The calendar flipped to October 1907. Though Michael, with his ability had foreseen the inevitable market crash, he could not know from which direction the failure would come.
The true spark came from a source no one suspected.
The central figure in the impending crisis was the United Copper Company, a copper firm whose Chairman was the notorious financier F. Augustus Heinze.
Heinze had first made a legendary fortune as a copper magnate in Butte, Montana, where he had built his empire on mineral wealth. In 1906, however, Heinze moved to New York City, leaving the mines for the lure of high finance. Heinze quickly established a close working relationship with Charles W. Morse, a notorious and powerful Wall Street banker famous for his audacious manipulation of the New York City ice market. These two men represented a new breed of aggressive speculators who used their banking connections less for stability and more for personal enrichment.
Heinze and Morse quickly developed a vast and interlocking financial empire. By working together, they gained controlling interests in an array of financial institutions across the city. The pair served on the boards of at least six National Banks, ten State Banks, and four major insurance firms. This staggering network meant that their personal fortunes and risky ventures were deeply intertwined with the capital and stability of dozens of independent institutions. Any major failure on their part would not be isolated; it would send shockwaves across the entire financial district, crippling the flow of credit to ordinary banks and paralyzing the economy.
The panic began with a scheme to corner the market in the company's shares, devised by Otto Heinze, Augustus's brother.
Otto Heinze's plan was to execute a short squeeze on United Copper.
Cornering the market involves secretly purchasing such a massive quantity of an asset—in this case, United Copper shares—that you gain control over virtually all its available supply, allowing you to dictate the price. The goal was to initiate a short squeeze: a situation where speculators betting the stock price would drop had "sold short" (meaning they borrowed shares and sold them, expecting to buy them back later at a lower price and pocket the difference). The market controllers (the Heinzes) would then force these short sellers to repay the borrowed shares when the price was artificially high. With no other source of shares, the short sellers would be forced to buy from the Heinzes at any price, driving the stock to absurd heights and ruining the short sellers.
To finance this ambitious operation, Otto, Augustus, and Morse approached Charles T. Barney. Barney was thepresident of the Knickerbocker Trust Company, one of the largest and most prominent financial institutions in New York. Though Barney had funded Morse's previous schemes, the scale of the copper corner was too large and too risky even for him, and Barney declined the full request.
Otto decided to proceed anyway.
On Monday, October 14th, Otto began aggressively buying up United Copper. The price immediately shot up, soaring from $39 to $52 per share in a single day. On Tuesday, Otto issued the call for the short sellers to return the borrowed stock, seeking to tighten the noose. The price briefly peaked near $60.
But Otto had made a fatal miscalculation. He had underestimated the amount of readily available United Copper stock in the market. Plenty of shares existed outside the Heinze family's control. The short sellers found shares elsewhere, and the "corner" crumbled instantly.
The stock price reversed with catastrophic speed. It closed at $30 on Tuesday and, by Wednesday, October 16th, it had plunged to a mere $10. Otto Heinze was instantly ruined, his wealth evaporating.
But the real disaster was not the ruin of one man; it was the realization that the wealthy and connected men behind the scheme—F. Augustus Heinze and Charles W. Morse—were inextricably linked to dozens of fragile institutions. The market's confidence in the financial leadership, already paper-thin, began to crack.
While the public mistrust began to creep toward all financial institutions, the failure of the Knickerbocker demonstrated a critical difference between the highly regulated National Banks and the quickly growing Trust Companies.
National Banks were tightly controlled by federal law. They were mandated to hold large cash reserves (often 25% of their deposits) in their vaults to cover unexpected withdrawals. They were therefore inherently more stable during a panic.
Trust Companies, however, were subject to minimal state regulation. They were permitted to hold only negligible cash reserves, often less than 5%, and were allowed to invest the remainder of their depositors' money far more aggressively in high-risk ventures like real estate and volatile stock market loans. This strategy allowed them to offer higher interest rates to depositors, drawing enormous sums of money, but it left them brittle. When the crisis hit, the public instinctively trusted the regulated National Banks more, while the Trusts—especially the one associated with the copper speculators—were seen as highly exposed and immediately became the target of catastrophic bank runs.
Because of his past association with Heinze and Morse, the Knickerbocker board forced Barney to resign on Monday, October 21st. The situation was immediately exacerbated when the powerful National Bank of Commerce, where J.P. Morgan was a dominant figure, announced it would no longer handle the Knickerbocker's clearing transactions. This refusal signaled that the Knickerbocker was untrustworthy and acted as a death sentence for the institution.
On October 22nd, the Knickerbocker faced a classic, terrifying bank run. Crowds grew so large that police had to be called in to maintain order. Though officials quickly unloaded two van loads of cash, it did nothing to calm the panic. The New York Times reported that as fast as one depositor walked out, ten more came asking for their money. In less than three hours, a staggering $8 million (equivalent to $270 million today) was withdrawn, forcing the Knickerbocker Trust Company to suspend all operations shortly after noon.
The Knickerbocker's spectacular failure sent a paralyzing shockwave through the entire financial system. Other banks and trust companies became instantly reluctant to lend any money, fearing they might be next. Interest rates for loans to brokers on the Stock Exchange skyrocketed to a crushing 70%. Because brokers could no longer secure financing, stock prices plummeted to their lowest level since December 1900.
Watching the chaos unfold brought Michael and his family a heavy sorrow. They knew they could not stop the inevitable collapse, yet witnessing the destruction of public trust and the ruin of countless small investors was deeply troubling. However, they were not merely observers. They had committed $20 million to short-selling various exposed stocks, betting on the fall.
The collapse of United Copper and the subsequent closure of the Knickerbocker had already delivered them a $7 million profit. With the financial contagion spreading rapidly across the list of shorted banks and trust companies, Michael knew their gains were poised to climb even higher as the panic continued to engulf Wall Street.
The panic quickly became an epidemic, spreading to two other large institutions, the Trust Company of America and the Lincoln Trust Company. By Thursday, October 24th, a graveyard of financial names littered the street as a chain of failures occurred almost daily: the Twelfth Ward Bank, Empire City Savings Bank, Hamilton Bank of New York, First National Bank of Brooklyn, International Trust Company of New York, Williamsburg Trust Company of Brooklyn, Borough Bank of Brooklyn, Jenkins Trust Company of Brooklyn and the Union Trust Company of Providence. The entire decentralized banking system was collapsing under the weight of fear and insolvency.
With no central bank in the country, the job of saving the economy fell to one man: J.P. Morgan. The seventy-year-old financial titan, recognizing that the crisis was spiraling out of control, took decisive, private charge of the rescue operation.
Morgan and his associates first examined the books of the Knickerbocker. Their conclusion was blunt: the institution was fatally insolvent due to its reckless lending, so Morgan withheld his support and let it fail. However, the run on the Knickerbocker was now triggering runs on even healthy trust companies. Allowing the sound institutions to collapse from sheer panic would destroy the entire credit system.
On the afternoon of Tuesday, October 22nd, as the chaos peaked, the president of the Trust Company of America urgently requested Morgan's help. That same evening, Morgan gathered the most powerful men in American finance in his library: George F. Baker (President of First National Bank), James Stillman (of the National City Bank), and, crucially, George B. Cortelyou (the United States Secretary of the Treasury).
Cortelyou assured the group that the government was ready to inject deposits into the banks to shore up public confidence—an unprecedented act. Following this commitment, an overnight audit of the Trust Company of America showed that, despite the panic, the bank was fundamentally sound. On Wednesday afternoon, Morgan declared the turning point: "This is the place to stop the trouble, then."
As the run began on the Trust Company of America, Morgan, Stillman, and Baker worked fiercely to liquidate the company's assets, generating enough cash to meet the demands of the panicking depositors. The bank managed to survive the day, but Morgan knew that the panic was far from over and far more capital would be needed to keep the financial system standing.