Wealth managers have much to talk about with their clients. A Republican administration is in power, consumed by an economic downturn and war. Confidence in the banking system wanes. The aftermath and cleanup of a previously unthinkable natural disaster uncovers critical failures in public infrastructure. Technology reshapes American life. The country is watching its ethnic balance shift in ways unimaginable a generation ago. The lexicon of Wall Street seeps into daily conversation and creates a shroud of mystery over the proceedings of the country’s economic machine. At the same time, well-known financial bandits are branded with a scarlet letter and, in some cases, become targets for government prosecution.

We could be thinking of today’s market meltdown or even the Great Depression, circa 1929. But these circumstances also describe the Bankers’ Panic of 1907. As Mark Twain supposedly said, “History doesn’t repeat itself, but it rhymes.” The same pattern seems to connect events that happened almost exactly a century ago.

The natural disaster? In April 1906, San Francisco suffered a devastating earthquake that destabilized financial markets and attracted money for reconstruction. Similar to Hurricane Katrina and its aftermath? Maybe. But compare the 1906 ground shaking — which required massive public funding that was hard to come by because London had stopped sending gold — with an almost complete economic meltdown on a global scale and you have the basic idea.

The real link between 100 years ago and today, however, revolves around leadership — or the lack thereof. In the middle of market mayhem, a towering figure of U.S. business steps forward with his reputation, record of astute investing, and financial resources for public good and personal gain. Are we talking about J.P. Morgan? Warren Buffett, the Oracle of Omaha?

Nothing beats a parlor game of compare and contrast. Since last August, endless comparisons between current economic turmoil and the crash of the Great Depression have been made. But many economic historians have been pointing to a short-lived panic a few years earlier.

In 1907, troubles in the banking system led to panic, which then spilled over into the stock market. In 1929, the stock market crashed; a year later (which suggests the 1929 crash had much less to do with banking problems and the Great Depression than is usually assumed), banks began to fail en masse as the U.S. Federal Reserve stood idly by.

The financial system depends on credit and confidence in contracts. When excessive risk taking leads to defaults on financial contracts or to other forms of contract impairment, credit and confidence are lost, and the great big financial network tends to break down as problems spread from one part of it to other parts of it.

J. Pierpont Morgan’s role in the Panic of 1907 has its echo in Warren E. Buffett’s actions during the current financial troubles, but Morgan’s imprint is actually seen more clearly as a beta version of the Fed. But both men, each in their 70s, played to an anxious investor-public that needed to see decisive action.

Morgan has been described as America’s one-man central bank at a time when we did not have a true central bank. He organized lender-of-last-resort operations (and bailouts) as the Fed has been doing (and sometimes not doing, as in the early 1930s) since 1914. I had the opportunity to speak with Richard Sylla, an economist and financial historian at the Stern School of Business at New York University, about these parallels. He indicated:   

“The JPM-Buffett analogy is based on both of them being bullish on America. Specifically, the similarity of Buffett taking stakes in Goldman Sachs, General Electric, and perhaps other firms needing more capital during this crisis is similar to Morgan’s actions during the Panic of 1907, when he bailed out a brokerage house called Moore & Schley.”

Morgan arranged for U.S. Steel, a firm he had founded via mergers in 1901, to absorb Tennessee Coal & Iron, whose securities, owned by Moore & Schley, had declined in value during the crisis. Moore & Schley had used those securities as collateral for loans that were coming due, and the company was on the verge of going under. It was saved by the subsequent buyout.

Topping this year’s ranking of billionaires by Forbes magazine with $62 billion, Warren Buffett is the world’s richest person. Yet Buffett has much more than money; revered for his acumen and sound judgment, he has the reputational capital that comes from being a peerless long-term investor. Buffett has put his imprint on the current situation by investing heavily in troubled blue-chip companies, including an $8 billion stake in Goldman Sachs and General Electric. He stands to benefit handsomely from the companies he has propped up.

The companies also benefit from the credibility dividend that comes with the Buffett endorsement. The day after he announced his investment in GE, the company raised more than $12 billion in a public sale of shares.

Make no mistake: Neither titan sacrificed monetarily at all; they took bold positions but also reaped great benefit. “What Morgan did, and what Buffett has done more recently, can be viewed as profitable patriotism,” added Sylla.

Morgan wielded his power over the financial markets more directly than Buffett does, although Morgan’s personal wealth was paltry compared with that of John D. Rockefeller and Andrew Carnegie. “But imagine Buffett or Bill Gates picking up the phone and saying, ‘Paulson! Bernanke! Come to my residence at once!’ Which is similar to what Morgan did,” explained Sean D. Carr, coauthor, with Robert F. Bruner, of The Panic of 1907: Lessons from the Market’s Perfect Storm.¹

Indeed, Morgan called together a group of more than 50 bankers to his home on Fifth Avenue and locked them inside until they were willing to provide funds to stop the panic. After some arm twisting, they agreed. Remember the rescue of Bear last spring? “You could say Morgan was Paulson, Buffett, and Jamie Diamond all rolled up in one,” observed Carr.

Morgan also used the power of his personality and public statements to try to shape market behavior and psychology. In the current crisis, when authorities became concerned that short-sellers were accelerating the stock-market swoon, the U.S. SEC issued a legal order prohibiting short selling in the shares of roughly 800 companies.

John Steele Gordon, a business historian and author spoke with me about the similarities and differences. In 1907, financial policies were less formal. According to Gordon, Morgan simply stated that short-sellers, who bet that a company’s share price would drop, “shall be properly attended to.”

Morgan’s words were to be taken as an implied threat and as a reminder that he was watching. “Nobody wanted to find out what that might mean,” Gordon explained. “In Morgan's day, the world was so much smaller, and Morgan was so powerful.”

How each financial crisis came to pass is illustrative. The banking problems of 1907 first emerged in trust companies, new types of banks that were much less regulated than the older national and state banks. Think not only hedge funds but also structured investment vehicles. Then add mortgage origination, mortgage securitization, and collateralized debt obligations created out of mortgage-backed securities and we see a financial infrastructure much less regulated than commercial banking. Thus, a number of fairly recent innovations have the characteristics of the lightly regulated trust companies where the 1907 panic began.

Deciding where and when the system is to be rescued is a form of high art among central bankers and links Morgan to the role of the Fed. Does Lehman survive? Does AIG get one bailout or two? In 1907, Morgan deliberately allowed the nation’s third-largest trust company to fail and decided instead to bail out a competitor. Morgan’s statement that “this is the place to stop the trouble” represented the beginning of the end of the crisis, although it took another four weeks to put out all the fires. The intervention by JP Morgan (the bank) to acquire Bear Stearns last spring was a bold attempt to replicate the leadership and calming influence of J.P. Morgan (the man). But this time, even that was not enough.

Morgan stepped in and functioned as America’s central bank. The U.S. Treasury handed him $25 million (more than $550 million in today’s dollars) with the blessing of President Theodore Roosevelt, who was not a natural Morgan ally given his aversion to big business and its leaders, whom he once memorably derided as “malefactors of great wealth.” Roosevelt, the ultimate trustbuster, came to realize that his most able compadre was the man who came to help not only the public but also the trusts themselves! Carr further commented:

“Here was a classic case of unwise leadership. Roosevelt’s anti-business stance made the general public nervous and terrified investors. So here came “Old Jupiter” (as Morgan was called, due to his God-like presence on the street) back to New York to save the system, even as the president was out hunting!

How will President-Elect Obama deal with those people and institutions that his supporters view with scorn? How will those who led the cheers for deregulation deal with the inevitable regulatory tightening? The same pattern and parallels continue. 

Bob Margolis is a freelance financial journalist.