June 24, 2007

The Great Bank Panic of '07


Here's an overview of the Bank Panic of 1907. Good reading for those interested in the current Bear Stearns / Hedge Fund / Merrill Lynch / CDO / Subprime debacle now firmly underway. Those who ignore history are doomed to repeat it...

The Panic of 1907, also known as the 1907 Bankers' Panic, was a financial crisis in the United States. The stock market fell nearly 50% from its peak in 1906, the economy was in recession, and there were numerous runs on banks and trust companies.

Its primary cause was a retraction of loans by some banks that began in New York and soon spread across the nation, leading to the closings of banks and businesses. The severity of the downturn was such that it eventually pressured the United States Congress to accept the proposal by a group of bankers to pass the Glass-Owen Bill, essentially a blueprint of the Nelson W. Aldrich plan, a plan that had been defeated in congress earlier, this bill allowed a group of bankers to create, buy the shares, and own the Federal Reserve System in 1913. The 1907 panic was the fourth panic in 34 years.

In March 1907, over-expansion and poor speculation led to a stock market crash. Money became extremely tight. A second crash occurred in October 1907. This time, the crash was directly precipitated by Heinze's brothers, who had used money borrowed from Knickerbocker Trust in a failed attempt to corner United Copper.


Anonymous said...

"...What people don't fully appreciate is the extent to which our financial system has geared up over the last twenty years to finance the worldwide residential housing boom..."

MOST SIGNIFICANT MARKET EVENTS cause an immediate and substantial price reaction, which makes it hard to profit from them. But sometimes there's a sort of slumber, when the market gazes sleepily about itself not quite sure what to do.

We may be experiencing one of them now.

This week a major American investment bank called Bear Stearns was reported as having some serious trouble with a couple of hedge funds. It is difficult to be clear exactly what is going on, because this story involves lots of people and banks who have a vested interest in not being very open. I have been trying to find out the details.

It starts with the humble mortgage. Lots of people in the United States who have no money – they are called sub-prime borrowers – borrowed 100% of the value of a house right at the top of a housing market which has since fallen sharply.

The lenders, however, did not have to worry very much about the risk of default, because they rolled these mortgages into packages called Mortgage-Backed Securities, which they then sold. They got to be off-risk within a few weeks, because by then these MBS belonged to other financial organizations.

But it is not always easy to sell a package of these Mortgage-Backed Securities (MBS). The process of selling such a device demands that the credit quality is assessed – and because the underlying lender is marketing to sub-prime borrowers, the package of debt in the MBS is heavily composed of mortgages quite likely to go into default. So a credit ratings agency will give it a low credit score.

This makes it difficult to sell, which is where a bunch of smart investment bankers join in.

The investment bankers slice the MBS into several chunks or "tranches". These are known as Collateralized Debt Obligations, or CDOs for short. The idea is to create some higher risk assets and some much safer ones, slicing up the MBS into what are called equity, mezzanine and investment-grade bonds.

The equity takes the higher risk, and so it earns the higher return if things go well. But if things start to go wrong, the equity is lost first...and then the mezzanine. However, even if there's quite a high rate of failure in the higher risk end, the investment-grade bonds still get fully paid out. This persuades the credit ratings agencies to give them a respectable stamp of approval, thereby creating out of low-quality mortgages a respectable amount of highly-rated bonds.


Shakster said...

Good reading.Want to ask the readers if
Heinze brothers were like the Blackstone /Blackrock we have right now?Were the Heinze Brothers the scapegoats,like the Hunts of Texas?Who will be the scapegoats this time?The government ,and the Fed will never take the responsibility,but as usual will have a Villain Like Al Quaida,Osammma,or Hunt,Heinze,or maybe Blackrock,the new out of nowhere begger of WallStreet.

Anonymous said...

So should anyone be surprised bush is buying up land in Paraguay?

Anonymous said...

The banks create these financial crisis to get their way. Banks come out more powerful after each crisis.

Anonymous said...

After this orgy of credit there has to be a contraction

Anonymous said...

Watch the M3 money supply!

Anonymous said...

This one is about profits and wealth redistribution sure... but it's also about changing our political structure.

Global government, single currency, and a paternal dictatorship/aristocracy is the plan.

If you like these ideas, vote Clinton in 08!

Anonymous said...

It would be poetic if we could call 1907 and raise them

Anonymous said...

The behavior exhibited this past week by Wall Street firms is more in keeping with a pre-1929 maneuver called "Organized support". Then it took the form of banks buying up stock shares to pump up stock prices to what they viewed as a "Reasonable price". It merely delayed the inevitable, why? because market sets the price and not a select portion of the market players who want the price to be what they want it to be.

The actions taken recently are all just a delay tactic at best, to keep market forces from afixing value to the CDOs that are backed by MBSs which are backed by Toxic mortgage loans which are backed by people with poor credit & weak/unstable income streams and by over valued housing assets which prevailing market forces are currently acting upon to bring to a price point that is generally lower than recent years. Those forced being a shift up in supply and a shift down in demand.

It will not be pretty, and if you think your not going to be touched by this think again. Taxpayer bail outs will hit us all; CDO/MBS drops in value will hit every pension plan that invested in them; foreclosures will further hit housing values in every neighborhood where they occur; the social trauma related to all this will stress/stretch social services; the impact upon property values will force gov't to raise rates thus pushing up the cost of ownership even further.

Good Luck.

borkafatty said...

Thank you Keith good read

Anonymous said...

How do you know that bush is buying land in Paraguay? I have a client from Gambia who told me the Bushes have an estate there. Could this be true?

burn baby burn said...

"I don't have your money here. It's at Bill's house and Fred's house!" Oh wait no it's not shit!

Anonymous said...

Im DUMPING all of my stocks on Monday.

Anonymous said...

Why is it Republicans are in charge when all of the panics occur?

Anonymous said...

The Ludwig von Mises Institute, www.mises.org, has a vast number of articles and books on the Austrian School of Economics, the true free market school. If you search "panic of 1907" you will find numerous articles on the subject. I think Murray Rothbard wrote a book on it, perhaps it was his doctoral thesis...I forget.

Anonymous said...

"Im DUMPING all of my stocks on Monday."

Checked my mutual fund prospectuses, and sure enough, some are infested with CDOs. Seeing what I can do to pull away from those.

OC Mike said...

Nice job, Keith. Amazing the parallels are not being drawn by more people.

For as crazy as you are, dude.... this is what brings me back.

Nice job.

corvinus said...

With Bear Stearns et al., we still have six months for a Great Bank Panic of '07 this year.

jbwvegas said...

OC Mike said...
Nice job, Keith. Amazing the parallels are not being drawn by more people.

For as crazy as you are, dude.... this is what brings me back.

Nice job.

Amen to that.