ONCE UPON A TIME...
At a time when the conventional wisdom is that "All Bankers are Evil", it's interesting to hark back to a time when that wasn't necessarily the case. This op-ed piece by author Jean Strouse in the New York Times this weekend takes us back to that time:
"A look back at the handling of another financial crisis a full century
ago underlines the point about decisive action. You just don’t want to
take the wrong decisive action. Markets today are immeasurably more
complex, global, fast-moving and regulated (a lot of good that did)
than they were a hundred years ago, but the need for strong leadership
has not changed..."
"In October 1907, when a panic started among trust companies in New
York and terrified depositors lined up to get their money out, Schiff’s
dire prediction seemed about to come true. The United States had no
Federal Reserve, the Treasury secretary did not have much political
authority, and the president, Theodore Roosevelt, was off shooting game
in Louisiana.
J. Pierpont Morgan, a 70-year-old private banker, quietly took charge of the situation.
In
the absence of a central bank, Morgan had for decades been acting as
the country’s unofficial lender of last resort, gathering reserves and
supplying capital to the markets in periods of crisis. For two
harrowing weeks in 1907, with the whole world watching, he operated
like a general, deploying three young lieutenants to do leg work and
supply him with information, and bringing two other leading bankers,
James Stillman of National City Bank and George Baker of the First
National Bank, into a senior “trio” to make executive decisions. (First
National and National City eventually combined to form what is now
Citigroup — are the shades of Baker and Stillman writhing over what has
become of their descendant institution?)
The Morgan teams ran
“stress tests” on the unregulated trust companies, figuring out which
were impossibly overleveraged and should be allowed to fail, and which
were basically sound but crippled by the panic. Once they had
determined that a trust was essentially healthy, the bankers supplied
it with cash, matching their loans dollar-for-dollar with the trust’s
collateral assets."
The story does have a happy ending,
"At the end of Week 1, President Roosevelt sent a letter to the press
congratulating the “substantial businessmen who in this crisis have
acted with such wisdom and public spirit.”
"Though Morgan had a large sense of public duty, he had not
shouldered the falling church out of pure altruism. His self-interest
operated on a national scale.
His clients — many of them Europeans who
had invested for decades in the emerging American economy through the
House of Morgan — had billions of dollars committed in the United
States. In watching over their long-term interests, trying to control
the excesses of the business cycle and maintain the value of the
dollar, Morgan had come to serve as guardian of American credit in
international markets.
His power in 1907 derived not from the
size of his own fortune but from the trust placed in him by investors,
other bankers and international statesman.
After Morgan died in 1913,
the newspapers reported his net worth as about $80 million — roughly
$1.7 billion in today’s dollars. John D. Rockefeller, already worth a
billion in 1913 dollars, is said to have read the figure, shaken his
head, and remarked, “And to think he wasn’t even a rich man.”
The whole piece is worth reading. Maybe history could again repeat if given half a chance.
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