The Panic of 1907 was an interesting chapter in Wall Street
History as it helped establish the legend of J.P. Morgan; one of
the 2 or 3 key figures in the financial history of this country.
But first there is the story of Heinze and Morse. Just like the
failure of the Hunt Brothers in 1979-80 when they attempted to
corner the silver market (see Wall Street History archives),
Heinze and Morse tried to corner a market of their own, only this
time it wasn”t a commodity but rather a commodity stock, United
Copper.
The story of F. Augustus Heinze really begins in 1889 when
Heinze, a Brooklynite, sought fame an fortune in the Butte,
Montana area. He had an eye for mining property and, over the
years, he outmaneuvered such titans as Morgan and William
Rockefeller (John D.”s brother) when he got in the way of their
Amalgamated Copper trust. Eventually, Heinze received $10.5
million for his mining interests, property that Amalgamated had
sought for themselves.
Heinze then took his money and headed to Wall Street, buying a
seat on the New York Stock Exchange. By now it”s the early
1900s and speculation was rampant on Wall Street. Heinze
picked up a partner in Charles Morse, a man who had formed the
American Ice Company, and the two of them began to acquire
control of a few banks as a ready source of funds to aid in their
speculation. Morse controlled the Bank of North America and
used that bank”s money to gain control of Mercantile National
Bank. Later, he gained control of Knickerbocker Trust Co., one
of the larger banks in New York City.
As John Steele Gordon writes in his book, ”The Great Game,”
“Together (Morse and Heinze) sought out a hot speculation.
With his previous success in mining, Heinze set up the United
Copper Co., and capitalized it with $80 million. They didn”t
intend to produce copper, however, rather they sought to corner
the stock of their own company by purchasing shares and call
options, running up the price and inducing other speculators into
going short . Once they had a corner, they would exercise their
call options and the shorts would discover the trap too late.”
There was just one problem. One of the executives that Heinze
had outsmarted in Montana was H.H. Rogers, a top man at
Standard Oil. Rogers hadn”t forgotten how Heinze had in
essence forced Standard Oil to pay ransom for property they
thought was rightfully theirs. And Standard Oil was the most
powerful corporation in the world at this time, having an 80%
monopoly on a product whose demand was only going to grow
exponentially in the future. Plus, with hundreds of millions of
dollars in financial reserves, the company was a major financial
leader as well as being an oil company. Brokers, reporters, and
bankers all had to pay tribute to Standard Oil if they wanted to
stay in their good graces.
Heinze began the big trade in February 1907. In March, the
action started. Excess speculation began to take its toll on some
issues. The Dow Jones peaked on March 12 at 86.53. Two days
later the Dow was at 76.23, a decline of 12 percent. But as most
issues were sliding, United Copper (UC) was beginning to rise.
Over the next few months the market continued to slide but UC
held steady.
In October a new slide began. On October 14 the Dow closed at
62.14. Copper stocks were beginning to slide. But that day
Heinze put his plan in place. Gordon writes:
“On Monday October 14, the shorts began to cover, and while all
other copper stocks declined, UC shot up from 37 + to 60.
Heinze was sure that triumph was at hand and sent word to his
various brokers to exercise his call options. But the brokers were
unaccountably slow to act. Time was of the essence but they
dawdled about sending out the notices. Further, stories began
appearing in the papers about UC, questioning its finances. There
is no proof that Standard Oil was involved in either the delays or
the bad press, but few on Wall Street at the time, and few
historians since, have doubted that they were both orchestrated
from 26 Broadway, the headquarters of the Rockefeller empire.”
Non-Heinze-and-Morse banks began to call in loans the pair had
taken, forcing them to sell stock at the worst possible time. By
the end of Tuesday, 10/15 UC had tumbled back to 36. At the
close on Wednesday, 10/16 the stock hit 10. [Take note, ye
holders of Internet high-flyers]. The Heinze corner was history.
Heinze and Morse were out millions.
But then a run started at Mercantile Bank and New York Clearing
House, heavily influenced by Standard Oil, declined to help until
both Heinze and Morse resigned. On Friday, 10/18 they did.
Then Monday, 10/21, as stocks slid anew, there were further runs
on banks (to be covered next week). Heinze and Morse were
destroyed. Even Morse”s ice company shares melted. Rogers
and Standard Oil had their revenge.
Next week, J.P. Morgan to the rescue.but not of Heinze and
Morse.
Sources: John Steele Gordon, “The Great Game”
Martin Fridson, “It Was A Very Good Year”
Brian Trumbore
