The Panic of 1907: Lessons Learned from the Market's Perfect Storm

This books offers an insightful glimpse into what was, at the time, the largest bank run in U.S. history. (I do believe the crash of '29 eclipsed it, but don't quote me on that.) It is a wonderful recounting of how such a panic can occur:

1. Start with some insanely stupid speculating
2. Compound the problem by intertwining financial structures and interests so that any unwind is greatly exacerbated.
3. Mix in a significant economic event which changes the financial paradigm and creates an imbalance which cannot be calmly resolved under current economic and market conditions. Such an event will also change market psychology, introducing varying levels of uncertainty, uneasiness and fear.
4. Wait for the tipping point - a seemingly small event which sets in motion a chain of much larger and more damaging events.
5. Enjoy a full-fledged meltdown.

While I'm certainly adding a dash of sarcasm, the result is both serious and insightful, particularly given the events of the current day markets. One key difference between then and now is that no longer can one or few institutions save the market as they did in 1907. There is no J.P. Morgan today; the markets are too broad and far too complex.

My only criticism of this book was that I wish it had offered a more detailed explanation of the gold standard and how it affected currency flows and balances of payments. Given that this standard has long been dead, I would have found a broader explanation infinitely helpful.

All in all, this book is a must-read for anyone who is serious about the markets.

A great book, with a good bit of linkage to today's "credit crunch." Every investor needs to take advantage of this well-written book to learn what happened then -- and what could easily happen again!

Remember what George Satyana said ("Those who do not know history are condemned to repeat it")? Well, he was right as this very timely book demonstrates. The book is a case study of the financial panic of 1907 when liquidity and asset value issues rocked U.S. banks, trusts and financial markets. Much of what occurred in 1907 bears an eerie resemblance to the current "credit crunch". A reader may wonder whether he or she is reading a book or the most recent edition of The Wall Street Journal. Aside from its timeliness, the book offers a workmanlike account of some very interesting occurrences and does a very good job in painting a portrait of the larger than life characters involved in the 1907 panic--- particularly the legendary J.P. Morgan (the authors had access to and quote from the private papers of several Morgan partners). If you like stories of the Guilded Age (be it real life accounts or Edith Wharton), you will like this book. Finally, the book pulls off the hat trick by providing a nice scholarly summing up of factors leading to the financial panic of 2007. This book should be required reading for everyone working on Wall Street today.

Shortly before 10:00 on the morning of November 14, 2007 Charles T. Barney walked into his second-story Park Avenue, took the pistol containing three bullets kept there for protection and fired one bullet into his head.

Up to that moment, he was a man of the Gilded Age. The son of a prosperous Cleveland merchant, he married into the Whitney family, was a director of 33 companies and had served as the top officer of the Knickerbocker Trust Company up until a few short weeks prior.

He had been asked to resign. The reason: early the previous month, he, along with several other New York City trust companies had funded an attempt to corner the market in the stock of a copper mining company. The attempt had failed. As word of his involvement spread, his investors and depositors panicked and started a run on his bank that would eventually lead to its closing.

The country had lost confidence in its financial system. It would take leadership, largely from one man, J. P. Morgan, to restore it.

Robert F. Bruner and Sean D. Carr take the reader day-to-day through this crisis. Beginning with the famed San Francisco earthquake and culminating with Barney's suicide, they draw seven lessons that are, perhaps more instructive today, than they would have been in 1907. They are:

1. Complexity makes it difficult to know what is happening and establish linkages that enable the crisis to spread.
2. Economic expansion creates rising demands for capital and liquidity. The mistakes that accompany those rising demands must eventually be corrected.
3. In the late stages of an economic expansion borrowers and creditors overreach in their application of debt. This lowers the financial system's safety margin.
4. Prominent public and private figures provided adverse leadership. Their policies raise uncertainty, lower confidence and elevate risk.
5. Random events shake the economy and financial system.
6. Greed becomes fear.
7. Well-intended responses prove inadequate to the crisis' challenge.

This book drips with insight. Well-written, easy-to-read, it should be read by banker, traders and students of business and economics. It is a rare dissection of how and why a panic unfolds.

The Panic of 1907 seems to focus a lot on the small details of the panic. The conclusion in my opinion, fails to take a look at the big historical picture. The Federal Reserve was later created in 1913, to help prevent another liquidity crisis. But was this a devil`s bargain? What would JP Morgan have to say about the Federal Reserve`s dilution of the US money supply? I wonder which is the lesser evil, an unregulated financial industry, or government control of the money supply? Thomas Jefferson warned against the use of a Central Bank. His warning has long since been forgotten . The book never discusses these type of larger issues.
The authors also talk a lot about the rational pricing of stocks. Stock prices reflect peoples emotions, not their rational thoughts.
The House of Morgan, by Ron Chernow is a much better review of the 1907 Panic.