How J.P. Morgan Tamed the Trust Companies

As author of Morgan, American Financier, Jean Strouse "lived" through the Panic of 1907. If Morgan were around today, she writes in The Washington Post, he might be thinking how relatively easy he had it. No inscrutable derivatives. And he'd probably back the bailout.

Morgan would surely note one similarity between a century ago and now: reckless "bankers" running wild. In our Credit Crisis, the culprits are (or were) highly-leveraged investment banks. In 1907, Strouse recalls, the wild and crazy "bankers" were…trust companies.

What set a match to the tinder in October 1907 was a run on New York trust companies. ••• An attempt by speculators to corner the stock of a copper company failed, and as word got out that trust companies had made loans to the speculators, people with money on deposit at the trusts lined up to take it out. The trust companies, the weakest link in the financial system, operated like commercial banks -- accepting deposits, issuing loans and financing speculative schemes -- only with no regulatory supervision or mandated reserves.

Within weeks, the panic had killed off one trust company and shaken others. Banks teetered. The credit crunch threatened to close The New York Stock Exchange. Almost single-handedly, J.P. Morgan quelled the panic. But as November arrived he was still hard at work cleaning up the mess. As Strouse tells it, the new Morgan Library, completed only the year before, was his secret weapon:

[T]he bankers had to bail out a near-bankrupt New York City, and the trust companies, source of the original trouble, weren't in the clear. Sunday night, Nov. 3, Morgan gathered 50 trust company presidents at his library, told them they had to come up with $25 million on their own and left them in a large room filled with Renaissance bronzes, Gutenberg Bibles and tiers of books. He withdrew to his librarian's office. At 3 a.m., he called in one of his sleep-deprived lieutenants, Ben Strong, for a review of a trust company's books. Strong gave his report, then headed to the library's front doors and found them locked. Morgan had the key in his pocket. No one would leave until the trusts ponied up. The presidents continued to talk. At 4:15, Morgan walked in with a statement requiring each trust company to share in a new $25 million loan. One of his lawyers read it aloud, then set it on a table. "There you are, gentlemen," said Morgan.

No one moved.

Morgan took the arm of Edward King, the head of the Union Trust, and drew him to the table. "There's the place, King," he said, "and here's the pen." King signed. The other presidents signed. They set up a committee to handle the loan and supervise the final-stage bailouts of endangered trusts. At 4:45, the library's heavy brass doors swung open and let the bankers out.

As the stock market rallied and gold began to arrive from Europe, the two long weeks of crisis came to an end.

THE MORGAN LIBRARY

The 1907 run on the trust companies drained their deposits by $275,000,000. That's comparable to perhaps $6 billion today.