In his absorbing new book, A History of the United States in Five Crashes, Scott Nations chronicles five financial collapses through the prism of the people and institutions that caused the ruin and those who helped restore order and prosperity.

Nations’s stylish writing gives these stories of greed and fear a cliffhanger momentum. He provides many stock quotes and opening and closing market numbers from each crash, but balances the numbers with ample social and historical context, plus colorful portraits of big and small players.

The five crashes are the Panic of 1907, when the Dow lost about half of its value in a few weeks; Black Tuesday, in 1929, which leveled the Dow and brought the Great Depression; Black Monday, in 1987, when the Dow dropped 22.6 percent in one day.

And the Great Recession, in 2008, when the banking system, the market and much of the economy collapsed; and the Flash Crash (2010), plunging the Dow down 998.5 points, about a trillion dollars in valuation, in minutes.

“Just as every modern stock market crash has an external catalyst,’’ (assassination, oil spill) ‘’each collapse has been fueled by a new, poorly understood financial contraption’’ (credit default swaps, high-speed trading) ‘’that introduces leverage into a system that is already unstable.’’

In 1907, it was “ungoverned and piratical’’ trust companies with an “absolute lack of reserves, much of the collateral securing trust company loans was illiquid and couldn’t be easily sold to pay off the loans.’’ As 50 brokerage houses were about to fail, banker J.P. Morgan cajoled banks to commit $25 million in bailout money. The Dow lost 37.7 percent, “still the second-worst loss ever.’’

To temper inflationary growth and speculation, and then halt collapsing prices and a recession, the Federal Reserve “embarked on a course of (discount) rate cuts as wild as the hikes they’d instituted at the end of 1919 and throughout 1920.’’ At 7 percent in 1920, the rate was cut to 3 percent by 1924, leading to “the unrestrained speculative frenzy that ignited the Great Depression.’’ Lowered discount rates and increased outflow of gold to Europe (which shrank the money supply and made “call money’’ loans more expensive) created “a new and supremely dangerous phenomenon—the growth of stock speculation in call money,’’ $3.3 billion in 1926 to $6.5 billion in 1928.

The 1929 contraption was $1 billion in inflated leveraged investment trusts. Some stock shares were trading for about double the value of the securities contained in the trust. Selling surged and blue chips plummeted. The Federal Reserve injected $132 million into the money market, replacing ‘’call money’’ pulled from circulation.
 
Next contraption: “Put options, the right to sell stock at a predetermined price, were considered dangerous and un-American.’’ But two academics created “portfolio insurance,’’ and changed investors’ minds. Nations says put options grew too large to be safe, and its inventors “failed to accept that if liquidity were poor, their own selling might drive the stock’s price down in a cascade.’’

The cascade happened: “Oct. 19, 1987 remains the worst day the American stock market has ever had.’’ Other culprits in Black Monday were the leveraged buyout, with investors borrowing “a mountain of money to do a takeover’’ but committing small amounts of capital, and the “junk’’ bond franchise, whose purveyors lobbied Congress, which failed to pass 30 bills to regulate takeovers. “The 1987 crash tempered the greed of the Me Decade,’’ Nations says.

First « 1 2 » Next