This week in financial history is second only to next week for infamy. Here we find the first of October's black days as well as financial panic and a rogue currency trader. (From robber baron to the hero of the Panic of 1907, this man helped shape Wall Street as we know it. See The Kingpin Of Wall Street: J.P. Morgan.)
Morgan Calms the Panic
October 19, 1907, 70-year-old banker, J.P. Morgan, returned to Wall Street as an unlikely superhero. Wall Street was on the edge of a financial meltdown with the panic of 1907. A bank run on the Knickerbocker Trust Co. of New York revealed that the bank would not have enough capital to cover outstanding deposits - and these were days before banks publicly revealed their balance sheets and still many years before the FDIC. To prevent similar runs on other banks, Morgan returned from a vacation/retirement and gathered all the major players at his home.
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Through force of will, Morgan threatened and cajoled the attendees and orchestrated a cash bailout to help banks with liquidity problems, much like the Fed does now. The fact that the process depended on an aging banker spurred the government to begin serious work on creating the Fed.
A Tale of Two Embargos
On October 19, 1960, the United States began the trade embargo against Cuba. It remains the longest embargo of the modern era. This embargo was imposed due to the communist overthrow of the Cuban government and was further strengthened as Cuba aligned with the Soviet Union.
By happy coincidence, today also marks the end of a short-lived embargo against the actual Soviet Union. On October 20, 1975, the U.S. picked trade over politics by removing barriers to the sale of grain to the USSR. The reason? One obvious one is that the U.S. grain growers were against the USSR embargo from the first, whereas U.S. sugar growers were in support of the Cuban embargo. The rest, as they say, is just politics.
On October 19, 1987, the DJIA was treated to a mysterious plummet that set off a nearly catastrophic chain reaction around the world. Remembered as Black Monday, the Dow had a record drop of 508 points. A young(er) Alan Greenspan was rushing to flood the market with liquidity to offset the cascade of stop-loss orders, margin calls, shrinking stock values and a thousand other details that were revealing their devilish side in the increasingly interconnected world markets. New measures - including the circuit breakers - were introduced to prevent such rapid bloodletting in the future.
Did it work? Well, the record drop of 508 points barely rounds out the top 10 now, with recent drops over 700 - but this is also a function of the Dow being over 10,000 (the 1987 Dow was a meager 2500). So, as a percentage of the total value of the Dow, the 22% loss of value hasn't repeated.
On the subject of the Dow, October 19, 2006, marks the first day it closed above the 12,000 mark (you'll notice it lies below that now). The current market pain aside, there are two other firsts worth noting. One occurred on October 23, 1981, when the U.S. national debt broke $1 trillion. Unlike the Dow, this number has been topped by a factor of 10.
The other first is the first of the 1929 black days, Black Thursday. Although it was mild compared to the other black days, it was the beginning of one of the worst crashes ever. Nearly 13 million shares changed hands in bouts of panic selling. It was a record that would ominously stand for less than a week.
The Slippery Yen
Lastly, we have John Rusnak, a currency trader who, on October 24, 2002, pled guilty to several charges of bank fraud. Rusnak lost $691 million by placing unhedged bullish bets on the yen and entering false trades to cover-up losses. By entering false option orders and using historical rate rollovers, Rusnak made it appear that he was making, or at least not losing, money on the yen, despite the general downwards slide related to the Asian crisis. (Check out What Causes A Currency Crisis?)
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Rusnak was thus granted a prime brokerage account and, like all troubled gamblers, promptly doubled-down. This tied up a good portion of the bank's capital to the Forex market, causing superiors to look more closely at Rusnak's portfolio. What they found led to the aforementioned loss of over half a billion and damaged but did not break Allied Irish Bank.
That's all for this week. Next week we have the blackest of black days to look forward to as October draws to a close.