Can Jamie Dimon Outdo JP Morgan Himself In This Panic?

(Bloomberg Opinion) -- Last week, Jamie Dimon, head of JPMorgan Chase & Co., rode to the rescue of First Republic Bank as it faced a cataclysmic run on its deposits. Dimon and his allies at 10 other banks deposited $30 billion in the struggling institution, pledging to keep the money there for at least four months, if not longer.

Dimon’s intervention calls to mind a similar crisis many years ago, when John Pierpont Morgan helped quell the Panic of 1907. Almost everyone on Wall Street knows the story: Morgan summoned the nation’s top financiers to his palatial library and forced them to hammer out an accord that quelled the panic. The parallel is especially apt given that Dimon’s bank traces its ancestry to Morgan himself.

If Dimon is following in J.P. Morgan’s footsteps, buckle up. Morgan’s role in the Panic of 1907 is often distilled down to a single, decisive act. But in reality, he presided over a series of messy, improvised interventions, each more dramatic than the last and all of which came perilously close to failing. If history is really repeating itself, then we may be at the start, not the end, of the crisis.

The story of the Panic of 1907 has been told many times, but nowhere better than in Robert Bruner’s recent history. The crisis erupted in October of that year when a speculator named Augustus Heinze tried to corner the copper market and failed. Heinze, like many financial players, had controlling interests in a number of banks. As news of Heinze’s failure spread, panicked depositors pulled their money from any institution rumored to be in Heinze’s pocket.

But Heinze controlled more than banks; he also controlled the Knickerbocker Trust Company. This trust, like others of its kind, operated under a lighter regulatory regime than conventional banks, even as it operated like a commercial and investment bank. As fear over Heinz’s failure spread, depositors began pulling money from the Knickerbocker, too, prompting the trust’s executives to beg Morgan to help.

The phrase “larger-than-life” is overused, but appropriate for Morgan.  A visit from the legendary banker, one contemporary recalled, left one feeling “as if a gale had blown through the house.” He towered over most men, and his face featuring piercing eyes and an enormous bulbous nose disfigured by a skin disease made most avert their gaze. His habit of caning those who tried his patience only added to his terrifying reputation.

Alarmed by the growing panic, Morgan sent Benjamin Strong, a brilliant banker who would later join the Federal Reserve, to inspect the Knickerbocker’s books. Strong quickly concluded there wasn’t time to get a handle on the underlying assets. Morgan, despite having a significant stake in the Knickerbocker, decided it was beyond saving, leaving it to the mercy of ravening creditors.

As the Knickerbocker bled to death, another trust company found itself in the crosshairs: the Trust Company of America. On the morning of October 23, panicked depositors began yanking out millions of dollars after the press reported it might be the next to fall. Morgan, learning that the trust was likely solvent, famously declared that “This, then, is the place to stop this trouble.” He injected his own cash into the company in exchange for high-quality securities that Morgan held as collateral. Morgan then went one better, coercing the other trusts in the city to pledge a total of $10 million to prop up all the troubled trusts.

Problem solved? Hardly. Instead, other trusts now confronted bank runs, quickly draining the pool of reserves. The trusts began liquidating equities to cover their deposits, fueling a stock market collapse. Speculators who needed to cover their positions found themselves unable to raise the requisite cash. As call money evaporated and prices collapsed, speculators were forced to borrow money at 60% interest, and eventually, 100%.

Once again, Morgan stepped into the fray, putting together another pool to inject liquidity into the stock exchange. Morgan convened the leaders of New York City’s biggest banks and told them they had 10 minutes to pledge a total of $25 million. Morgan’s ally, the president of the First National City Bank (now Citibank) pledged $5 million. The others reluctantly made similar commitments. The money in hand, Morgan began making millions in call loans. An eyewitness reported that one of the brokers, upon learning of the news, yelled: “We are saved, we are saved!”

Actually, no. The next day, the trusts kept liquidating stock, continuing the cycle of despair. Morgan tried to raise an additional $15 million, but fell short. He managed to keep the stock exchange afloat until the weekend, but every stay of execution only opened the door to new crises.

By the second week of the panic, Morgan was fighting fires on all fronts. As people continued to pull money out of banks and trusts, tellers began slow-walking redemption, deliberately drawing out each transaction in order to buy themselves time. This only fueled more panic, as did the news that New York City itself was about to run out of money.

Morgan and his circle bought up $30 million in bonds to save the city from bankruptcy, only to learn that Moore & Schley, one of New York’s biggest brokerages, would shortly fail. The effect, Morgan realized, might spark a much larger conflagration. But there was a way out. The brokerage had collateral: stock in the Tennessee Coal and Iron Company. While these couldn’t be sold on the open market without sparking more panic, it might be possible to find a buyer for the company, saving the brokerage in the process.

Morgan enlisted U.S. Steel to play the role of white knight. If the feds approved, U.S. Steel would swap its own rock-solid bonds for the company’s stock. But they would only do this if the trusts banded together to stabilize the larger financial system.

It was at this point that Morgan convened the most consequential meeting of the entire crisis, summoning leaders of the city’s trusts to his private library. Morgan put executives of the Trust Company of America and a second, equally vulnerable trust in two separate rooms; executives from the other trusts went into a larger room; U.S. Steel representatives sat in a fourth room. Morgan made sure no one could leave, locking the front door and pocketing the key. “Mr. Morgan took no chances,” one attendee recalled. “He meant to have the situation cleared up before a single man left the building.” 

By four o’clock in the morning, Morgan had a deal. The still-viable trusts reluctantly pledged their reserves to a bailout fund. U.S. Steel absorbed the Tennessee Coal and Iron Company, shoring up Moore & Schley. And the panic came to an end the very next day.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Stephen Mihm, a professor of history at the University of Georgia, is coauthor of “Crisis Economics: A Crash Course in the Future of Finance.”

More stories like this are available on bloomberg.com/opinion

©2023 Bloomberg L.P.