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Dr. Alex Castaldo

10/23/04
For those with interest in market history.

"American-Style Option Exercise, c. 1884," from Charles A. Collman, Our Mysterious Panics 1830-1930 (Greenwood Press, 1931)


One of the great enigmas of the crisis of 1884 is that old Russell Sage should have been caught in its clutches.

As an ex-congressman "Uncle Russell" had settled in Wall Street to divert his declining years by the sale of [options]. Now this is a highly technical business, and one which demands a keen sense of vision, and also the cool head of a trained speculator. Yet, up to this year, Sage had never been proved wrong in his calculations.

Sage's office at this time was on the second floor of the "Arcade", on the southwest corner of Broadway and Rector Street. He was then close upon seventy years. He looked the part of a simple country gentleman, with his slim side-whiskers, short stubbly beard, bland face and innocent-looking gray eyes.

On that May day of 1884, when Seney's Metropolitan Bank suspended, a perturbed rumor sped through Wall Street that Uncle Russell, its oldest and most renowned dealer in puts and calls, had squatted on his contracts. Mr. Sage began to face a small, private panic all his own. [...]

Notwithstanding an extraordinary capacity for anticipating the stock market, Mr. Sage had been selling Puts freely on the rising market of the last few months. [...] Mr. Sage, for once, had bet on the losing side. [As prices fell] large amounts of stock [began to be] delivered to Mr. Sage on his outstanding puts. At first he took and paid for them, but suddenly the payments stopped. The prudent old gentleman had availed himself of a stipulation printed on each of his puts, exacting 24 hours' previous notice that the stocks were to be offered to him. His outer office, meanwhile, was packed with brokers, customers and messengers, demanding checks for their proffered puts. But the checks were no longer forthcoming.

The panic still continuing on the following day, Mr. Sage's position became still more precarious, for the lower the quotations ran on stocks, the bigger became the losses on his puts. He then made access to his office more difficult. The doors were barred. Only those persons were admitted who had given him the requisite notice the day before.

Long lines of angry men and youths, waiting outside the closed doors, insisted that this was but a trick of the old [option] dealer to keep them standing there until after banking hours, and thus prevent them from cashing their puts the next day.

Third day in the run on Russell Sage's office. The affair was serious. Before nine o'clock, holders of options gathered in front of the closed doors, all of them ready to present puts bearing Sage's promise to purchase stocks at prices far above those then prevailing in the market.

Half an hour later. Clamorous clients blocked the corridor and stairway. No longer a good-natured crowd. Ten o'clock passed. Office doors still barricaded.

It was evident that Uncle Russell calculated to profit in two ways by delaying payments. He was giving the stock market time to recuperate. Then he was diminishing his losses by frightening his put-holders into compromising their claims. Already alarmed persons were hawking Sage's puts about the Street, offering them at half their face value.

Men, waiting in the crowd, exchanged their experiences. Many had come to the offices two days before, for the stock market being so low, they were tempted to take the money that was due them. But they had been kept cooling their heels in the hall ever since. Now the market was recovering and their profits were slipping away. They had already lost thousands, because the clerks of the option dealer would not stamp their puts.

Finally Mr. Sage capitulated when the Stock Exchange threatened him with expulsion. He consented to admit his fellow brokers, but these, on emerging from his office, expressed their disgust at the manner in which the wily financier tried to compromise their claims.

One speculator, who held a put on Northwestern at 110, had the sum of $900 due to him, since his stock was then selling at 101. Sage, however, refused to pay the full difference between the "put price" and the market price. He offered to compromise for $600. This was an example of nearly all the transactions.

Only about 60% of the amounts actually due were proffered by the obstinate old financier. A latent fear that he might be forced to suspend, induced the greater number of claimants to accept the sums offered.

On the succeeding day Mr. Sage unbarred his doors. A partial truce was effected in the "put and call" warfare, but the financier persistently objected to paying face value on the puts presented.

In the end it was known that Mr. Sage had paid out nearly $7,000,000 in cash.

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