Bank Panic of 1907
Categories: Banking, Regulations
In a three-week period starting October, 16, 1907, the New York Stock Exchange fell to a level 50% below its previous year's peak. It was a wealth-ectomy on the richly invested.
The impetus for the panic was two greedy scalawags, a Mr. Heinze and a Mr. Morse. They tried to "corner the market" in terms of a company called United Copper. "Corner the market" means to obtain controlling interest just shy of a monopoly in an attempt to manipulate the copper market in the U.S. They failed. However, the failure caused a residual impact of people wanting to disassociate from them.
That need to disassociate was interpreted as bank insolvency, which caused a level of anxiety, which became a fear. People wanting their money out of banks associated with Heinze and Morse caused numerous runs on banks and trust companies. The U.S. was already in a recession, and the impact of this local panic rippled outwards throughout the U.S., to the point that many state and local banks and businesses entered bankruptcy.
Heinze and Morse were minor speculators and minor participants in the financial world, but the fear they caused preyed upon the lack of liquidity of banks in the New York area. That scare began to shape U.S. policy in protecting the fragile and vital trust that investors have in the capital markets system of this country.
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finance a la shmoop what is a savings and loan versus a bank all right
savings and loan some savings and loans yeah it's a cleverly named you know like [Case of cash appears]
home loans car loans stuff like that banks issuer of credit cards and big
lines of credit for small to large business savings and loans the little
local retail gal banks the big fat cat corporate dude with big appetites and [Woman sitting behind savings and loans desk]
small fast red convertible cars with a stick-shift
savings and loans owned either by the lenders and borrowers of the savings and
loan itself you know kinda like a co-op or it can be set up like you know normal
ish corporation banks usually owned just by shareholders some are big like this
guy and that guy yeah and there's a whole bunch of other small fries too
savings and loans can loan up to 20% of their assets half of that for big [Savings and loans assets pie chart appears]
business half of that for small business loans at least these days and why did
delineation well because small business is default a whole lot more than big
businesses savings and loans are allowed to tap into the very liquid Federal Home
Loan Bank system Fannie Mae in the gang those guys and in order to do that ie [Man with savings and loans briefcase for head appears]
get cheaper money in return SNL's have to have at least 65% of their assets
invested in residential mortgages meaning most of their loans are you know
small home mortgages a lot of first-time buyers there all right well why is this
a thing well because the American Dream from a political perspective revolves in [A couple moving into house]
large part around owning your own home right not a bad idea the government has [Uncle Sam appears and boy walks away with pile of cash]
gone to a whole lot of effort to make it easy for the little guy to borrow money
and have his or her own little castle a little to start anyway banks those cold [Boy dancing outside castle]
cruel concrete walled things don't live under this same structure they don't get
to tap into the same cash fool reserves that SNL's do is not all the time but
they get to loan money a more or less wherever they want to loan money there's
way fewer strictures on banks than SNL's banks exist to make money for the
shareholders of the bank duh and they're financially Darwinian beasts [Charles Darwin beast appears in misty forest]
good at lending money that costs them low rates to rent and then they rent it
out at much higher rates to customers right and they live on that spread so
banks also get hot and heavy with other kinds of borrowings things like credit [Man and woman sitting in car looking at sunset]
card issuance like I think about how much money your credit cards charges and
so on they get a big piece of that and servicing a debt you know and wealth
and/or financial management services like they take a percent of year or so
for managing all your dough and to some extent merchants and investment banking
services as well you know for the big guys who are global so banks think big
loans big money big spreads wholesale savings and loans think small loans
small money small spreads retail banks mr. Potter savings and loans [Mr Potter appears]
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