. In regard to the latter attribute, Morgan is shown summoning the United States Treasury Secretary to New York, warning short sellers that they will be "properly attended to" after the crisis and ordering bank presidents to work. At one point, Morgan is almost godlike as he decides which savings institutions will be supported and which will be allowed to die.
Thus, The Panic of 1907 becomes the story of J. Pierpont Morgan vs. panic and greed. Government is given little credit for helping solve the crisis (except when the president agrees to interrupt his breakfast to promise he won't interfere with Morgan's plans). As an example of "adverse leadership," Theodore Roosevelt is listed as a primary cause of problems due to "rising regulation of an activist President."
While it may seem like a small error, the authors mistakingly credit novelist Sinclair Lewis with reporting about the meatpacking business rather than Upton Sinclair. This carelessness causes me some concern about other details presented in this work.
The reader knows more about the events of 1907 when he finishes the book but I am not sure that knowledge is balanced. Further, I did not find the lessons for today very applicable or compelling. I think the book would have benefitted from a bit more discussion about causes, effects and implications for the present. I would also be interested in a more nuanced analysis of the motives of Morgan and the other financiers who acted to help turn the corner on the panic but who must bear some responsibility for the state of finances prior to the crisis.
on September 4, 2007
Bruner's book is a must read for anyone interested in the history of American finance, or in the intricacies & complexities of financial crises in the US & elsewhere. The 1907 Panic was at once a watershed event in US finance, since it was the immediate stimulus for the creation of our first real central bank, the Federal Reserve. But it also was (and is) typical of financial crises generally. Those of the 19th century that immediately preceded it (that is, in the post-Civil War "Gilded Age"), and those of our own time (that is, Enron, Long-Term Capital Management, Continental Illinois, etc.). Bruner has done an fine job digging up the details of what actually happened in the October/November 1907 crisis, the personalities & institutions, and in showing how these events overlaid on an already unstable economic situation that were lowering public confidence. The book is very well written, if not novel-like, certainly approaching the form. I read nearly all of it in one sitting.
on December 24, 2008
I read with interest the glowing reviews of this book so I bought it. Was I ever disappointed. I have not attended business school, but it appears that this "book" may be the basis of a "case study" in business school (I think the author's slipped at the end when they just about say as much on page 152, "Any single case study, such as the one we have presented here...") The "chapters" are so brief you can read two or three of them while waiting in line for a cup of coffee, and they basically amount to this: (1) a great financial calamity occurred; (2) JP Morgan said "I'll fix it", and (3) he did. The next chapter is (1) another great financial calamity occurred; (2) JP Morgan said "I'll fix it", and (3) he did. Repeat till you get to the end of this extremely short "book" (which is 178 pages, excluding notes.) I have nothing against JP Morgan, mind you, and have read some excellent books about him--as can you, if you buy something else. For what it's worth, I would have given the book two stars instead of only one but for the fact that the authors (academics with grand titles, no less--check out the book's back flap) are apparently accustomed to charging outrageous prices for what they force their B-School students to buy. The price of this book--even with Amazon's outstanding discount--leaves it vastly overpriced. There are no new lessons here, nothing you can't figure out yourself, and nothing worth the price.
on November 27, 2007
Shortly before 10:00 on the morning of November 14, 2007 Charles T. Barney walked into his second-story Park Avenue, took the pistol containing three bullets kept there for protection and fired one bullet into his head.
Up to that moment, he was a man of the Gilded Age. The son of a prosperous Cleveland merchant, he married into the Whitney family, was a director of 33 companies and had served as the top officer of the Knickerbocker Trust Company up until a few short weeks prior.
He had been asked to resign. The reason: early the previous month, he, along with several other New York City trust companies had funded an attempt to corner the market in the stock of a copper mining company. The attempt had failed. As word of his involvement spread, his investors and depositors panicked and started a run on his bank that would eventually lead to its closing.
The country had lost confidence in its financial system. It would take leadership, largely from one man, J. P. Morgan, to restore it.
Robert F. Bruner and Sean D. Carr take the reader day-to-day through this crisis. Beginning with the famed San Francisco earthquake and culminating with Barney's suicide, they draw seven lessons that are, perhaps more instructive today, than they would have been in 1907. They are:
1. Complexity makes it difficult to know what is happening and establish linkages that enable the crisis to spread.
2. Economic expansion creates rising demands for capital and liquidity. The mistakes that accompany those rising demands must eventually be corrected.
3. In the late stages of an economic expansion borrowers and creditors overreach in their application of debt. This lowers the financial system's safety margin.
4. Prominent public and private figures provided adverse leadership. Their policies raise uncertainty, lower confidence and elevate risk.
5. Random events shake the economy and financial system.
6. Greed becomes fear.
7. Well-intended responses prove inadequate to the crisis' challenge.
This book drips with insight. Well-written, easy-to-read, it should be read by banker, traders and students of business and economics. It is a rare dissection of how and why a panic unfolds.
You should never take at face value the claims and declarations of politicians, public relations people, or journalists about the state of the economy. What you are being told is too often self-serving, manipulative, or ignorant. Remember that I said "at face value" because the truth is probably out there, but you will have to dig to find it. History is a good place to dig because in the hands of a careful historian or reporter, the distance of time provides some perspective, the facts are more fully known, and the events can be seen in the context of similar events. The danger is always to judge the past by what happened afterwards as if the people at the time had some knowledge about the path they were heading down with anything more than hope and guesswork.
The banking industry in the United States has suffered from periodic panics throughout its history. Much of this had to do with the fragmented and local nature of the institutions and how a real or imagined crisis can start a small fire in one bank that spreads as depositors and investors rush to try and recover their savings before the bank fails. Much of this has to do with the fact that banks are highly leveraged institutions. That is, they loan out the same dollars multiple times for businesses, to buy homes, and other purchases. We all benefit from this. However, if all depositors want their deposits at the same time, there simply is not enough to go around and the bank will quickly collapse without access to other capital. This ready access to a supply of sufficient capital is called liquidity and in earlier times without a federal bank there was no standard mechanism ready to supply it.
While some disagree, it seems clear to me that our present economic difficulties would be far worse without the Federal Reserve, some bank regulation (we have too much), and some level of deposit insurance. None of this existed in 1907. The San Francisco Earthquake and subsequent fire was so costly that it damaged the global economy. The following year there was a series of events that nearly wrecked the national economy. We don't talk about 1907 much nowadays, but it was this panic that led to the founding of the Federal Reserve and other banking reforms.
This very interesting book by Robert Bruner and Sean Carr takes us through the events of the post earthquake economy that also suffered from the attacks on big corporations by Teddy Roosevelt's Progressive administration. The panic was set off by the disastrous attempt by Otto Heinze to corner the copper market and short squeeze the speculators he just knew were out there, and the tsunami that spread out from the failure of United Copper to banking and trading interests. The relationship of these events to the institutions involved is told in a clear and lively way.
The story of this important period centers on the personal credibility and financial power of one man, J.P. Morgan. He knew what to do and had the personal clout to get others to follow him and do what he told them needed to be done. Another man was also important to this event, but is only touched on in this book. When the crisis was threatening to veer out of control, John D. Rockefeller put up $10 million cash and $40 million more in credit for Morgan to use as needed to stem the tide. Until Morgan and all involved were able to calm the financial seas it was unclear how far the contagion of fear would spread, but it was far from certain that Morgan could pull it off. He worked tirelessly and thank heavens the others had the wisdom to cooperate with him and each other.
I think this is a very interesting and useful book that provides information that can instruct us even in today's very different world, where some underlying principles remain the same but are too often ignored.
Reviewed by Craig Matteson, Ann Arbor, MI
on January 24, 2009
The authors write an exciting story, and it is an important one in American financial history. With no Federal Reserve in existence, JP Morgan with his allies (ironically, those allies head what will become Citicorp) step in and mount a rescue that looks very similar to the one Bernanke and Paulson have been attempting. And the authors are to be congratulated on bringing out this book with perfect timing - publishing it in 2007 as the current crisis starts. The parallels are so obvious, it is safe to assume that most readers will be using this book to draw insights into the current crisis.
Unfortunately, the glaring analytical errors in the final chapter (titled "Lessons") call into question the accuracy, and certainly the interpretation, of everything that comes before. For example, compare the payoff matrix on page 170 with the wikipedia definition of Prisoner's Dilemma and you will see the authors apparently do not understand the most widely discussed puzzle in game theory. Likewise, on page 155 the authors mix together two subtly different market failures arising from asymmetric information - adverse selection (only customers with bad health sign up for insurance) and Akerlof's market for lemons (there is no market clearing price in the used car market, since buyers should interpret a below average price as a sign of worse than normal quality known by the seller but not the buyer). You would not expect these errors from professors at U Va"s business school.
The authors suggest that the 1907 crash (and by extension, all other crashes?) was a random event brought about by a confluence of unique historical circumstances. Perhaps they are right and the best explanation for a panic is, "Stuff happens!," but a slipshod use of buzzwords from economic theory and calling the crisis "a perfect storm" is not convincing. As an alternative view, Karl Marx argued that financial crises were the heartbeat of capitalism, and economists have been searching for the underlying mechanisms ever since. So, enjoy the book for the story, but be careful in accepting the analysis.
This small book does a good job of explaining the Panic that led to the creation of the Federal Reserve Bank. In 1907, JP Morgan was powerful enough, and the world of finance was small enough, that one man could stem the tide. He was 70 years old and had had enough experience to know what to do. His reputation was such that others would take his advice. The story is well told and I was willing to give the authors one more star for their observation that John Maynard Keynes' 1936 recommendation for government counter-cyclical spending during recessions was quickly distorted by politicians to mean government spending in both boom and recession. That led to our present problems with deficits and discredited Keynes. That observation alone convinced me that these authors should be taken seriously. I recommend the story although, as others have pointed out, more information on the role of the gold standard would have been helpful. Morgan was a fascinating figure worth more attention as a cultural icon. It is appropriate that Caleb Carr includes him as a hero in his novels about the same era. A fine little book on economic history.
on November 19, 2008
Most people reading books on finance, particularly historical books, aren't really expecting something highly readable by a layman. That is where this book is quite surprising. It flows very nicely and quickly. It visualizes events of the day very well. To be clear, this book focuses quite closely on the events immediately preceeding, leading up to and mostly during the crisis in October-November 1907. Some discussion is done of the aftermath and results but it really focuses and puts you in the meeting rooms with the people making the decisions at the time they were happening. Some space is given to the aftermath and addressing the causes but it really does a spectacular job of actually walking through the events that occurred as they were perceived. What is thought provoking is how eerily similar some attributes of this moment in history are to today. Particularly as Bruner and Carr walk you through the cascade of one institution disintegrating after another and as the events unfold to cascade wider and wider in scope. What exacerbated the events of the day, liquidity evaporating, is very much what is driving and exacerbating more recent events. The authors do seem a touch fond of J.P. Morgan and how he handled the crisis and do focus quite a bit on this. However, the facts are what they are. Had there been no J.P. Morgan to step in, one wonders how differently things may have unfolded. This book is highly readable and flows quite smoothly and quickly and is very enlightening.
on September 12, 2007
I agree with the previous review on the poor editing of this book. Indeed the kinds of mistakes made are uncalled for. But the previous reviewer need not question the role that Morgan played in the rescue nor the government's weak involvement. One of the surest ways to determine the accuracy of events of long ago is to research what was the generally held opinion at the time of the events. Without exception all parties ( the bankers, Roosevelt, financial journalists, etc) credited Morgan with the victory. Even the normally hostile press and public recognized this. Their good tidings did not last long of course because they knew that Morgan would not live forever. What would they do after he died? Hence the adoption of fellow banker Paul Warburg's recommendations for a Federal Reserve system.
As to the governments lack of involvement. Well, that's logical given that there was no structure in place for the government to work through. It was a 'Wall Street problem'.
For a much better history and analysis of these events read Ron Chernow's 'The House of Morgan', Jean Strouse's 'Morgan', and Carosso's 'The Morgans'. And if you can find a copy, Herbert Satterlee's 'J Pierpont Morgan'. ThESE are the books on the subject.