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Now for today’s piece:

The Tale Of Two Billionaire Bank Bailouts

Highlights

Introduction

I got the idea for this piece after hearing the news.

On Sunday, March 19th, over 20 regional bank executives flew to Omaha, NE on the heels of a string of bank collapses not seen since 2008.

I could only think of one reason these executives would be flying into Nebraska on a Sunday night: To speak with the Oracle Warren Buffett.

Banks have been in a tight spot these past few weeks and are now feeling the pain of the Fed’s unprecedented rate hikes.

Just in the past month, we’ve seen five banks fail, and who knows if this contagion will spread?

My guess is that Warren Buffett might be using the stockpiled Berkshire-Hathaway cash to stop banks from failing before this problem spreads any further.

This wouldn’t be the first time he’s bailed out banks (more on this later).

While researching for this piece, I came across another wealthy American billionaire that bailed America not once, but twice: J.P. Morgan.

History doesn’t repeat, but it often rhymes.

And despite occurring over a century apart, J.P. Morgan and Warren Buffett share many similarities in their respective bailouts.

Let’s break it down:

J.P. Morgan’s Bailout(s) of the U.S.

How Morgan Began Building His Wealth

The year is 1861. J.P. Morgan was working as a financier on Wall Street when the American Civil War breaks out.

The union army called for all able-bodied men to join the fight, but Morgan couldn’t be bothered with the idea of fighting in a war.

There was money to be made, so like Rockefeller and Carnegie, Morgan pays $300 ($10,255.91 today) to avoid the war.

That doesn’t stop Morgan from making money on the war though.

He notices Union Military Bond values fluctuating after the results of each battle and begins trading them based on who wins and loses, making a tremendous profit.

But that’s not the only way he’s profiting from the war.

It was at this time when J.P. Morgan met a lawyer from New York named Simon Stevens.

Stevens approaches Morgan and asks Morgan to lend him $20,000 at 7% to buy 5,000 antiquated guns called Hall Carbines.

Stevens bought outdated military guns for $3.50 and paid $.75 to upgrade their shooting capacity.

He then sold them back to the Union Army which was seriously lacking guns for $22 each a month later and used the profits to pay back J.P. Morgan.

This was the start of J.P. Morgan’s fortune.

The Gold Panic of 1893 (First Bailout)

It’s important to know that at this time, all U.S. currency was backed by gold, and the government had gold reserves in case banks couldn’t swap enough gold for cash.

While not a legal requirement, the U.S. government kept $100M in gold reserves as a safety net for the economy.

The causes of the Gold Panic of 1983 could be its own newsletter issue, but the important thing to know is that economic instability caused people to lose faith in banks, and a bank run was triggered.

This bank run caused Federal gold reserves to drain to dangerous levels.

But that’s not all — railroads (which made up about 2/3 of the economy) were collapsing and competing heavily with each other on pricing.

This drove down margins and many railroads failed.

192 railroads went bankrupt in just one year.

Morgan knew railroad companies were in a tight spot, and he offered cash for complete control of the distressed businesses.

This period was known then as The Great Depression (not to be confused with the 1930s).

At the same time, gold reserves were shrinking and Morgan had a plan to restore them.

He drove from New York City to Washington D.C. and demanded to explain his plan to the U.S. Government and President Grover Cleveland.

After standing outside and demanding to speak to the president, Morgan finally got a chance to pitch his plan.

Much to Morgan’s surprise, Cleveland said no and stated that he wanted to issue bonds instead.

The government was expected to default in 3 weeks and was spending $2M per day.

While in the room a phone call comes in saying the US only has $9 million left of gold reserves.

J.P. Morgan knew there was a $12 million debt that the US government owed.

He knew it was time to strike.

He then uses an outdated Civil War law to offer the private sale of his company’s gold to replenish the United States reserves.

By doing this, he was able to bypass congress, stabilize the economy, and make a boatload of money.

The Panic of 1907 (Second Bailout)

At this time, Morgan is a business mogul with his hands in nearly every industry at the time.

He is also public enemy #1 for President Theodore Roosevelt, who vehemently opposed big business and monopolies.

Unfortunately for Roosevelt and most Americans, 1907 was another year of panic and bank runs.

It all started with the failure of the United Copper Company, which was followed by the failure of 2 brokerage houses and an insolvent bank, all in one week’s time.

This triggered a bank run of epic proportions and Americans were scrambling.

A reluctant Pres. Roosevelt knew there was only one man who could save America: His bitter arch-rival J.P. Morgan.

Roosevelt extended $25M of government funds to Morgan, in an effort to avert this crisis.

Morgan then invites banking leaders over to his library, and after multiple hours of negotiation, he organizes the capital needed to bail out banks.

As a result, a full-blown crisis was averted, and the Federal Reserve was created to separate the government from monetary policy.

Fun fact I found during this research: J.P. Morgan owned the Titanic. Who knew?

Warren Buffett’s Bailout Of Big Banks

Buffet’s first bailout came 101 years after J.P. Morgan’s final bailout.

The year is 2008, and the country is witnessing panic levels and stock market crashes not seen since The Great Depression.

This period of history was dubbed “The Global Financial Crisis” and was triggered by the collapse of many well-known financial institutions such as Bear Stearns and Lehman Brothers.

During this time, Goldman Sachs was near total collapse, and that’s when Buffett stepped in.

Buffett extended $5 billion to Goldman Sachs to provide liquidity and stop what could’ve been an even bigger financial crisis.

In exchange, Buffett received $5 billion in preferred stock paying a 10% annual dividend.

Buffett also did the same with Bank of America.

He extended $5 billion to them in return for a huge chunk of preferred stock paying a 5% dividend.

In the end, The Global Financial Crisis affected millions of people, but Buffett’s actions may have lessened the blow.

Similarities Between The Two Bailouts

While occurring over 100 years apart, the bailouts by Morgan and Buffett share a few similarities.

• Both of the bailouts involved significant investments from individuals.

You could argue that this is a bad thing, it makes mega-billionaires even wealthier and more powerful.

But on the other hand, if the government were to bail out financial institutions it would be using taxpayer dollars to do so.

It's a tough scenario.

• Both bailouts helped stabilize the financial industry and prevent further economic damage.

Without the infusion of cash from Morgan and Buffett, who knows what could’ve happened?

We could have had more frequent recessions or entire industries collapse.

But on the flip side, did these bailouts just delay the problem and make the recessions that did happen worse than they would’ve been?

Food for thought.

• Both individuals were seen as heroes by some and criticized by others for their actions

Much like the last 2 points I made, there are two ways to look at these bailouts.

Did Morgan and Buffett save the economy?

Or were they just making the best business deals that benefitted themselves in the process?

Is it a little bit of both?

My guess is that Buffett wasn’t bailing out banks to just amass a giant fortune.

He’s planning on donating 99% of his wealth to charity anyway.

Final Thoughts

Warren Buffett is in the news and there’s speculation that he may be ready to bail out banks again.

What does this mean for us investors? What can we learn from the past?

The need to bail out banks highlights the systemic risks that large banks pose to the broader economy, and the need for effective regulatory frameworks to mitigate these risks.

Also, bailouts demonstrate the significant problem that arises when banks are described as "too big to fail."

It encourages the excessive risk-taking and irresponsible behavior we’ve seen play out over the past few weeks.

Finally, bailouts highlight the importance of effective crisis management tools and planning to ensure effective responses to future financial crises.

How long can we rely on people like Buffett and Morgan to come to the rescue when banks make bad decisions that impact the entire economy?

How does the government decide which banks are “too big to fail” and which ones just fail?

Are all deposits insured? Or only ones up to $250,000?

There is too much uncertainty and risk involved for me to invest in banks, but that doesn’t mean you should avoid them as well.

I don’t want to hold companies that need leverage to grow and are susceptible to industry-wide meltdowns.

Just my personal preference.

I also have no idea when or if the market will crash, I can only see what’s in front of me and invest according to my plan.

So the plan remains the same: Accumulate quality companies at attractive prices, reinvest dividends, and hold for the long term.

Happy dividend investing!

Sincerely,

Dr. Dividend

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Links And Memes

Here are some links to some of the best stuff I saw this week:

• A train running through residential apartments in China — What is the building code that allows this? (If there is one.) (Fascinating)

• Traffic lights that illuminate the color of the stoplight — Hopefully this can lower the number of accidents (How Things Work)

• The dangers that come with investing in the most concentrated S&P 500 of all time — I don’t own market-weighted indexes anymore (RJR Capital)

• Chat GPT integrating plugins — This must be what it felt like to see the internet for the first time (Ben Tossel)

And of course, some memes:

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