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Those were the good old days when markets were unregulated and...

  1. 1,383 Posts.
    Those were the good old days when markets were unregulated and public outcry was just that:

    The 1907 panic began with a stock manipulation scheme to corner the market in F. Augustus Heinze's United Copper Company. Heinze had made a fortune as a copper magnate in Butte, Montana. In 1906 he moved to New York City, where he formed a close relationship with notorious Wall Street banker Charles W. Morse. Morse had once successfully cornered New York City's ice market, and together with Heinze gained control of many banks—the pair served on at least six national banks, ten state banks, five trust companies and four insurance firms.[15]

    The panic began in the vibrant marketplace for stocks that took place on the curb outside the New York Stock Exchange; this curb market later became the American Stock Exchange.

    Augustus's brother, Otto, devised the scheme to corner United Copper, believing that the Heinze family already controlled a majority of the company. A significant number of the Heinzes' shares had been borrowed, and Otto believed that many of these had been loaned to investors who hoped the stock price would drop, and that they could thus repurchase the borrowed shares cheaply, pocketing the difference—a technique known as short selling. Otto proposed a scheme called a "bear squeeze", whereby the Heinzes would aggressively purchase as many remaining shares as possible, and then force the short sellers to pay for their borrowed shares. The aggressive purchasing would drive up the share price, and, being unable to find shares elsewhere, the short sellers would have no option but to turn to the Heinzes, who could then name their price.[16]

    To finance the scheme, Otto, Augustus and Charles Morse met with Charles T. Barney, president of the city's third-largest trust, the Knickerbocker Trust Company. Barney had provided financing for previous Morse schemes. Morse, however, cautioned Otto that he needed much more money than he had to attempt the squeeze and Barney declined to provide funding.[17] Otto decided to attempt the corner anyway. On Monday, October 14, he began aggressively purchasing shares of United Copper, which rose in one day from $39 to $52 per share. On Tuesday, he issued the call for short sellers to return the borrowed stock. The share price rose to nearly $60, but the short sellers were able to find plenty of United Copper shares from sources other than the Heinzes. Otto had misread the market, and the share price of United Copper began to collapse.[18]

    The stock closed at $30 on Tuesday and fell to $10 by Wednesday. Otto Heinze was ruined. After the crash, The Wall Street Journal reported, "Never has there been such wild scenes on the Curb, so say the oldest veterans of the outside market".

    Moved from the "United States" forum. Original message number: 1433
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