In 1907 two brothers, Otto and F. Augustus Heinz, teamed up with infamous Wall Street banker Charles W. Morse in an attempt to manipulate the stock of a United Copper Company. Heinzes had made a fortune as a copper magnate in Montana, while Morse gained his reputation once cornering successfully New York City's ice market.
Together with Heinze their influence reached many banks—the pair served on at least six national banks, ten state banks, five trust companies and four insurance firms. Otto Heinz plan involved a short squeeze, a sort of stock market manipulation scheme. They planned to corner the market in the copper company's shares by buying aggressively, driving up the share price, forcing short sellers to panic and eventually buy the same stock from Heinzes for a much greater price.
Of course, such a plan involved several participants and a lot of money. To finance the plan, the trio 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. Simple plan should have worked but as Barney declined funding, Heinzes found themselves insufficiently capitalized. Otto decided to attempt the copper cornering anyway.
Cornering the stock market
On Monday, October 14, he began aggressively purchasing shares of United Copper, which rose in one day from $39 to $52 per share. 30% jump in share value was considered to be sufficient to cause significant panic among the short sellers. Next day, Otto Heinz 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.
They had misinterpreted the market, as there was plenty of United Copper shareholders eager to capitalize the sudden spike in price. So the share price of United Copper began to plummet, stock closing at $30 on Tuesday. Panic worked the other way with stock price falling to $10 by Wednesday. Heinz brothers were ruined completely in only two days.
The stock of United Copper was traded outside the hall of the New York Stock Exchange, literally an outdoor market "on the curb", which later became the American Stock Exchange. Unable to meet its obligations, Otto Heinze's financial company Gross and Kleeberg went bankrupt first. The State Savings Bank of Butte, which was owned by Augustus and which had used large amounts of United Copper stock as collateral fell next. Augustus was also the president of the Mercantile National Bank in New York City, heavily involved in trading the stock. When the bank's board of directors learned of his actions, they forced him to resign on Thursday morning.
The financial crisis begins to spread
Uncertain of the institution's exposure to the copper stock collapse and fearing for its insolvency depositors at the bank panicked and rushed to withdraw their money. Seeing bank runs in the city, others began to worry about their deposits and the panic began to spread. Next in line were the National Bank of North America and New Amsterdam National, institutions run by Charles Morse. Runs later spread to other affiliated banks and trusts, leading to the downfall of the Knickerbocker Trust Company spreading additional fear.
The following week Charles T. Barney, president of the Knickerbocker Trust Company, was also forced to resign by his board because of ties with Morse and the Heinzes. The firing of Barney triggered a massive run on Knickerbocker Trust on Tuesday, October 22, which brought down the institution in a few hours. Panic extended across the nation as vast numbers of people withdrew deposits from their regional banks, regardless of their involvement in the stock market.
As news of failures spread, other banks and trust companies were reluctant to lend any money. The interest rates on loans to brokers at the stock exchange soared and stock prices fell harshly. The crisis that was now clear hit two other large trusts, Trust Company of America and Lincoln Trust Company. By Thursday, October 24, a chain of failures littered the street: 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.