Financial History Issue 131 (Fall 2019) - Page 27

would have no control over market prices for these assets prior to and during the Panic, but the lack of portfolio diversifica- tion evidenced a careless attitude on his behalf regarding investment selection. Simi- lar railroad equities and debt instruments held by Ohio Life Insurance and Trust would perform in a similar fashion, leaving little equity on its balance sheet and cents on the dollar for its bond holdings. Aside from purposely compromising his fiduciary responsibilities, Ludlow, presum- ably done for maintaining sufficient liquid- ity, continuously yielded to the ill-advised practices of the company trustees. For instance, a director of Ohio Life, acting on behalf of the trustees, suggested in Decem- ber of 1856 that Ludlow “coax” several New York banks into underwriting short-term loans up to $200,000. In turn, the Ohio branch utilized the proceeds for specula- tion; Ludlow, perhaps reluctantly, com- plied. Still, he displayed absolute complic- ity when faced with another liquidity crisis. In what a state investigating committee would describe as a “kiting operation” in 1856, Ludlow admitted complicity with the trustees to purchase Ohio municipal bonds at a discount to par. The discount went undisclosed prior to their resale (presum- ably at a price greater than the discount received) to New York investors. Not only was the transaction duplicitous, but by keeping the remaining bonds as inventory, Ohio Life employed illegitimate collateral for the purpose of falsifying its liquidity. Given that its creditors were now aware of substantial mismanagement and illi- quidity issues plaguing the company, by early 1857, attempts at maintaining ade- quate capital reserves seemed beyond the reach of Ohio Life. What’s more, the stock price traded on relatively low volume early to mid-year, consistently staying below $100 per share—a level considered risky to Ohio’s equity position. Ludlow, again will- ing to adopt a “go at it alone” approach in hopes of benefiting Ohio Life, commenced a stock purchase scheme to increase its price. Although volume picked up and the stock traded as high as $99, investors —sensing an overvaluation in the stock —commenced a “bear attack,” or short selling. In essence, they sold borrowed shares of stock in the hopes of repurchas- ing them at a lower price. Adding to this unintended consequence, Ludlow discov- ered one of Ohio’s New York trustees had shorted 400 shares of company stock! Undeterred and presumably still hop- ing to alleviate further problems, Ludlow, consistent in his non-fiduciary approach to his duties, originated loans (Ohio Life’s stock serving as collateral) to investors and himself amounting to $282,193. He further engaged in “off balance sheet” activities, whereby he personally borrowed money and incurred debt not reported as assets or liabilities on Ohio Life’s balance sheet. Such a practice further deteriorated the company’s equity position and increased indebtedness. Ludlow also refused to sub- mit financial statements for internal audit purposes. Two days prior to Ohio Life’s collapse, on August 22, Ludlow solicited emergency funding from members of New York City’s banks. By this time, most lenders had either heard of the firm’s incessant liquidity prob- lems or were creditors of what would soon become the defaulted obligations of the company. Predictably, lines of credit were non-existent since Ohio Life had lost the faith of New York City’s banking commu- nity because of mismanagement, fraud and the sullied reputation of its head cashier. Facing no other alternative, Charles Stet- son, Ohio Life’s president, announced on August 24 that the company had suspended payment on all its obligations. Essentially, the New York offices and headquarters of Ohio Life Insurance and Trust closed their doors, permanently. After his arrest, for the purposes of settling outstanding financial claims due to his embezzlements, Ludlow agreed he would deliver personally held railroad stocks and bonds into the possession of Ohio Life’s creditors and the trustees. Though many were, in fact, of diminished value and failed to satisfy the financial needs of creditors, he faced no jail time. Ludlow would win back some degree of respectability in the not-too-distant future; Abraham Lincoln nominated him as captain and assistant quartermaster of volunteers in New York City in 1862. He later became a lieutenant colonel by the end of the Civil War. Although major banks in New York City had begun limiting the amount of loan originations (particularly to rail- roads for reasons mentioned earlier) early in 1857, their efforts had little impact on the economy. That is until Ohio Life and Trust’s collapse. Writer J.S. Gibbons, whose work entitled The Banks of New York, Their Dealers, The Clearing House, and the Panic of 1857 was published in 1864, commented that the impact of its closure “struck on the public mind like a cannon shot.” The failure, while not caus- ing the panic, produced a major sell off on Wall Street with a 3–7% decrease in stock valuations in the aftermath. When those New Yorkers marching from Tom- kins Square in fall of 1857 for public relief also descended upon Wall Street demand- ing banks release funds, their appeals fell upon deaf ears. A lending paralysis had gripped New York’s banking community, the effects of which would last into 1859.  Ramon Vasconcellos is a history professor and lecturer in Accounting and Econom- ics at Barstow Community College in Barstow, CA. He has published numer- ous biographical and topical articles on the history of the West, particularly related to finance. Ramon has also taught economics and history at the University of London. Sources Calomiris, Charles W. and Larry Schweikart. “The Panic of 1857: Origins, Transmission, and Containment.” The Journal of Economic History. Vol. 51, No. 4. December 1991. Fishlow, Albert. American Railroads and the Transformation of the Antebellum Economy. Cambridge, Massachusetts: Harvard Uni- versity Press. 1965. Hammond, Bray. Banks and Politics in Amer- ica From the Revolution to the Civil War. Princeton University Press. 1957. Huston, James L. The Panic of 1857 and the Coming of the Civil War. Baton Rouge and London: Louisiana University Press. 1987. Riddiough, Timothy J. and Howard E. Thomp- son. “When Prosperity Merges into Crisis: The Decline and Fall of Ohio Life, Politi- cal Economy of Bank Suspension, and the Panic of 1857.” December 21, 2016. https:// ssrn.com/abstract=2888689 Spiegelman, Mortimer. “The Failure of the Ohio Life Insurance and Trust Company, 1857.” Ohio State Archeological and Histori- cal Quarterly, LVII. 1948. Stampp, Kenneth. America in 1857: A Nation on The Brink. New York, Oxford: Oxford University Press. 1990. Van Vleck, George W. The Panic of 1857: An Analytical Study. New York: Columbia Uni- versity Press. 1943. www.MoAF.org  |  Fall 2019  |  FINANCIAL HISTORY  25