Financial Panics: 1600 - 2000

11

Financial Panics: 1600 - 2000Financial Panics: 1600 - 2000

Peter FortunePeter Fortune

Ph.D. Harvard UniversityPh.D. Harvard University

www.econseminars.comwww.econseminars.com

Email: [email protected]: [email protected]

2

Legendary CrisesLegendary Crises

in the in the

1717thth and 18 and 18thth Centuries Centuries

3

The Dutch Tulip ManiaThe Dutch Tulip Mania

Of 1636-37: Of 1636-37:

A Famous Non-Event A Famous Non-Event

References

Garber, Peter. Famous First Bubbles: The Fundamentals of Early Manias, MIT Press, Cambridge MA, 2000 (esp. pages 20-86)

4

The ContextThe Context

¶ ¶ The Netherlands in the 1630sThe Netherlands in the 1630s

Bubonic Plague in the Netherlands (1634-1637)\Bubonic Plague in the Netherlands (1634-1637)\ 17% of Amsterdam died17% of Amsterdam died The National Psyche TurnedThe National Psyche Turned To The Short Term To The Short Term

¶ ¶ The Botony of TulipsThe Botony of Tulips

Bulbs Were Planted in September, Bloomed in MayBulbs Were Planted in September, Bloomed in May One Bulb Could Produce Several Bulbs via BudsOne Bulb Could Produce Several Bulbs via Buds Exotic Bulbs Always Rare: A Known CommodityExotic Bulbs Always Rare: A Known Commodity Common Bulbs Could Become Rare if InfectedCommon Bulbs Could Become Rare if Infected by a Specific Virus, Making Them A Perfectby a Specific Virus, Making Them A Perfect Speculative CommoditySpeculative Commodity

5

The Tulip Bulb Market

¶ ¶ The Exotic Bulb MarketThe Exotic Bulb Market

Exotic Bulbs Traded in a Sophisticated Dealer Exotic Bulbs Traded in a Sophisticated Dealer MarketMarket

Exotic Bulbs Were Traded by the BulbExotic Bulbs Were Traded by the Bulb Exotic Bulbs Were Very Expensive Both Before and Exotic Bulbs Were Very Expensive Both Before and

After After the Tulip Maniathe Tulip Mania

¶ ¶ The Common Bulb MarketThe Common Bulb Market

Common Bulbs Were Traded in BulkCommon Bulbs Were Traded in Bulk Common Bulbs Traded in Taverns (“Colleges”)Common Bulbs Traded in Taverns (“Colleges”) Common Bulbs Traded in a Forward Market:Common Bulbs Traded in a Forward Market: Bulbs Were Bought in the Fall for Delivery in MayBulbs Were Bought in the Fall for Delivery in May

6

Characteristics Of Forward ContractCharacteristics Of Forward Contract

¶ ¶ No Margin Required from BuyerNo Margin Required from Buyer

¶ ¶ No Bulb Required of Seller (Naked Contracts)No Bulb Required of Seller (Naked Contracts)

¶ ¶ All Contracts Were for Forward DeliveryAll Contracts Were for Forward Delivery

¶ ¶ Most Contracts Cash Settled: Delivery of ActualMost Contracts Cash Settled: Delivery of Actual

Bulb Was RareBulb Was Rare

¶ ¶ Contracts Were Not Marked to Market (LimitedContracts Were Not Marked to Market (Limited

Lender Protection)Lender Protection)

¶ ¶ Contracts Traded in Taverns (“Drinking Game”)Contracts Traded in Taverns (“Drinking Game”)

¶ ¶ Contract Trading And Prices Peaked at Height Contract Trading And Prices Peaked at Height

Of The Plague (1636)Of The Plague (1636)

7

Tulip Bulb Prices During The BubbleTulip Bulb Prices During The Bubble

¶ ¶ Exotic Bulb PricesExotic Bulb Prices

Prices Rose Steadily Throughout 1634-1636Prices Rose Steadily Throughout 1634-1636

Prices Remained High After 1636Prices Remained High After 1636

¶ ¶ Common Bulb PricesCommon Bulb Prices

Prices Remained Steady Until Sharp Spike inPrices Remained Steady Until Sharp Spike in

November 1636November 1636

Prices Fell Sharply After January 1637Prices Fell Sharply After January 1637

8

Effects on Dutch EconomyEffects on Dutch Economy

¶ ¶ Government Suspended Tulip Contracts inGovernment Suspended Tulip Contracts in

April 1637April 1637

¶ ¶ No Evidence That Any Contracts Were No Evidence That Any Contracts Were

Enforced By CourtsEnforced By Courts

¶ ¶ No Indications of Bank FailuresNo Indications of Bank Failures

¶ ¶ The Tulip Mania Was A Non-EventThe Tulip Mania Was A Non-Event

9

The French “Mississippi Bubble”The French “Mississippi Bubble”AndAnd

John LawJohn LawThe First Financial EngineerThe First Financial Engineer

1716-17221716-1722

ReferencesReferences

Garber, Peter. Garber, Peter. Famous First Bubbles: The Fundamentals of Early Famous First Bubbles: The Fundamentals of Early Manias, Manias, MIT Press, Cambridge MA, 2000. (esp. pages 87-102)MIT Press, Cambridge MA, 2000. (esp. pages 87-102)

Velde, Francis. 2004. Velde, Francis. 2004. Government Equity And Money: John Law’s Government Equity And Money: John Law’s System In 1720 FranceSystem In 1720 France. Federal Reserve Bank of Chicago, . Federal Reserve Bank of Chicago, mimeo.mimeo.

11

John LawJohn Law

¶ A Brilliant Scottish Monetary Theorist

¶ An Iveterate Gambler, Probable Murderer, And An International Black Sheep

¶ Peripatetic, Chased Out of Many Cities, Settled in Paris in 1715

¶ Became Financial Advisor to the Duke of Orleans, Regent for Louis XV After Convincing Him That A State Bank Would Improve The Public Credit

12

The Historical Context

¶ ¶ Louis XIV, The Sun King, Died in 1715Louis XIV, The Sun King, Died in 1715

¶ ¶ After Versailles, Profligate Spending, andAfter Versailles, Profligate Spending, and

Numerous Wars, the French Government WasNumerous Wars, the French Government Was

Near BankruptcyNear Bankruptcy

¶ ¶ The Economic Policies of Louis’s FinanceThe Economic Policies of Louis’s Finance

Minister, Jean Claude Colbert, Left the FrenchMinister, Jean Claude Colbert, Left the French

Economy Bound by Rigid Regulations andEconomy Bound by Rigid Regulations and

Restrictive Trade Policies (“Mercantilism”)Restrictive Trade Policies (“Mercantilism”)

13

The French Government’s Budget Deficit Under The French Government’s Budget Deficit Under Louis XIVLouis XIV

14

Key Elements of Law’s Monetary TheoryKey Elements of Law’s Monetary Theory

¶ ¶ Substitution of Fiat Money for Specie Will AllowSubstitution of Fiat Money for Specie Will Allow Increased Credit Resulting in Increased Trade Increased Credit Resulting in Increased Trade and Higher Tax Revenuesand Higher Tax Revenues

¶ ¶ Privatizing the French National Debt Will Strengthen the Public Credit and Prevent “Crowding Out” of Private Investment ¶ ¶ These Goals Can Be Achieved By Creating A These Goals Can Be Achieved By Creating A State Bank To Sell Shares to the Public, Use the State Bank To Sell Shares to the Public, Use the Proceeds to Buy French Government Bonds (AProceeds to Buy French Government Bonds (A Debt for Equity Swap), And Increase the MoneyDebt for Equity Swap), And Increase the Money Supply by Lending and Issuing Bank NotesSupply by Lending and Issuing Bank Notes

15

Formation of the Banque Generale Formation of the Banque Generale (1716)(1716)

¶ ¶ Functions of the BanqueFunctions of the Banque Deposit And Note IssueDeposit And Note Issue

Took Specie Deposits Convertible Into Bank NotesTook Specie Deposits Convertible Into Bank Notes Made Private Loans Issuing Bank Notes In ExchangeMade Private Loans Issuing Bank Notes In Exchange Investments And Asset ManagementInvestments And Asset Management Purchased French Government Debt at Par, Paying Purchased French Government Debt at Par, Paying In New Bank NotesIn New Bank Notes Held Tax Farming Rights And Foreign Trading RightsHeld Tax Farming Rights And Foreign Trading Rights

¶ ¶ Protection Of Deposits And NotesProtection Of Deposits And Notes Initially Held High (50%) Reserves in SpecieInitially Held High (50%) Reserves in Specie Value of Notes Protected Against Devaluation ofValue of Notes Protected Against Devaluation of CoinageCoinage By 1720 the Government Prohibited Large Payments in By 1720 the Government Prohibited Large Payments in Specie And Made Bank Notes the Sole LegalSpecie And Made Bank Notes the Sole Legal

16

The Banque’s Equity Structure

¶ Issued Shares to the Well Connected The King Was the Largest Investor “Society” Subscribed Heavily

¶ Shares Viewed As A Slam-Dunk—A Free Call Option

Shares were sold via Call Option with 5,000L Strike Price—20% Up Front, Remainder in 5 Months, with Right to Cancel Payment for Shares was 25% Specie and 75% Government Bonds at Par (Market Price was 60% of Par) Investors could borrow from the Banque to Pay for Shares (“Margin Debt”)

17

The Market For Banque Shares

¶ A High Share Price Was Essential To Banque Viability

Shareholders Received Value Increase If Price-Earnings Ratio on Stock Exceeded The Price-Dividend Ratio On Government Debt That Was Tendered For Shares Three Sources Of High Stock Price Strong And Increasing Revenues From Government Bonds Held, Tax Farming Rights, Foreign Trading Rights, And Return On Loan Portfolio High Confidence In Convertibility Of Notes Into Specie—A Run On Specie Would Deplete Reserves, Force Sale Of Assets, And Reduce Capital The Banque’s Stock Repurchase Program

18

Law’s Share Price Support Plan

¶ If Share Prices Fell Below A Threshold, The Banque Would Engage In Stock Repurchases Print Notes And Buy Shares To Maintain Required Price

¶ The Inherent Contradiction Effect Of Share Support Would Be Increased Note Issue As Notes Outstanding Grew Relative To Specie, Noteholders Would Convert Notes To Specie A Run On The Banque Might Result The Note Issuance Would Create Inflation Foreign Noteholders Would Convert Notes To Specie And Repatriate The Specie Credit Would Tighten In France And A Credit Crunch Would Emerge

19

The Banque’s Middle Stage (1717 – 1718)The Banque’s Middle Stage (1717 – 1718)

¶¶ In 1716 to 1717 The Banks Was Wildly Successful In 1716 to 1717 The Banks Was Wildly Successful Shareholders Received A 64% Annual DividendShareholders Received A 64% Annual Dividend The Business Model Was ConfirmedThe Business Model Was Confirmed

¶¶ In 1717 Law Formed the Compagnie d’OccidentIn 1717 Law Formed the Compagnie d’Occident Purchased the Louisiana Company and the Canada Purchased the Louisiana Company and the Canada

Company Company with All Development Rights in Canada and “Mississippi”with All Development Rights in Canada and “Mississippi” IPO Was at 500L Per Share, Payable Entirely in IPO Was at 500L Per Share, Payable Entirely in

Government Government BondsBonds IPO Was Executed Via Call Option Sale, As In General BankIPO Was Executed Via Call Option Sale, As In General Bank

¶¶ In 1718 The Government Nationalized The BanqueIn 1718 The Government Nationalized The Banque The King Bought All Existing Shares The King Bought All Existing Shares Provided the King With a Printing PressProvided the King With a Printing Press

20

The Compagnie d’Occidente Buys The GovernmentThe Compagnie d’Occidente Buys The Government

¶¶ In 1718 The Company of the West Undertook a Series In 1718 The Company of the West Undertook a Series of Major Acquisitionsof Major Acquisitions Bought the Rights to All “Tax Farming” in FranceBought the Rights to All “Tax Farming” in France Acquired Other Trading Companies (Senegal, WestAcquired Other Trading Companies (Senegal, West

Indies, Africa)Indies, Africa) Was Granted the Right to Run the Royal Mint andWas Granted the Right to Run the Royal Mint and Receive All Seignorage (10-20% Premium)Receive All Seignorage (10-20% Premium)

¶ The Company Was Renamed the Compagnie des Indes Shares Sold For 500L At IPOShares Sold For 500L At IPO Subscribers Coud Delay Payment And Had Right To CancelSubscribers Coud Delay Payment And Had Right To Cancel

¶ The Company Acquired the “Royal Bank” in Feb 1720

21

The Status Of Law’s System By Early 1720 The Status Of Law’s System By Early 1720

¶ ¶ Law Had Completed an LBO of the GovernmentLaw Had Completed an LBO of the Government Taken Over All Aspects of France’s FinancesTaken Over All Aspects of France’s Finances Taken over All Government Foreign Trading Taken over All Government Foreign Trading RightsRights Become the Sole Issuer of Bank Notes--Which Had Become the Sole Issuer of Bank Notes--Which Had Become France’s Sole Legal Tender Except for Become France’s Sole Legal Tender Except for

CompanyCompany Use of Specie in Foreign TransactionsUse of Specie in Foreign Transactions

¶ Use Of Banque Notes To Finance LBO Created Excessive Note Issuance And Major Economic

Problems Significant Inflation Began As Money Supply ExplodedSignificant Inflation Began As Money Supply Exploded The French Livre Began To Decline Relative To Specie,The French Livre Began To Decline Relative To Specie, Reducing Confidence In Note Convertibility Into SpecieReducing Confidence In Note Convertibility Into Specie The French Currency Depreciated Relative To ForeignThe French Currency Depreciated Relative To Foreign Currencies, Creating More Inflation And Specie OutflowsCurrencies, Creating More Inflation And Specie Outflows

22

The Late Stage (1720-1721)The Late Stage (1720-1721)

¶¶ In May 1720 The Baque Experienced Runs AsIn May 1720 The Baque Experienced Runs As Noteholders Converted To SpecieNoteholders Converted To Specie

Surge In Notes Outstanding Relative To Specie Reserves

Created Loss Of Confidence In Paper Money The Banque Lost Specie Reserves The Loss In Reserves Led To Further

Conversions The Banque Was Forced To Sell Assets Asset Prices Declined, Reducing Bank Capital

Government Delared Notes To Be The Sole Legal

Tender Goal Was To Prevent Conversion Of Notes To Specie

23

In May 1720 The Company’s Stock Price In May 1720 The Company’s Stock Price CollapsedCollapsed

Initial Causes

Profit-Taking: Share Price Had Risen To 10,000L

Banque’s Capital Was Eroding Paltry Revenues From Foreign Trading

Rights

Law Implemented Stock Repurchases The Company Set A Repurchase Price Of

9,000L Stock Repurchases Added To Note Issue

And Additional Banque Problems

24

Banque Notes in CirculationSilver-Equivalent Value

April 1719 to December 1720

0

200

400

600

800

1000

1200

1400

1600

1800

J F M A M J J A S O N D J F M A M J J A S O N D

1719 1720

Sil

ve

r Liv

res E

qu

ivale

nt

En

d-o

f-M

on

th

Banque Notes in Circulation Peaked in May 1720

25

The Specie-Value of Banque Notes Began Rapid Depreciation in May 1720

26

The Company’s Stock Price Collapsed After May The Company’s Stock Price Collapsed After May 17201720

27

What Went Wrong?What Went Wrong?

¶ Key WeaknessesKey Weaknesses

Law’s Business Model Flawed Law’s Business Model Flawed Subscribers To Company Shares Could Pay ModestSubscribers To Company Shares Could Pay Modest Amount Down, Remainder Later, With Right To CancelAmount Down, Remainder Later, With Right To Cancel Viability Required a High Share Price But StockViability Required a High Share Price But Stock Repurchase Program Exacerbated The Economic Repurchase Program Exacerbated The Economic

ProblemsProblems After Initial Success, Company Revenues Failed To After Initial Success, Company Revenues Failed To

Meet Meet ExpectaionsExpectaions Banque Had Seriously Overpaid For Government BondsBanque Had Seriously Overpaid For Government Bonds

Law’s Monetary Theory Was WrongLaw’s Monetary Theory Was Wrong Substitution Of Fiat Money For Specie Resulted In Substitution Of Fiat Money For Specie Resulted In

Inflation,Inflation, Not Greater TradeNot Greater Trade

28

The AftermathThe Aftermath

¶ Several Attempts to Save the Company by ConvertingSeveral Attempts to Save the Company by Converting Banque Notes to Banque Bonds FailedBanque Notes to Banque Bonds Failed

¶ Law Fled France in 1720, Died in 1729Law Fled France in 1720, Died in 1729

¶ The Government Reversed the System, Converting The Government Reversed the System, Converting Banque Notes and Bonds to Government BondsBanque Notes and Bonds to Government Bonds

¶ The Indies Company Was Given Additional The Indies Company Was Given Additional Monopolies and It SurvivedMonopolies and It Survived

¶ The Clean-Up Was Completed in April 1722The Clean-Up Was Completed in April 1722

¶ France Prohibited the Creation of OrganizationsFrance Prohibited the Creation of Organizations Named “Banque,” Substituting the words “Credit” orNamed “Banque,” Substituting the words “Credit” or “ “Societe,” as in “Credit Agricole” or “Societe Societe,” as in “Credit Agricole” or “Societe

Generale”Generale”

29

Did Law’s System Create Additional Trade?Did Law’s System Create Additional Trade?

No, Its Primary Effect was on InflationNo, Its Primary Effect was on Inflation

30

Answer An Emphatic “NO” To All Of The Following:

¶ Did Law’s System Strengthen the Government’s Credit?

¶ Did The System Create Financial Stability?

¶ Did The System Create More Production And Trade?

¶ Did The System Develop the “Mississippi” Area? No Significant Investments Were Made in Louisiana

The Spanish Were Unwilling to Let France Take Away

Its Trade Routes in the Americas

31

Lessons From The Mississippi Bubble

¶ ¶ Monetary Expansion Affects Prices More Than Monetary Expansion Affects Prices More Than TradeTrade

¶ ¶ The Risk of Low Bank Cash Reserves – The Banque’sThe Risk of Low Bank Cash Reserves – The Banque’s High Ratio of Notes Outstanding to ReservesHigh Ratio of Notes Outstanding to Reserves Exposed It To RunsExposed It To Runs ¶¶ The Risk of “Reputational Put Options” – TheThe Risk of “Reputational Put Options” – The Company’s Efforts to Set a Floor on Its Stock PriceCompany’s Efforts to Set a Floor on Its Stock Price via Buy-Backs Contributed to Its Weaknessvia Buy-Backs Contributed to Its Weakness ¶¶ The Risk of High Leverage – The Company Had High The Risk of High Leverage – The Company Had High Indebtedness And Its Capital Was Easily Threatened By Indebtedness And Its Capital Was Easily Threatened By Declines In Asset PricesDeclines In Asset Prices

All Of These Have Re-Emerged In Later Financial All Of These Have Re-Emerged In Later Financial Crises!Crises!

32

The English South Seas BubbleThe English South Seas Bubble

Laws’s System ReduxLaws’s System Redux

ReferenceReference

Garber, Peter. Garber, Peter. Famous First BubblesFamous First Bubbles: The Fundamentals of Early Manias, : The Fundamentals of Early Manias, MIT Press, Cambridge MA, 2000.MIT Press, Cambridge MA, 2000.

33

The BackgroundThe Background

¶ 1711 - The South Seas Company Is Formed to Develop Trade With The East Coast of South America

Gold and Silver in Spanish Americas: Mexico, Peru, ChileGold and Silver in Spanish Americas: Mexico, Peru, Chile Spain was Expected to Allow English Trade Presence In Spain was Expected to Allow English Trade Presence In The “South Seas”The “South Seas” Spain Allowed Only One Vessel Per Year, Spain Allowed Only One Vessel Per Year,

DemandingDemanding 25% of Profits and a Tax of 5% On Remainder of25% of Profits and a Tax of 5% On Remainder of ProfitsProfits First Vessel Not Sent Until 1717 But Spain AllowedFirst Vessel Not Sent Until 1717 But Spain Allowed No MoreNo More Even So, The Company’s Shares Remained StrongEven So, The Company’s Shares Remained Strong

34

The Government Captures The South Seas CompanyThe Government Captures The South Seas Company

¶¶ In 1717 the King, Impressed by The Apparent Success In 1717 the King, Impressed by The Apparent Success Of Law’s Scheme, Proposed Refunding the Public DebtOf Law’s Scheme, Proposed Refunding the Public Debt

South Seas Company and Bank of England Both Invited South Seas Company and Bank of England Both Invited toto

Propose Plans to Sell Shares and Buy Government Debt, Propose Plans to Sell Shares and Buy Government Debt, Then Renegotiate Debt With Government Then Renegotiate Debt With Government The Company Embarked on Extensive Bribery of The Company Embarked on Extensive Bribery of Parliament to Obtain Favorable TermsParliament to Obtain Favorable Terms After Lengthy Debates, the South Sea Company Won After Lengthy Debates, the South Sea Company Won the Contractthe Contract The First Act Allowing Refunding Passed Parliament in The First Act Allowing Refunding Passed Parliament in March 1720March 1720 Investors Could Covert Government Bonds to South Investors Could Covert Government Bonds to South Seas Shares, Bonds, and Cash at Par—About Twice Seas Shares, Bonds, and Cash at Par—About Twice The Market Value Of Government BondsThe Market Value Of Government Bonds

35

A Surge in Speculation on South Seas Shares A Surge in Speculation on South Seas Shares BeganBegan

36

The EndThe End

¶ ¶ The Speculation Resulted in Formation ofThe Speculation Resulted in Formation of

Numerous “Bubble Companies,” Many of Numerous “Bubble Companies,” Many of ThemThem

ScamsScams

Parliament Passed “Bubble Act” In June 1720 toParliament Passed “Bubble Act” In June 1720 to

Prevent Competition With The CompanyPrevent Competition With The Company

Shares of Bubble Companies Fell, Forcing Margin Shares of Bubble Companies Fell, Forcing Margin

Calls and Sales of Shares in “Good” CompaniesCalls and Sales of Shares in “Good” Companies

A Liquidity Crisis Emerged In Which The South SeasA Liquidity Crisis Emerged In Which The South Seas

Company’s Shares Were Dragged DownCompany’s Shares Were Dragged Down

37

The U.S. Monetary System 1870 – The U.S. Monetary System 1870 – 19361936

Essential Background InformationEssential Background Information

ReferenceReference

Friedman Milton. Friedman Milton. Money Mischief: Episodes in Monetary HistoryMoney Mischief: Episodes in Monetary History, , Harcourt Brace & Co., New York, 1994. (esp. pages 51-79)Harcourt Brace & Co., New York, 1994. (esp. pages 51-79)

38

Bimetallism Before 1870Bimetallism Before 1870

¶¶ Until 1873 Most Of The World Was On AUntil 1873 Most Of The World Was On A Bimetallic Monetary Standard Bimetallic Monetary Standard Both Gold and Silver Were Legal TenderBoth Gold and Silver Were Legal Tender

The Mint Would Buy or Sell Silver at a Silver-The Mint Would Buy or Sell Silver at a Silver-Gold Gold

Ratio of 16 Ounces of Silver to 1 Ounce of GoldRatio of 16 Ounces of Silver to 1 Ounce of Gold The U.S. was Effectively on a Silver StandardThe U.S. was Effectively on a Silver Standard Before the 1870s Because the Silver-Gold Before the 1870s Because the Silver-Gold

MarketMarket Price Ratio Exceeded the Mint Parity of 16:1Price Ratio Exceeded the Mint Parity of 16:1

¶¶ The Problem Of BimetallismThe Problem Of Bimetallism When Gold-Silver Market Price Deviated From When Gold-Silver Market Price Deviated From 16:1, One Metal Would Be Hoarded, The Other16:1, One Metal Would Be Hoarded, The Other Used For PaymentsUsed For Payments Gresham’s Law”: Bad Money Drives Out Good Gresham’s Law”: Bad Money Drives Out Good MoneyMoney

39

The Rise Of The Gold StandardThe Rise Of The Gold Standard

¶¶ Prior To 1870 Bimetallism Prevailed Prior To 1870 Bimetallism Prevailed Every Country Set A Mint Ratio (Usually 16:1)Every Country Set A Mint Ratio (Usually 16:1) Mint Would Exchange 1 oz. of Gold For 16 oz. of Mint Would Exchange 1 oz. of Gold For 16 oz. of

SilverSilver 1 oz. Gold = $20.64 => 1 oz. Silver = $1 oz. Gold = $20.64 => 1 oz. Silver = $

¶¶ The Start of The Gold Standard The Start of The Gold Standard Germany Won The Franco-Prussian in 1871Germany Won The Franco-Prussian in 1871 Germany Levied Reparations on France Payable in GoldGermany Levied Reparations on France Payable in Gold Germany Then Went on a Gold StandardGermany Then Went on a Gold Standard

In 1873 The U.S. Went On The Gold StandardIn 1873 The U.S. Went On The Gold Standard By 1900 All Western Countries Had Demonetized SilverBy 1900 All Western Countries Had Demonetized Silver And Adopted a Gold StandardAnd Adopted a Gold Standard China and Other Asian Countries Adhered to a SilverChina and Other Asian Countries Adhered to a Silver StandardStandard

40

The U.S. Goes To Gold The U.S. Goes To Gold

¶¶ Fourth Coinage Act of 1873 (The Crime Of ’73)Fourth Coinage Act of 1873 (The Crime Of ’73)

Ended Purchases of Silver by U.S. MintEnded Purchases of Silver by U.S. Mint Created A Gold-Based Currency and U.S. Adherence to an Created A Gold-Based Currency and U.S. Adherence to an International Gold Standard at 1 oz. = $20.64International Gold Standard at 1 oz. = $20.64 Resulted in a Decline in Silver Prices and Economic Resulted in a Decline in Silver Prices and Economic

DifficultiesDifficulties in the Western U.S.in the Western U.S. Called “The Crime of ’73” by Western “Silverites”Called “The Crime of ’73” by Western “Silverites” Shaped the Political Debate for 30 Years, for example, Shaped the Political Debate for 30 Years, for example,

Bryan’sBryan’s “ “Cross of Gold” Speech in 1896Cross of Gold” Speech in 1896 Had U.S. Stayed on a Silver Standard, the Depression of Had U.S. Stayed on a Silver Standard, the Depression of

thethe 1890s Might Have Been Mitigated1890s Might Have Been Mitigated Dollar Would Have Depreciated Relative To Gold AreaDollar Would Have Depreciated Relative To Gold Area Periodic Gold Outflows That Troubled The Economy Periodic Gold Outflows That Troubled The Economy

WouldWould Not Have OccurredNot Have Occurred

41

The Gold Standard after The Gold Standard after 18731873

42

The Pros And Cons Of The Gold Standard The Pros And Cons Of The Gold Standard

¶¶ Positive Aspects Of Fixed Exchange Rates Positive Aspects Of Fixed Exchange Rates No Exchange Rate RiskNo Exchange Rate Risk Easy to Compute Prices of Foreign GoodsEasy to Compute Prices of Foreign Goods International Lending Less RiskyInternational Lending Less Risky Encourages “Globalization” of Trade and FinanceEncourages “Globalization” of Trade and Finance Reduces Possibility of Prolonged InflationReduces Possibility of Prolonged Inflation

¶ ¶ ConsCons Limits Control Over Domestic Money Supply Limits Control Over Domestic Money Supply Links International Economies Together—Booms Links International Economies Together—Booms and Busts Quickly Transmitted Abroadand Busts Quickly Transmitted Abroad Can Promote Economic Instability When Policies in Can Promote Economic Instability When Policies in Different Countries Aren’t SynchronizedDifferent Countries Aren’t Synchronized

43

The U.S. Monetary Framework Under the Gold The U.S. Monetary Framework Under the Gold StandardStandard

45

1919thth and Early 20 and Early 20thth Century Monetary Century Monetary CrisesCrises

The Panic of 1893 The Panic of 1893 The Panic of 1907 The Panic of 1907

46

The Panic of 1893The Panic of 1893 ReferencesReferences

47

The Ecnonomic ContextThe Ecnonomic Context

¶¶ Railroad and Steel ConsolidationsRailroad and Steel Consolidations Declining Rail Tariffs led to Increased Competition,Declining Rail Tariffs led to Increased Competition, Especially For Short Haul RoutesEspecially For Short Haul Routes JP Morgan Led a Railroad Consolidation MovementJP Morgan Led a Railroad Consolidation Movement Morgan Formed U.S. Steel, A Consolidation of Morgan Formed U.S. Steel, A Consolidation of

Carnegie-Carnegie- Related Steel CompaniesRelated Steel Companies

¶ ¶ Declining Commodity PricesDeclining Commodity Prices Western Farmers Under Pressure As Ag Prices FellWestern Farmers Under Pressure As Ag Prices Fell Silver Prices Declined in Utah and NevadaSilver Prices Declined in Utah and Nevada Coalition of Western Senators Pushed for Coalition of Western Senators Pushed for

Increased Increased Credit From Eastern Banks and Return to Credit From Eastern Banks and Return to

BimetallismBimetallism

48

The Monetary ContextThe Monetary Context

¶ ¶ Supply of Bank Notes Was Linked to Gold Supply of Bank Notes Was Linked to Gold Reserves at Banks And The U.S. TreasuryReserves at Banks And The U.S. Treasury (High-Powered Money)(High-Powered Money)¶ ¶ Predictable Credit Cycle Associated with CropPredictable Credit Cycle Associated with Crop HarvestsHarvests

Bank Notes And Gold Moved Westward as Bank Notes And Gold Moved Westward as FarmersFarmers

Borrowed In The Fall Planting SeasonBorrowed In The Fall Planting Season Gold Imports Rose as Eastern Banks BorrowedGold Imports Rose as Eastern Banks Borrowed Abroad in The Fall To Finance Farm CreditAbroad in The Fall To Finance Farm Credit A Regular Credit Crunch in Fall—Interest RatesA Regular Credit Crunch in Fall—Interest Rates Would Rise As Credit Demands RoseWould Rise As Credit Demands Rose

49

The TriggersThe Triggers

¶¶ Sherman Silver Purchase Act of 1890Sherman Silver Purchase Act of 1890

Required U.S. Treasury to Buy 4.5M Ounces of Silver Required U.S. Treasury to Buy 4.5M Ounces of Silver Monthly Using Silver CertificatesMonthly Using Silver Certificates (Bank Notes(Bank Notes Convertible Into Silver)Convertible Into Silver)

Created Foreign Fears That U.S. Would Abandon the Gold Created Foreign Fears That U.S. Would Abandon the Gold Standard—Lending to U.S. Fell Sharply and Gold Flowed OutStandard—Lending to U.S. Fell Sharply and Gold Flowed Out of Countryof Country Reduction in Treasury’s Gold Reserves Created Incentives to Reduction in Treasury’s Gold Reserves Created Incentives to Convert Gold Certificates into Gold for Non-Monetary UsesConvert Gold Certificates into Gold for Non-Monetary Uses Treasury Suspended Convertibility of Gold CertificatesTreasury Suspended Convertibility of Gold Certificates Result Was A Severe Credit Crunch as Bank Lending FellResult Was A Severe Credit Crunch as Bank Lending Fell The Sherman Act Was Suspended in 1893The Sherman Act Was Suspended in 1893

50

The Economy In The Early 1890sThe Economy In The Early 1890s

¶¶ Continued Decline of Agricultural PricesContinued Decline of Agricultural Prices Bumper Crops in U.S.Bumper Crops in U.S.

Farm Loans Defaulted in Midst of ProsperityFarm Loans Defaulted in Midst of Prosperity Farmers Reduced PurchasesFarmers Reduced Purchases

¶¶ Important Industrial Company FailuresImportant Industrial Company Failures Philadelphia and Reading RailroadPhiladelphia and Reading Railroad National Cordage CompanyNational Cordage Company Many Banks (Mostly Western)Many Banks (Mostly Western)

¶¶ Labor StrikesLabor Strikes

51

The Economy After 1893The Economy After 1893

¶¶ The 1890’s Had Several Money-Related EpisodesThe 1890’s Had Several Money-Related Episodes

¶¶ Unemployment Remained High Throughout theUnemployment Remained High Throughout the

DecadeDecade

¶¶ The 1896 Campaign Was Between the Easy-The 1896 Campaign Was Between the Easy-MoneyMoney

“ “Silverites,” Led by Bryan, and the Hard-Money Silverites,” Led by Bryan, and the Hard-Money

Gold Standard Advocates led by McKinleyGold Standard Advocates led by McKinley

¶¶ The Debate Over The Gold Standard Continued The Debate Over The Gold Standard Continued ForFor

52

The Economy After 1893The Economy After 1893

U.S. Unemployment Rate1890 - 1900

0

2

4

6

8

10

12

14

1890 1891 1892 1893 1894 1895 1896 1897 1898 1899 1900

Perc

en

t of

Labor

Forc

e

53

Interest Rates In 1890-Interest Rates In 1890-19101910

54

The Panic Of 1907The Panic Of 1907


Bruner, Robert and Sean Carr. Bruner, Robert and Sean Carr. The Panic of 1907: Lessons Learned The Panic of 1907: Lessons Learned from thefrom the Perfect Storm Perfect Storm, John Wiley & Sons, Hoboken NJ, 2007., John Wiley & Sons, Hoboken NJ, 2007.

Tallman, Ellis and John Moen. “Lessons From The Panic of 1907,” Tallman, Ellis and John Moen. “Lessons From The Panic of 1907,” EconomicEconomic Revew Revew, Federal Reserve Bank of Atlanta, 1990., Federal Reserve Bank of Atlanta, 1990.

55

The PlayersThe Players

¶¶ Commercial Banks Commercial Banks

National Banks in Money Centers Could Hold Treasury National Banks in Money Centers Could Hold Treasury DepositsDeposits Rural Banks Held 25% of Deposits in Reserves—40%Rural Banks Held 25% of Deposits in Reserves—40% Cash And 60% In Deposits at Reserve City BanksCash And 60% In Deposits at Reserve City Banks

Reserve City Banks Held 25% of Deposits in ReservesReserve City Banks Held 25% of Deposits in Reserves——

50% Cash and 50% in Deposits At Major Money Center50% Cash and 50% in Deposits At Major Money Center Banks Banks Money Center Banks Provided Services to LesserMoney Center Banks Provided Services to Lesser Banks—Check Clearing, Currency and CoinBanks—Check Clearing, Currency and Coin Money Center Banks Provided Security Credit toMoney Center Banks Provided Security Credit to Brokerage Companies Which Made Margin Loans toBrokerage Companies Which Made Margin Loans to Stock InvestorsStock Investors

56


¶¶ The Trust CompaniesThe Trust Companies

Tended Toward More Aggressive Investments Than Tended Toward More Aggressive Investments Than BanksBanks

More Lightly Regulated Than BanksMore Lightly Regulated Than Banks

Provided Deposits Like BanksProvided Deposits Like Banks

No Reserve Requirements Before 1906No Reserve Requirements Before 1906

15% Reserve Requirements Imposed in 1907—15% Reserve Requirements Imposed in 1907—

33% In Cash33% In Cash

57


¶¶ The New York Clearing House (NYCH)The New York Clearing House (NYCH) Cleared Checks for Money Center, Reserve City, and Cleared Checks for Money Center, Reserve City, and Rural BanksRural Banks Made Net Payments at End of DayMade Net Payments at End of Day Provided Loans if a Bank’s Balances at NYCH WereProvided Loans if a Bank’s Balances at NYCH Were InsufficientInsufficient Served as the Lender of Last ResortServed as the Lender of Last Resort

¶ ¶ The New York Stock Exchange (NYSE) The New York Stock Exchange (NYSE) Member Firms Traded StocksMember Firms Traded Stocks NYSE Responsible For Clearing (Settlement)NYSE Responsible For Clearing (Settlement) Member Firms Borrowed from Money Center Banks to Member Firms Borrowed from Money Center Banks to

Make Make Margin Loans to CustomersMargin Loans to Customers NYSE Provided Loans To Members With Insufficient NYSE Provided Loans To Members With Insufficient Balances to Meet Net PaymentsBalances to Meet Net Payments

58

The Economic ContextThe Economic Context

¶ ¶ A Deteriorating EconomyA Deteriorating Economy Stock Prices Down 8% Sept ’06 to Feb ’07Stock Prices Down 8% Sept ’06 to Feb ’07 Stock Decline Accelerated in March ’07Stock Decline Accelerated in March ’07

¶¶ Gold Outflows After Britain Prohibited “Finance Bills”Gold Outflows After Britain Prohibited “Finance Bills” Finance Bills Were Loans to U.S. to Speculate Against the Finance Bills Were Loans to U.S. to Speculate Against the Pound—Borrow Sterling, Buy DollarsPound—Borrow Sterling, Buy Dollars Gold Outflows Reduced Bank Reserves and Bank LendingGold Outflows Reduced Bank Reserves and Bank Lending Interest Rates IncreasedInterest Rates Increased

¶ ¶ Tight Money Was Compounded by Annual Fall Credit Tight Money Was Compounded by Annual Fall Credit

Demand Associated With Agricultural HarvestsDemand Associated With Agricultural Harvests

59


¶¶ Stock Manipulation: A Short Squeeze on UnitedStock Manipulation: A Short Squeeze on United Copper Company SharesCopper Company Shares

Otto Heinze (Heinze & Co. Broker), F. Augustus Henize Otto Heinze (Heinze & Co. Broker), F. Augustus Henize (President, Mercantile Bank), and Charles Morse (Chairman,(President, Mercantile Bank), and Charles Morse (Chairman, Mercantile Bank) Believed that There was a Large ShortMercantile Bank) Believed that There was a Large Short Position in UCC SharesPosition in UCC Shares Hatched Plan for a Short Squeeze—Buy UCC Shares onHatched Plan for a Short Squeeze—Buy UCC Shares on Margin, When Short Sellers Try to Cover The Heinze-MorseMargin, When Short Sellers Try to Cover The Heinze-Morse Group Would Profit From Price SpikeGroup Would Profit From Price Spike Problem: UCC Price Increase Was Not Due to Short PositionsProblem: UCC Price Increase Was Not Due to Short Positions But To Copper Supply Restrictions By a UCC CompetitorBut To Copper Supply Restrictions By a UCC Competitor Heinze Tried to Force Shorts to Cover by Requiring Return ofHeinze Tried to Force Shorts to Cover by Requiring Return of Group’s Shares That Had Been Loaned to Short SellersGroup’s Shares That Had Been Loaned to Short Sellers Instead, UCC Price Fell When Competitor Returned to NormalInstead, UCC Price Fell When Competitor Returned to Normal Copper ProductionCopper Production Heinz Bros. Faced Margin Calls When UCC Price WeakenedHeinz Bros. Faced Margin Calls When UCC Price Weakened

60


¶ ¶ Consequences of the Failed Short SqueezeConsequences of the Failed Short Squeeze In Mid-October, 1907 UCC Shares Plunged as UCC In Mid-October, 1907 UCC Shares Plunged as UCC Owners Sold Heavily—Liquidity DisappearedOwners Sold Heavily—Liquidity Disappeared Heinze Bros. Defaulted on Margin Loans, ForcingHeinze Bros. Defaulted on Margin Loans, Forcing Brokers Into Default on Bank Loans from Mercantile BankBrokers Into Default on Bank Loans from Mercantile Bank Heinze & Co. Was Suspended by NYSE; Mercantile Bank Heinze & Co. Was Suspended by NYSE; Mercantile Bank

FiredFired Augustus HeinzeAugustus Heinze A Run on Mercantile Bank Began; Its Cash Was Drained andA Run on Mercantile Bank Began; Its Cash Was Drained and It Was Unable to Repay Loans or Redeem ChecksIt Was Unable to Repay Loans or Redeem Checks NYCH Concluded that Mercantile was Solvent and Decided toNYCH Concluded that Mercantile was Solvent and Decided to Lend to It To Restore PaymentsLend to It To Restore Payments A General Banking Panic Was Averted by NYCH InterventionA General Banking Panic Was Averted by NYCH Intervention and by Redeposit of Mercantile Withdrawals at other NYCand by Redeposit of Mercantile Withdrawals at other NYC BanksBanks

61

Development of A General PanicDevelopment of A General Panic

¶¶ The Early Stages The Early Stages Knickerbocker Trust Fires its President, Perhaps Guilt byKnickerbocker Trust Fires its President, Perhaps Guilt by Association with Heinze-Morse; Confidence in KnickerbockerAssociation with Heinze-Morse; Confidence in Knickerbocker Weakens Weakens

National Bank of Commerce Refuses to Clear Checks forNational Bank of Commerce Refuses to Clear Checks for KnickerbockerKnickerbocker A Run on Knickerbocker Begins, both Retail and WholesaleA Run on Knickerbocker Begins, both Retail and Wholesale Call Money Rates Rise Sharply, Forcing Stock Sales and MarginCall Money Rates Rise Sharply, Forcing Stock Sales and Margin Loan DefaultsLoan Defaults Bank Runs Begin at Other Trust CompaniesBank Runs Begin at Other Trust Companies As Money Center Banks Weaken, Reserve City and Rural BanksAs Money Center Banks Weaken, Reserve City and Rural Banks Experience RunsExperience Runs J. P. Morgan Determines that Knickerbocker Can Not Be SavedJ. P. Morgan Determines that Knickerbocker Can Not Be Saved

62

Development of A General PanicDevelopment of A General Panic

¶¶ J. P. Morgan Personally Intervenes J. P. Morgan Personally Intervenes Doubts About NYC Credit As European InvestorsDoubts About NYC Credit As European Investors Withdraw and Uncertainty Rises About Safety of NYC Withdraw and Uncertainty Rises About Safety of NYC Deposits at Banks Deposits at Banks Morgan Calls Meeting of Financial Leaders: BenjaminMorgan Calls Meeting of Financial Leaders: Benjamin Strong, JPM’s Assistant; George Perkins, JPM’s Partner;Strong, JPM’s Assistant; George Perkins, JPM’s Partner; James Stillman,National City Bank; George Baker, NationalJames Stillman,National City Bank; George Baker, National City Bank; Other Bank and Trust Company PresidentsCity Bank; Other Bank and Trust Company Presidents Group Organizes Pool to Make Loans to Trust CompaniesGroup Organizes Pool to Make Loans to Trust Companies (JD Rockefeller Pledges $50M)(JD Rockefeller Pledges $50M) Pool Temporarily Helps, But Stock Market Begins to TankPool Temporarily Helps, But Stock Market Begins to Tank NYCH Issues Clearing-House Certificates—IOUs That BanksNYCH Issues Clearing-House Certificates—IOUs That Banks Can Use in Clearing ChecksCan Use in Clearing Checks Morgan Invests Heavily in NYC Bonds to Prevent CollapseMorgan Invests Heavily in NYC Bonds to Prevent Collapse

63

Continuation Of The General Panic Continuation Of The General Panic

¶¶ Problems Continue into November Problems Continue into November Trust Companies Still Under PressureTrust Companies Still Under Pressure On Nov 2 Morgan Calls Trust Company Presidents to On Nov 2 Morgan Calls Trust Company Presidents to

HisHis Office and Locks Them In Until They Agree to a Self-Office and Locks Them In Until They Agree to a Self- Support FundSupport Fund Trust Companies Subscribe to a $25M Pool to be Trust Companies Subscribe to a $25M Pool to be

UsedUsed for Loans to Weaker Trust Companiesfor Loans to Weaker Trust Companies A Major Brokerage Company in Near-Bankruptcy for A Major Brokerage Company in Near-Bankruptcy for Cash-Flow Reasons is Rescued By Morgan, whoCash-Flow Reasons is Rescued By Morgan, who Arranges via Henry Frick for US Steel to Buy ItsArranges via Henry Frick for US Steel to Buy Its Holdings of a Coal CompanyHoldings of a Coal Company With This, the Worst Was Over!With This, the Worst Was Over!

64

Lessons from the 1907 PanicLessons from the 1907 Panic

¶ ¶ Weaknesses of the Financial SystemWeaknesses of the Financial System The US Financial System Had No “Lender of Last The US Financial System Had No “Lender of Last Resort”-Reliance on People Like Morgan To Resort”-Reliance on People Like Morgan To Organize Support Was a Weak Reed to Lean On Organize Support Was a Weak Reed to Lean On The Currency in the U.S. was Inelastic—GoldThe Currency in the U.S. was Inelastic—Gold Outflows and The Harvest-Related Demand forOutflows and The Harvest-Related Demand for Credit Had Demonstrated the Need for an ElasticCredit Had Demonstrated the Need for an Elastic CurrencyCurrency The Banking System’s Connection to the StockThe Banking System’s Connection to the Stock Market Via Margin Loans to Brokers was a Weak Market Via Margin Loans to Brokers was a Weak

PointPoint

¶ ¶ Led To The Federal Reserve Act Of 1913Led To The Federal Reserve Act Of 1913

65

The Federal Reserve Act Of 1913The Federal Reserve Act Of 1913

¶¶ Major Features Of The Act Major Features Of The Act Created a Lender of Last Resort: Provided Loans to Banks Created a Lender of Last Resort: Provided Loans to Banks by Discounting Commercial Bills at the Discount Rateby Discounting Commercial Bills at the Discount Rate Supervised Banks to Ensure Adequate Capital and AssetSupervised Banks to Ensure Adequate Capital and Asset QualityQuality Limited Currency to Federal Reserve Notes No More thanLimited Currency to Federal Reserve Notes No More than 4 Times Gold Stock at Fed4 Times Gold Stock at Fed Held Bank Reserves as Deposits at FedHeld Bank Reserves as Deposits at Fed Established and Monitored Required Reserve Ratios Established and Monitored Required Reserve Ratios Established 12 Regional Banks Following the Reserve CityEstablished 12 Regional Banks Following the Reserve City Classification as ModelClassification as Model Centralized Authority in the Board of Governors in DCCentralized Authority in the Board of Governors in DC Act Was Amended 1934 to Set Margin RequirementsAct Was Amended 1934 to Set Margin Requirements

66

Financial Collapses Financial Collapses

In The In The

Great Depression Great Depression

1929-1933 1929-1933

67

The 1929 Stock Market CrashThe 1929 Stock Market Crash

ReferenceReference

Galbraith, Kenneth. The Great Depression,Galbraith, Kenneth. The Great Depression,

68


¶¶ Significant Rise in Stock Prices IN 1920s Significant Rise in Stock Prices IN 1920s The Bubble Was Largely In New Technology Stocks The Bubble Was Largely In New Technology Stocks

(Radio,(Radio, Electric Utilities, Automobiles)Electric Utilities, Automobiles) Widespread Public ParticipationWidespread Public Participation Easy Broker-Dealer Margin Credit Easy Broker-Dealer Margin Credit (10:1 debt/equity reported; 4:1 more realistic)(10:1 debt/equity reported; 4:1 more realistic) ¶¶ The Triggers The Triggers Federal Reserve Concern About Margin LoansFederal Reserve Concern About Margin Loans Warning Letter to Banks in Late 1928Warning Letter to Banks in Late 1928 Discount Rate Increase from 1.5% to 5% During Discount Rate Increase from 1.5% to 5% During Jan-July 1929Jan-July 1929 GNP Peaked in September 1929GNP Peaked in September 1929 Stock Market Peaked On September 3; DJIA = 381.17Stock Market Peaked On September 3; DJIA = 381.17

69


The CrashThe Crash

¶¶ The Sequence The Sequence From September 3 To Friday October 25 The DJIA FellFrom September 3 To Friday October 25 The DJIA Fell By 21 % By 21 % On Monday, October 28, And Tuesday, October 28, On Monday, October 28, And Tuesday, October 28,

The The DJIA Fell By An Additional 23.6% DJIA Fell By An Additional 23.6% The DJIA Did Not Reach Its October 25, 1929 LevelThe DJIA Did Not Reach Its October 25, 1929 Level During the DecadeDuring the Decade

¶¶ Why The Sharp Selloff? Why The Sharp Selloff? Forced Liquidation Due To Margin Calls By Brokers Forced Liquidation Due To Margin Calls By Brokers

AndAnd Loan Calls By BanksLoan Calls By Banks Anticipation Of Defaults On Non-Security Bank LoansAnticipation Of Defaults On Non-Security Bank Loans General Fear And Panic General Fear And Panic

70


71

Did The Crash Cause the Great Depression?Did The Crash Cause the Great Depression?

¶¶ The Yes Vote The Yes Vote The Crash Destroyed ConfidenceThe Crash Destroyed Confidence The Crash Reduced Consumers’ Wealth, HenceThe Crash Reduced Consumers’ Wealth, Hence Discouraging Spending On Consumers’ Goods, Discouraging Spending On Consumers’ Goods,

ParticularlyParticularly DurablesDurables The Crash Discouraged Business InvestmentThe Crash Discouraged Business Investment By Raising The Cost Of Equity CapitalBy Raising The Cost Of Equity Capital By Reducing Consumer SpendingBy Reducing Consumer Spending

¶¶ The No Vote The No Vote A Serious Recession Was Already In The Works A Serious Recession Was Already In The Works The 1920s Consumer Spending Boom Was At An EndThe 1920s Consumer Spending Boom Was At An End The Auto And Utility Boom Was At An EndThe Auto And Utility Boom Was At An End The Stock Market Is Forward-Looking And The CrashThe Stock Market Is Forward-Looking And The Crash Reflected Anticipations Of A Serious RecessionReflected Anticipations Of A Serious Recession The Depth and Length Of The Depression Was Due To BankThe Depth and Length Of The Depression Was Due To Bank Failures, Bad Policies, And Non-Stock Market FactorsFailures, Bad Policies, And Non-Stock Market Factors

72

Overview OfOverview Of

The Great DepressionThe Great Depression

ReferenceReference

73

Overview Of The 1930s: The Real PictureOverview Of The 1930s: The Real Picture

74

Overview Of The 1930s: The Financial Overview Of The 1930s: The Financial PicturePicture

75

Overview Of The 1930s: The Stock MarketOverview Of The 1930s: The Stock Market

76

The Banking Panics Of 1930-The Banking Panics Of 1930-19311931


Friedman, Milton and Anna Schwartz. Friedman, Milton and Anna Schwartz. A Monetary History of the United A Monetary History of the United StatesStates, Princeton University Press, Princeton NJ, 1962. (esp. pages 308-, Princeton University Press, Princeton NJ, 1962. (esp. pages 308-332)332)

77


¶¶ Economic Environment Economic Environment Stock Market Crash (Oct 1929)Stock Market Crash (Oct 1929) Smoot-Hawley Tarriff (June 1930)Smoot-Hawley Tarriff (June 1930) Real Real Interest Rates Rose Very Sharply, by at least 10%Interest Rates Rose Very Sharply, by at least 10% During 1930 GNP and Prices Dropped by 10% and 2.5%,During 1930 GNP and Prices Dropped by 10% and 2.5%, Respectively Respectively

¶¶ Borrowers Experienced Difficulty Paying Principal Borrowers Experienced Difficulty Paying Principal andand

Interest on Bank Loans, Especially in MidwestInterest on Bank Loans, Especially in Midwest Non-Paying Loans at Banks Increase Sharply in NovemberNon-Paying Loans at Banks Increase Sharply in November Capital at Banks Was Seriously Impaired, Forcing Capital at Banks Was Seriously Impaired, Forcing

ReductionReduction New Loans Loans New Loans Loans Internal Drains from Bank Reserves to Gold Outside BanksInternal Drains from Bank Reserves to Gold Outside Banks And Interior Banks And Interior Banks Shift Assets Toward Cash To Build LiquidityShift Assets Toward Cash To Build Liquidity Bank Loans Contract Sharply Bank Loans Contract Sharply

78

The Unfolding Of The 1930-31 Banking PanicsThe Unfolding Of The 1930-31 Banking Panics

¶ ¶ The First 1931 Banking PanicThe First 1931 Banking Panic A Major Credit Crunch Occurred: (Oct 1930 - Feb 1931) A Major Credit Crunch Occurred: (Oct 1930 - Feb 1931) Bank Asset Values, Capital, And New Loans Fell SharplyBank Asset Values, Capital, And New Loans Fell Sharply The Real Short Term Interest Rate Rose Sharply The Real Short Term Interest Rate Rose Sharply The First 1931 Banking Panic Eased By February 1931The First 1931 Banking Panic Eased By February 1931

¶ The Second 1931 Banking Panic Bank Failures in Austria and Germany In May, 1931 Led To Shift Into Dollars And Gold Inflows to the U.S. Gold Inflows To The U.S. Initially Helped U.S. Banks Deposits At Foreign Banks Were Frozen Foreign Bank Failures Led to Sympathetic Runs on Domestic Bank Deposits Internal Gold Drains Forced Banks To Sell Assets And Impaired Bank Capital

79

The Third 1931 Banking PanicThe Third 1931 Banking Panic

¶¶ Britain Faces Large Gold Flows to the France Britain Faces Large Gold Flows to the France and and

Leaves The Gold Standard in September, 1931Leaves The Gold Standard in September, 1931

A Speculative Attack On U.S. Gold Reserves A Speculative Attack On U.S. Gold Reserves BeginsBegins

U.S. Gold Outflows Led to Further Declines in U.S. Gold Outflows Led to Further Declines in High-High-

Powered Money and Additional Pressure on Powered Money and Additional Pressure on Bank CreditBank Credit

U.S. Bank Failures Rose SharplyU.S. Bank Failures Rose Sharply

80

The Economy In 1931The Economy In 1931

¶¶ Financial MarketsFinancial Markets

A Flight To Quality Reduces Treasury Bond Rates A Flight To Quality Reduces Treasury Bond Rates And And

Increases Rates On Corporate BondsIncreases Rates On Corporate Bonds The Rise in Interest Rates Combined With The Rise in Interest Rates Combined With

Continuing FallsContinuing Falls in the Price Level Kept in the Price Level Kept Real Real Interest Rates HighInterest Rates High Reduced Bank Credit and High Real Interest Rates Reduced Bank Credit and High Real Interest Rates Contributed to Further Economic MalaiseContributed to Further Economic Malaise ¶¶ The Economy The Economy The Price Level Fell by 9% From 1930 To 1931The Price Level Fell by 9% From 1930 To 1931 Real GNP Declined by 15%Real GNP Declined by 15% Employment Declined by 9%Employment Declined by 9%

81

Federal Reserve Actions in 1931Federal Reserve Actions in 1931

¶ ¶ Actions To Increase Bank Reserves Actions To Increase Bank Reserves Loaned Heavily to Banks Through the Discount WindowLoaned Heavily to Banks Through the Discount Window Did Not Engage In Open-Market OperationsDid Not Engage In Open-Market Operations Did Not Restrictions on Bank Withdrawals, so Bank RunsDid Not Restrictions on Bank Withdrawals, so Bank Runs Were Not Contained by InconvertibilityWere Not Contained by Inconvertibility Efforts Were Insufficient To Increase Money And CreditEfforts Were Insufficient To Increase Money And Credit

¶¶ Why Minimal Fed Action? Why Minimal Fed Action? Did Not Yet Understand the Impact and EffectivenessDid Not Yet Understand the Impact and Effectiveness Of Fed Purchases of Securities (Death of Benjamin Of Fed Purchases of Securities (Death of Benjamin Strong in 1929)Strong in 1929) Thought That Its Primary Tool Was The Discount Rate, Thought That Its Primary Tool Was The Discount Rate, Which Was Very LowWhich Was Very Low Did Not Understand That It Is Did Not Understand That It Is RealReal Interest Rates That Interest Rates That Determine Spending, Not Determine Spending, Not NominalNominal Interest Rates Interest Rates

82

Policy Actions During 1932Policy Actions During 1932

¶¶ Major Financial LegislationMajor Financial Legislation Formed The Reconstruction Finance Corporation Formed The Reconstruction Finance Corporation

(RFC) to(RFC) to Make Treasury Loans to Banks; Eventually RFC Make Treasury Loans to Banks; Eventually RFC

Bought Bought Preferred Stock Of Troubled BanksPreferred Stock Of Troubled Banks Formed The Federal Home Loan Bank to Make Formed The Federal Home Loan Bank to Make

Loans toLoans to Mortgage Lenders on First-Mortgage CollateralMortgage Lenders on First-Mortgage Collateral ¶¶ Federal Reserve ActionsFederal Reserve Actions First Open-Market Purchases Begin in July, 1932First Open-Market Purchases Begin in July, 1932 Thereafter, Discounting and the Discount Rate Thereafter, Discounting and the Discount Rate Began to Fade in UseBegan to Fade in Use ¶¶ The Economy Began to Strengthen and Real Interest The Economy Began to Strengthen and Real Interest Rates FellRates Fell

83

The Banking Panic Of 1933The Banking Panic Of 1933

84


¶ In Late 1932 A Wave of Bank Failures in the West and Midwest Led To Another Period of Bank Runs The New Government Institutions (RFC, FHLB) Were The New Government Institutions (RFC, FHLB) Were Insufficient To Maintain ConfidenceInsufficient To Maintain Confidence Federal Reserve Discounting and Open-Market Federal Reserve Discounting and Open-Market

Operations Operations Did Not Provide Sufficient LiquidityDid Not Provide Sufficient Liquidity

¶ Pressures on Interior Banks Created Internal Drains In The

Form Of Losses of Gold (Reserves) At Reserve City Banks

¶ A Wave of Bank Holidays Began Bank Holidays Were Initiated By States Bank Holidays In One State Led to Runs In Other States. By March, 1933 About Half Of The States Had Initiated Bank Holidays

85

External Drains Add To Banking CollapseExternal Drains Add To Banking Collapse

¶¶ Fears That The U.S. Would Be Forced To Devalue As Fears That The U.S. Would Be Forced To Devalue As GoldGold

Reserves Were Drained From Banks Led To Foreign Reserves Were Drained From Banks Led To Foreign RunsRuns

On U.S. BanksOn U.S. Banks The Fed Followed The Classic Central Bank Rule OfThe Fed Followed The Classic Central Bank Rule Of Protecting The Gold Standard: It Raised The Discount Protecting The Gold Standard: It Raised The Discount

RateRate To Increase U.S. Interest RatesTo Increase U.S. Interest Rates No Open-Market Purchases OccurredNo Open-Market Purchases Occurred

¶¶ New York’s Governor Lehman (déjà vu) Declared A New York’s Governor Lehman (déjà vu) Declared A BankBank

Holiday After Reserves at New York Banks Fell Below Holiday After Reserves at New York Banks Fell Below Legal LimitsLegal Limits

¶¶ Unemployment Rate Peaks At 25%Unemployment Rate Peaks At 25%

86

Government Actions Under FDRGovernment Actions Under FDR

Securities LegislationSecurities Legislation

¶¶ Securities Exchange Act Of 1933 Securities Exchange Act Of 1933 Required Registration Of Investment AdvisorsRequired Registration Of Investment Advisors

¶¶ Securities Exchange Act Of 1934 Securities Exchange Act Of 1934 Required Full Disclosure Of Material FactsRequired Full Disclosure Of Material Facts Required Registration Of New Security IssuesRequired Registration Of New Security Issues Established the Securities Exchange Commission Established the Securities Exchange Commission

(SEC)(SEC)

¶¶ Investment Company Act Of 1940 Investment Company Act Of 1940 Regulated Investment Companies (Mutual Funds)Regulated Investment Companies (Mutual Funds)

87


Banking LegislationBanking Legislation

¶¶ Bank Act Of 1933 (Glass-Steagall Act) Bank Act Of 1933 (Glass-Steagall Act)

Separated Investment Banking, Insurance, andSeparated Investment Banking, Insurance, and

Commercial BankingCommercial Banking

Established The FDIC To Insure Bank Deposits Established The FDIC To Insure Bank Deposits AndAnd

Prevent Bank RunsPrevent Bank Runs

88


Industrial And Labor LegislationIndustrial And Labor Legislation

¶¶ National Industrial Recovery Act (June, 1933) National Industrial Recovery Act (June, 1933) Gave President Broad Authority To Regulate Gave President Broad Authority To Regulate

BusinessesBusinesses Created National Recovery Administration (NRA)Created National Recovery Administration (NRA) Established Floors On Wages And Prices By Established Floors On Wages And Prices By

IndustryIndustry Established Detailed Regulations On Established Detailed Regulations On

BusinessesBusinesses Guaranteed Right To Collective Bargaining (Title Guaranteed Right To Collective Bargaining (Title

1)1) Created National Labor Relations Board Created National Labor Relations Board Prohibited Unfair Labor PracticesProhibited Unfair Labor Practices Established Rules For Collective Bargaining Established Rules For Collective Bargaining

89


Legacy Of The NIRA

¶ ¶ Contributed To Depth Of DepressionContributed To Depth Of Depression

Excessive Bureaucracy--Detailed Regulations Excessive Bureaucracy--Detailed Regulations Added ToAdded To

Business CostsBusiness Costs

Wage-Price Fixing Added To Depth Of DepressionWage-Price Fixing Added To Depth Of Depression

Employment Dropped 25% In First Six Months Employment Dropped 25% In First Six Months

¶ ¶ Title 1 Of NIRA Found Unconstitutional In May, 1935Title 1 Of NIRA Found Unconstitutional In May, 1935

90

National Labor Relations Act Of 1935 (Wagner National Labor Relations Act Of 1935 (Wagner Act)Act)

¶¶ Affirmed Labor Relations Features Of NIRA Affirmed Labor Relations Features Of NIRA Right To Collective Bargaining Right To Collective Bargaining

Renewed The National Labor Relations BoardRenewed The National Labor Relations Board

Established Criteria For Union FormationEstablished Criteria For Union Formation

Established Procedures For Union Elections Established Procedures For Union Elections

Government Actions Under Government Actions Under FDRFDR

91


FDR Ends The U.S. Gold Standard In 1936FDR Ends The U.S. Gold Standard In 1936

¶¶ Gold Outflows Since 1931 Had Impeded RecoveryGold Outflows Since 1931 Had Impeded Recovery ¶¶ Prohibited Sales Of Gold To Foreign EntitiesProhibited Sales Of Gold To Foreign Entities ¶¶ Ended Internal Convertibility Of Gold (“Privatized Ended Internal Convertibility Of Gold (“Privatized

Gold”)Gold”) ¶¶ Negated Gold Clauses In Contracts Negated Gold Clauses In Contracts))

92

Modern Financial Crises The 1987 Stock Market CrashThe 1987 Stock Market Crash

The S&L And Junk Bond EpisodeThe S&L And Junk Bond Episode

The Enron DebacleThe Enron Debacle

93

The Stock Market Crash Of 1987The Stock Market Crash Of 1987

ReferenceReference

Lowenstein, Roger. Lowenstein, Roger. The Origins of the Crash: The Great Bubble and its The Origins of the Crash: The Great Bubble and its UndoingUndoing,, Penguin Press, New York, 2004. Penguin Press, New York, 2004.

94

The Context

¶¶ Several Years of Above-Average Stock Price Increases Several Years of Above-Average Stock Price Increases Started After The Reagan-Volcker Recession in 1982Started After The Reagan-Volcker Recession in 1982 Further Encouraged By Oil Price Collapse In Mid-1980sFurther Encouraged By Oil Price Collapse In Mid-1980s

¶¶ Possible (But Unlikely) Triggers Possible (But Unlikely) Triggers No Specific Macroeconomic, Financial, Or Foreign EventsNo Specific Macroeconomic, Financial, Or Foreign Events Rising Interest Rates Begin To Bite—30 Year TreasuriesRising Interest Rates Begin To Bite—30 Year Treasuries Reached the “Magic” 10%Reached the “Magic” 10% Dow-Jones Industrial Average Had Peaked on August 17Dow-Jones Industrial Average Had Peaked on August 17 Legislation Limiting Tax Advantages Of MergersLegislation Limiting Tax Advantages Of Mergers Market Poised To Crash--Between Peak on August 17 AndMarket Poised To Crash--Between Peak on August 17 And October 15 The DJIA Had Fallen 500 PointsOctober 15 The DJIA Had Fallen 500 Points

¶¶ On October 16 The DJIA Fell By 23% (500 Points) On October 16 The DJIA Fell By 23% (500 Points)

95

The Event: The 1987 Stock Market CrashThe Event: The 1987 Stock Market Crash

96

What Happened? Financial InnovationWhat Happened? Financial Innovation

¶ ¶ Development of Index Futures, Stock Options andDevelopment of Index Futures, Stock Options and Synthetic OptionsSynthetic Options Examples Examples Portfolio Insurance StrategiesPortfolio Insurance Strategies Index Arbitrage Through Cash-Futures TransactionsIndex Arbitrage Through Cash-Futures Transactions

ProblemsProblems Created Illusion of Hedges Against Risk of Complex Created Illusion of Hedges Against Risk of Complex InstrumentsInstruments Incomplete Hedges Induce High Volume Of Incomplete Hedges Induce High Volume Of

TransactionsTransactions

¶¶ Development of Computerized Trading (DOT)Development of Computerized Trading (DOT) Instantaneous Order Transmission When The Cash-Instantaneous Order Transmission When The Cash-

FuturesFutures Relationship Is Out Of Line (Index Arbitrage)Relationship Is Out Of Line (Index Arbitrage) Triggered Massive Order VolumeTriggered Massive Order Volume

97

What Happened: Problems On The TradingWhat Happened: Problems On The Trading Floor Floor

¶¶ Specialists On The NYSE Took a Walk Specialists On The NYSE Took a Walk

¶¶ Information OverloadInformation Overload Overwhelmlng Volume Of OrdersOverwhelmlng Volume Of Orders Long Delays In Printing Confirmations-CustomersLong Delays In Printing Confirmations-Customers Didn’t Know If Orders Had Been ExecutedDidn’t Know If Orders Had Been Executed Led To Multiple Sell OrdersLed To Multiple Sell Orders Stale PricesStale Prices Long Delays In Reporting Trade Prices—Long Delays In Reporting Trade Prices—

CustomersCustomers Had Out-Of-Date Price InformationHad Out-Of-Date Price Information Created Inverted Futures-Cash Price Relationship,Created Inverted Futures-Cash Price Relationship, Inducing Cash Market SalesInducing Cash Market Sales

98

What Happened: Disconnects Across Related What Happened: Disconnects Across Related MarketsMarkets

¶¶ Cash vs. Futures RelationshipCash vs. Futures Relationship

Cash Markets Closed But Options And Futures Cash Markets Closed But Options And Futures MarketsMarkets Remained OpenRemained Open The Panic Depressed Futures Prices But Cash The Panic Depressed Futures Prices But Cash PricesPrices Were StaleWere Stale Result Was Strong “Phantom” Sell Signal In CashResult Was Strong “Phantom” Sell Signal In Cash MarketsMarkets

99

Lessons LearnedLessons Learned

¶¶ In A Panic, Everyone Tries To Exit At Once In A Panic, Everyone Tries To Exit At Once Offers To Sell Surge, Bids Dry UpOffers To Sell Surge, Bids Dry Up Prices Free FallPrices Free Fall

¶ ¶ Markets Are Highly InterconnectedMarkets Are Highly Interconnected The Futures Market Rapidly Transmitted The Effects ofThe Futures Market Rapidly Transmitted The Effects of Bad Information And Exacerbated Sell Orders In TheBad Information And Exacerbated Sell Orders In The Cash Market Cash Market

¶¶ Technology Is A Double-Edged Sword Technology Is A Double-Edged Sword Electronic Trading (DOT) Transmitted Problems Electronic Trading (DOT) Transmitted Problems

QuicklyQuickly Mixed Technology (Old Paper Trading On NYSE, NewMixed Technology (Old Paper Trading On NYSE, New Electronic Trading In Futures) Can Add To ProblemsElectronic Trading In Futures) Can Add To Problems New Instruments (Derivatives Like Stock IndexNew Instruments (Derivatives Like Stock Index Futures) and New Methods (Portfolio Insurance) CanFutures) and New Methods (Portfolio Insurance) Can Compound ProblemsCompound Problems

100

The Savings & LoanThe Savings & Loan And And Junk Bond Crises Junk Bond Crises

1989 1989


Bruck, Connie. Bruck, Connie. The Predator’s Ball: The Inside Story of Drexel The Predator’s Ball: The Inside Story of Drexel Burnham andBurnham and the Rise of the Junk Bond Raiders the Rise of the Junk Bond Raiders, Simon & Schuster, New York, , Simon & Schuster, New York, 1988.1988.

101


¶ S&L Institutions Had Limited Financial Opportunities: They

Borrowed Short-Term (Deposits) And Made Long-Term Loans (Mortgages)

¶ In The 1970s and 1980s Interest Rates Rose, With Short Rates Rising Faster Than Long Rates

¶ The Rise In Short Rates Led To A Loss In Deposits And Forced Sales of Mortgages (Regulation Q)

¶ The Rise In Long Rates Led To Declines In Asset Values And Deterioration Of Capital

¶ As S&L Balance Sheets Deteriorated, And Liquidity Problems Increased, The S&L Industry Became Unviable.

102

The Advent Of Junk Bonds ¶ Milken Sees That Below-Investment-Grade Bonds Earn More Than High-Rated Bonds After Adjusting For Defaults ¶ Drexel, Burnham, Lambert Creates A Market For Junk Bonds Junk Bonds Allowed Smaller Companies To Get Access To Long-Term Financing S&Ls Bought Junk Bonds On A Large Scale As A Way To Diversify Beyond Mortgages and Get High Returns

103

The Policy Responses

¶ Laws Were Changed To Allow S&Ls To Broaden Their Assets Beyond Mortgages to Shorter-Term Loans, and Liabilities Beyond Deposits To Longer Term Debt (Garn-St. Germain 1982)

¶ The FHLBB Turned A Blind Eye To S&L Portfolio Problems And To Insolvency Created “Good Will Certificates” That S&Ls Could Carry On Their Books As Assets Made Loans To S&Ls To Bolster Liquidity

¶ These Responses Perpetuated The Problems

104

What Went Wrong?

¶ S&Ls Invested Heavily In Bad Loans Oil Prices and Home Prices Broke In The Mid-1980s Lack of Familiarity With New Lending Opportunities Scandalous Abuses In S&L Investing: The Keating Episode Mortgage Foreclosures Increased And S&Ls Began Failing, First in The South Then Elsewhere

106

Resolution ¶ Financial Institution Recovery Program (FIRREA-1989) Forced Insolvent S&Ls to Fail Or Be Bought By Stronger Institutions FDIC Pays Depositors of Failed S&Ls And Acquires S&L Assets The FHLBB Is Dissolved And The Office Of Thrift Supervision (OTS) Is Formed To Regulate All Thrift-Type Institutions (S&Ls And Mutual Savings Banks) Resolution Trust Company (RTC) Is Formed to Sell Foreclosed Homes And Other Assets Acquired From S&Ls RTC Sold Junk Bonds Acquired From S&Ls, Causing Collapse Of Junk Bond Market RTC Dissolves in 1993 After Cost To Taxpayer Of $150-$300 Billion

107

Long Term Capital Long Term Capital Management:Management:

The First Hedge Fund Failure The First Hedge Fund Failure

1998 1998

ReferenceReference

Lowenstein, Roger. Lowenstein, Roger. When Genius Failed: The Rise and Fall of When Genius Failed: The Rise and Fall of Long Term Capital Management Long Term Capital Management, Random House, New York, 2000., Random House, New York, 2000.

108

Formation Of Long-Term Capital ManagementFormation Of Long-Term Capital Management ¶ ¶ Formed in 1994 By John Merriwether (ex- Formed in 1994 By John Merriwether (ex-

SolomonSolomon Brothers) And Two 1997 Nobel Prize WinningBrothers) And Two 1997 Nobel Prize Winning Economists, Myron Scholes And Robert MertonEconomists, Myron Scholes And Robert Merton Traded In Currencies, Fixed Income Instruments,Traded In Currencies, Fixed Income Instruments, Equities, And Anything ElseEquities, And Anything Else No Disclosure Of Positions To Clients Or PublicNo Disclosure Of Positions To Clients Or Public Had Outstanding Performance Until 1998, When Had Outstanding Performance Until 1998, When

It HitIt Hit The WallThe Wall

109

LTCM’s Trading Strategies

¶ Convergence Trades Positions In Very Close Substitutes Whose Prices Are Out Of Line Example: Long On “Off-The-Run” Treasuries (less liquid, lower price), Short On “On-The-Run” Treasuries Profit When Prices Of On-The-Runs Fell Relative To Off-The-Runs Perfectly Hedged Against Interest Rate Changes ¶ Equity-Paired Trades Long On Some Equities, Short On “Equivalent” Equities Example: BP and RDS Market-Neutral Position: Hedged vs. Market Movements

110

LTCM’s Trading Strategies

¶ Debt-Paired Strategies Long On Treasuries and Short On High-Yield (Junk) Bonds Profit When Credit Risk Premium Falls Hedged Against Interest Rate Changes LTCM Had Very High Leverage Small Margins On Each Position Required Many Large Positions In Play Debt:Equity Ratio Of About 100:1 VERY Exposed To Any Losses

111

What Went Wrong?What Went Wrong?

¶ International Financial Crises In 1998International Financial Crises In 1998 Asian Financial CrisisAsian Financial Crisis Russian Default On Government BondsRussian Default On Government Bonds ¶ Flight To Quality Occurred Flight To Quality Occurred Interest Rates On High-Yield Corporate Debt Interest Rates On High-Yield Corporate Debt

RoseRose While Treasury Yield Fell, Creating Capital Losses While Treasury Yield Fell, Creating Capital Losses

BothBoth Sides Of HedgeSides Of Hedge Other Hedges Also FailedOther Hedges Also Failed

112

What Went Wrong?

¶ LTCM Had Very High Leverage Small Margins On Each Position Required Many Large Positions In Play Debt:Equity Ratio Of About 100:1 VERY Exposed To Any Losses Banks Called Loans To LTCM Forced LTCM To Sell Into Markets With No Bids Asset Price Declines Wiped Out LTCM Capital LTCM Bankruptcy Threatened Capital Base At Major Banks Systemic Risk: Potential For Bank Failures And Credit Lock-Up

113

Resolution

¶ Shades Of J.P. Morgan In 1907! President Of FRBNY Calls All Involved Banks To A Meeting Urged Them To Work Out Plan To Extend Credit To LTCM While Its Portfolio Is Being Liquidated Banks “Agree”

¶ LTCM Liquidated Gradually Banks Were Fully Paid LTCM Management Made Profits For Clients And Themselves No Losses To Public Treasury—No Bail-Out

114

The Enron DebacleThe Enron Debacle

2001 2001

ReferenceReference

McLean, Bethany and Peter Elkind, McLean, Bethany and Peter Elkind, The Smartest Guys In The The Smartest Guys In The Room: The Amazing Rise and Scanalous Fall of Enron Room: The Amazing Rise and Scanalous Fall of Enron,, Penguin Group, New York, 2003. Penguin Group, New York, 2003.

Financial Panics: 1600 - 2000

Documents

Transcript of Financial Panics: 1600 - 2000