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Time machine: Are these the scariest moments in banking history?

31 October, 2019Juno Baker

To celebrate Halloween, we look back through the years at the jitters and shivers in stock markets, banks and finance houses.
Cat against a blood red moon

1720: The South Sea Bubble

Shares soared when the UK government and the South Sea Company made a deal in 1720.

The government needed money for war with France. The South Sea Company wanted a trade monopoly with South America.

The company lent the government £7 million – and took on government debt. In return, the government bought shares in the company, underwrote the English national debt, and granted the monopoly.

It also agreed to pay an interest rate of 5% on the debt. Everyone was happy!

It all seemed perfectly above board. The King was the governor of the South Sea Company. There were stories of great fortunes being made.

People across the UK began to invest their savings in the South Sea Company and – buoyed up by the dream of getting rich quick – were easily persuaded to sink money into other investments.

And then the bubble burst! The stock market collapsed, shares – including government stock – tumbled. The South Sea Company directors were arrested, their estates confiscated. Hundreds of MPs (462) and 112 Lords were found to have been involved in insider trading.

Bankers panicked, crowding the parliament lobbies until the Riot Act was read to restore order.

1907: Knickerbocker Crisis

October – the month of Halloween – has often been a scary time in banking history. And October 1907 was no exception.

In fact the banks got such a shock that year, they set up the Federal Reserve System to protect them.

It started with a high-profile, failed attempt to take control of a copper company through a take-over bid.

The president of the Knickerbocker Trust Company, Charles T Barney, was associated with those behind the cornering bid. And, even though he'd declined to finance the bid, the Knickerbocker board asked him to resign.

Knickerbocker was the third largest Trust in the US. Though it was not officially a bank, it effectively operated as one.

More importantly, much of the money it lent went into the stock market. Commercial banks were not allowed to make loans without collateral, but trusts could. These uncollateralised loans were widely used to pay for stock trades. Without money from the trusts, the stock markets were in trouble.

When Barney’s association with the men behind the copper shares scam became public, the Bank of Commerce stopped clearing the cheques issued by the Knickerbocker Trust. All the other US banks followed.

That’s when the Knickerbocker Trust was confronted with a ‘bank run’.

The New York Times reported, "As fast as a depositor went out of the place ten people and more came asking for their money."

The police were brought in. US$8m was withdrawn. Knickerbocker’s glory days were over. But sadly, it didn’t end there. Runs on the banks took place up and down the United States.

If Knickerbocker had been a bank, it might have survived. Commercial banks were part of a clearing house that offered mutual support. Trusts were not. That was its death sentence.

1929: The Wall Street Crash

In 1928 President Herbert Hoover announced, “We in America today are nearer to the final triumph over poverty than ever before in the history of any land.”

Less than a year later, America – and much of the rest of the world – was in the grip of the Great Depression. So what went wrong?

Despite some market jitters in early 1929, investors on Wall Street continued piling into stocks – The Dow Jones Industrial Average peaking on 3 September 1929.

Then the London Stock Exchange crashed on 20 September after a leading investor and his associates were locked up for fraud.

Crowd outside New York Stock Exchange 1929This affected American optimism about investing overseas and from that moment the decline gathered momentum.

Between 28 and 29 October 1929 – eerily near to Halloween – shares on Wall Street lost 25% in the most dramatic two-day stock market fall in history.

1987: Black Monday

The spooky thing about Black Monday is it wasn’t caused by an international news event or change of market fundamentals. It was sudden, unforeseen, and hit the futures and options markets, as well as causing an international stock market crash.

Not only did prices plummet, the markets stopped functioning. The Federal Reserve stepped in publicly with short-term funding to restore confidence.

Even so, Black Monday wiped at least 20% off the value of the London Stock Exchange.

Ever since, economists and academics have been debating the causes of the Black Monday crash.

Was it overvaluation, illiquidity and market psychology? Were fear and panic contagious, as investors reacted to stock price falls and hearsay?

It was likely exacerbated by new computerised ‘program trading’. Fast and automatic, computers carried out their orders exactly. So when markets began to tumble, they did what they’d been programmed to do – sell!

1989: Black Friday

It seems October is an ominous month for bankers and those in financial services. That’s not actually true – according to the statistics. But the sense of doom remains and is called the October Effect.

And everyone knows the significance of Friday 13th.

Is it any wonder then, that when 13th October fell on a Friday in 1989, there was a mini-crash?

Perhaps not one of the scariest moments in banking history, although some believe it triggered the recession of the early 1990s. But with such an auspicious date we had to include it.

Who knows what this Halloween might bring!

See more from our Time Machine series