Déjà Vu All Over Again: Agency, Uncertainty, Leverage and the Panic of 1857
Timothy J. Riddiough
University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics
Howard E. Thompson
University of Wisconsin - Madison - School of Business
April 18, 2012
HKIMR Working Paper No.10/2012
The panic of 1857 is revisited with the benefit of hindsight provided by the panic of 2007-08, where a number of parallels are identified between the two panics. We present new evidence on causes of the failure of the financial institution that triggered the panic of 1857 and conduct a detailed analysis of railroad financial and accounting practices. New financial innovations are also studied — the railroad farm mortgage and farm mortgage-backed security — which had similarities to the modern sub-prime mortgage loan and MBS. Neglected risks and Knightian uncertainty appear to be fundamental reasons why investors continued to participate in a boom market that was also extremely fragile.
Number of Pages in PDF File: 56
Date posted: April 19, 2012
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