Monday, March 17, 2008

100 years later ..J.P Morgan Saves the Day... Again

Yesterday JP Morgan Chase literally pulled the rabbit out of the hat and picked up Bear Stearns for $2 a share and a little help from the FED. While it may be too soon to tell.. the hope is that keeping Bear Stearns out of bankruptcy may also keep the financial markets from collapsing. However like teenage boys with fast cars.. credit markets and banks just seem to keep making the same mistakes over and over.

This is not the first time J.P. Morgan and friends have bailed out the economy. Around the turn of the 20th Century John Pierpoint Morgan was the man who saved the US economy not once but twice in a manner very similar to yesterday's scenario. What's of interest is that the reasons why we are in trouble are so similar.

In 1895 during the Panic of 1893 the economy was in big trouble. At the time we were a gold based monetary system and a run on gold certificates led to banks closing their doors when they ran out of gold. The US Treasury was in no better shape as it too was about out of gold. The country was facing bankruptcy. JP Morgan and a few friends stepped in and managed to get loans equalling $65 million in gold to save the country from bankruptcy and economic chaos.

The Panic of 1907 was also known as the Bank Panic as banks were failing on a daily basis after the Stock market tanked almost 50% due to over-expansion and speculation that led to a stock market crash in the spring of 1907. Money was tight with little liquidity in the market as credit markets panicked. Hmmmmm sounds very familiar... In October 1907 the market crashed again. This time the crash was because of the shenanigans of one company, the Knickerbocker Trust. The ripple effect from the crash of the Knickbocker Trust failure spread panic to most of the major banks in New York.

Once again , this time at the behest of the Treasury Secretary, J.P. Morgan stepped up to help resolve the crisis. Morgan organized a team to help redirect money between banks, obtain credit and he even bought stock of corporations he thought were sound to stop the panic. Within a few weeks the panic passed and the country averted another major crisis that may well have destroyed the country.

One of the major outcomes of the steps taken by J.P. Morgan was to establish the Federal Reserve Act of 1913 which created the Federal Reserve system that we know today. While I'm often critical of some of the FED policies I think the move they made yesterday with JPMorgan Chase about Bear Stearns was probably the right one. What I find interesting is how similar the situation was in 1907.. then it was one company, the Knickerbocker Trust, that precipitated a massive panic. Yesterday it could have been Bear Stearns that started a total panic. Maybe we do learn a few things from our past mistakes.

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