Everyone knows about the 1929 crash on Wall Street. Few know of the 1907 crash. It was a crash brought on by a liquidity crisis. That is, there was no more margin, no more cash, and no more credit with which to buy stocks to keep a rally going and prices overinflated. J.P. Morgan stepped in and provided the liquidity. Here’s the rest of the story.
That day, October 24, 1907, was to be branded into Livermore’s memory. It was the first time he had ever made more than $1 million in profit, and he had done it in a single day. Furthermore, the day was not yet over. For him it was most important that he had followed his new rules. He had been patient in waiting for the big turn in the market. He had started with small positions, sending out probes into the market to confirm that he was right. And finally, when everything was in his favor, he had done what he loved best: He plunged big time, like a king cobra.
His paper profits and his stock positions were so large near the end of the day, as a result of his pyramiding, that he now had an even bigger decision to make. Morgan’s announcement to inject cash had solved only one problem: It reestablished liquidity—solvency among the brokers. But the other major problem was that there was still no demand. Livermore looked over the market near the close, and found there were simply no bids for stocks. Nobody wanted to buy stocks at any price.
Livermore knew that he could perpetrate a monumental raid by starting to sell at the opening the next day. The downward pressure of his hammering the key stocks would cause a further decline. His margin now was ever increasing; his profits had pyramided, risen as the market had fallen. He was in a position to begin the day by selling short 10,000 shares of Union Pacific, the market darling at the time. He could follow by selling half a dozen other stocks that were considered the bluest of the blue chips. He now had the account margin and the trading skills to hammer those issues into oblivion. He was looking at not $1 million profit, but $10 million. $20 million, if he hit the market hard the next morning.
Now it would be his turn to make the big decision. Would he support the market or drive it down and down and down, until the board of governors had to close the exchange, maybe forever?
Before the close of the trading day, while Livermore was studying his next move, a friend of his, Warren Augustus Reed, paid him a visit. During the panic that day Livermore had explained to his friend, who was a banker in a powerful investment banking house, exactly what would happen. Reed had watched Livermore operate in the past and was a believer in his market skill and deadly prowess.
Reed disappeared for a while when he was called away to see his boss, the president of the firm.
Reed returned and explained to Livermore, “J.L., I’ve been asked to talk to you about the market and request that you refrain from any more short selling. I understand that you are looking at even bigger profits for yourself if you hammer away, but sometimes we have to look at the greater good.”
“Auggie, this comes from your boss?” Livermore asked.
“No. It comes from a person more powerful than my boss,” he answered.
Livermore knew whom he meant—J. P. Morgan. “You sure?”
“I’m sure. It came from him personally I was in the office when it happened and heard the conversation.”
Livermore thought for a minute. “You know these same men have been selling into this market for months now—feeding stock to the public, knowing that the decline was coming, only interested in looking after themselves, killing the public?”
“Yes, I know, but J.L., isn’t that always the way, when prices get too high? The smart, market-savvy people sell to the less-smart people, the public.”
“J.L., if we are to get this market under control then we will have to stop the bleeding, the selling, and staunch the supply, or there will be no market left. There will only be chaos.”
Livermore pondered his position for a few minutes. “Tell your boss that I am in agreement with what he says. I will not sell any more stock today. I will cover my short positions in the morning by buying in the stock. After that, I will start to aggressively buy additional stocks on the opening. I understand the gravity of the situation.”
“Thanks, J.L., I’ll report this back to the man himself.”
Livermore had already analyzed the situation carefully before his friend had shown up. The carnage this day had been horrific, and Livermore felt the exchange was due for a rally on a technical rebound basis, provided it was not raided. Plus, he had some monumental short positions that would have to be covered in a liquid market to preserve his profits.
Finally, he had altruistic reasons for agreeing. Further raiding would severely hurt the country. He was astounded that he had this power in his hands, the raiding power and skill to actually drive the market into oblivion. He was 31 years old.
The next morning Livermore fueled the rally by covering his short positions. As the market continued to rally, he bought another 100,000 shares of various companies, which he fed back into the market that same day as the public jumped in. When the day was over he was worth $3 million—not in paper profits, but in cold, hard cash.
“What a life,” he thought. Broke three times before he was 30 years old and, at the age of 31, potentially able to batter the New York Stock Exchange into oblivion. He smiled to himself. He had shared power with J. P. Morgan for one day. Morgan had the power to save the market from oblivion, and Livermore had the power to hammer it into oblivion—even Morgan could not have stopped him. He had gone from being thrown out of bucket shops to being asked by the most powerful banker in America to lay off Wall Street, stop the punishment. His reputation was growing, and he had held the financial welfare of the nation in his hands for one day.
— Jesse Livermore, World’s Greatest Stock Trader by Richard Smitten
Of course, in today’s world, only the elected get to wield such power, because, you know, "we can trust them." They’re elected! Today, the SEC would be all over such a situation and there would be investigations, indictments, prison time, and who knows what else. And the elected will be re-elected because they "protected" all the dumb sheeple.
You know why I think Jesse Livermore played it the way he did? He was asked nicely; moreover, he was asked by someone who commanded his respect.
What a much worse world we live in today. But hey, it’s less risky, right? Someone’s always lookin’ out for you, and after all, that’s what’s important. Better safe than sorry, eh?