Monday, October 19, 2015

Boston Fed: In Which A Copper Speculator's Attempted Corner Causes A Stock Market Crash

From the Federal Reserve Bank of Boston:

Panic of 1907
Federal Reserve Bank of Boston

"Crash Crash Crash"
Boston Post-October 18, 1907

Although the headline referred to events in New York, Boston Post readers knew exactly what it "meant.
Effects of the financial crisis were certain to reach beyond Wall Street.

¶ Financial.panics and bank runs were all too common during the 19th and early 20th centuries. Some were more severe than others, but most followed the same general pattern. The misfortunes of a pronminent speculator would undermine public confidence in the financial system. Panic-stricken investors would then scramble to cut their losses.
 And because it wasn't uncommon for speculators to double as bank officials, worried depositors would rush to withdraw their money from any bank associated with a troubled speculator. If a beleaguered bank couldn’t meet its depositors’ demands for cash, panic would quickly spread to other banks. Remember! There was no federal deposit insurance until 1933. If a bank failed, depositors had little hope of ever seeing their money again.

 ¶ With far less government regulation of the financial system than there is today and with no government welfare "safety net," many Americans suffered sudden and dramatic reversals of fortune when a panic struck. Even in a relatively mild panic, fortunes evaporated and lives ended in ruin.

¶ The following pamphlet" recaps the chain of events that came to be known as The Bank Panic of 1907. By most measures, it was not- the worst panic in U.S. history. But in retrospedt, it was a watershed event that had a lasting impact on the financial system.


"In Which the Downfall of a Prominent Speculator Rocks the Financial System, and a Prominent Millionaire Saves the Day"

Headline, Boston Post - October 17, 1907 

On October 14, 1907, the stock of United Copper Company soared past $62 a share. Two days later it closed at $15, and one ~ F. Augustus Heinze was well on his way to financial ruin. 
The rise and fall of F.A. Heinze had been nothing less than spectacular. Only 18 months earlier, the.onetime owner of a Montana copper mine had ridden into New York with $25 million in cash and stocks garnered in an out-of-court legal settlement with a rival mining company. He soon attracted notice by aggressively purchasing interests iu several New York banks and engaging in speculative activities.  
As is so often the case when things are going well, Heinze seemed incapable of making a bad business deal. His downfall took everyone by surprise.  
The financial empire of. Augustus Heinze began to unravel ill October 1907 when he overreached himself in an effort to corner the stock of United Copper Company. (An investor who tries to "corner the market" on a commodity or a stock is attempting to gain control in order to fix the price.) In less than 24 hours, he dropped $50 million, and the financial markets went haywire. According to an article in the October 18, 1907 edition of the Boston Post:  
Sensations followed other in rapid succession in the financial district today, as the result of the collapse of the projected corner in United Copper and the suspension of a prominent brokerage firm yesterday. As a result of these sensations the stock market was halting and irregular, but there was an apparent feeling that the break of the attempted corner in United Copper had cleared the atmosphere somewhat and the market rallied before the close. 
(The "prominent brokerage firm" mentioned in the article was Otto Heinze & Co., which was run by the brother of F. Augustus Heinze and was heavily involved in the disastrous attempt to corner United Copper. In addition, F.A. Heinze’s Butte (Montana) Savings Bank failed on October 17, 1907.)  
Predictions that the atmosphere had cleared proved for too optimistic. The worst was yet to come.  
Had F. Augustus Heinze been a mere copper speculator, the financial markets might have been able to shake off the news of his collapse....MUCH MORE
 Scene in front of the New York Stock Exchange 
in October 1907 during the financial panic