The banking panic of 1907

Cornering stocks are rare nowadays as government regulations limit their existence. However it was a common scene in the early years of the 20th century. The plot is to make gains in a particular stock by squeezing the short sellers, thereby increasing the price further when the short sellers are forced to cover. It is only possible if an individual holds a majority of the stock, and decides to call out all of his holdings from stock brokers. Brokers normally lend out stock shares to short sellers, and this can be exploited by a firm or an individual who, in part, think that they own a vast majority of the lent out shares. By calling out the stock physically, brokers would be forced to recall the shares held by short sellers to comply with the real owner’s request to actually hold all physical shares that he owns. The engineer of this stock corner would profit from inflated prices of his shares, caused by short sellers trying to buy at any price just to cover or return the shares they borrowed. This idea was attempted by Otto Heinze, the brother of the short lived United Copper Company founder Fritz Augustus Heinze in 1907. This corner attempt contributed greatly to the great banking crisis of 1907.

It started with Otto Heinze on the 9th of October 1907. He purchased a $96,000 seat on the New York Stock exchange to start the Otto C. Heinze and Company brokerage house. Thinking that they own a majority of United Copper Company stocks, he engineered a stock corner that would eventually bring down most banks and trust funds at that time. Otto Heinze noticed that stocks of United Copper co. was trading well over 25,000 more shares than the total outstanding shares accounted. He came into a conclusion that, this was mainly due to the other brokerage houses lending out shares to short sellers. For the months to follow, Otto Heinze would try to exploit this heavy short selling activity with United Copper company shares. It required about $2,000,000 to purchase what he thinks would be sufficient to acquire a controlling interest of United Copper shares. However, the president of the Knickerbocker Trust company Charles W. Morse estimated that, it would probably take over $3,000,000 to successfully execute the corner when the Heinze brothers consulted him. Otto Heinze’s plan was well rejected by his brothers and Morse. This was mainly due to the fact that United Copper Co. has been buying its own shares on margin to support its declining stock price. But this share buy back activity was not put into consideration on their verdict that, it was merely due to the short sellers causing the price of United Copper Co. shares to drop in value. The Heinzes were already indebted to their brokers for their margin purchases. Ignoring all of these red flags, Otto Heinze still executed his plan to corner shares of United Copper Co.

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