This article was posted on Tuesday, Jun 01, 2021

John J. Cisco died in 1884, leaving his bank (John J. Cisco & Son) to his son.

Unlike chartered banks in those years, private banks were structured as self-insuring general partnerships. This placed the entire net worth of each partner at risk and, significantly, meant that substantial deposits were driven by social relationships. When Cisco passed, so did his relationships. His eponymous bank quickly began losing depositors.

Basically, in a self-insured private bank the sum of the bank’s reserves plus the combined net worth of the partners must be equal to or greater than total net deposits. If that were not the case, and the bank went tummy up, there would be insufficient reachable assets to indemnify all depositors. If you were a depositor in 1884, you had to think about these things.

The calculus is this: assume a private bank had reserves of $100,000 and the general partners had total net assets of $50,000. (Reserves plus partner contribution = $150,000.) Further assume that the bank had total deposits (a deposit is an asset to the depositor, but is a liability to the bank) of $125,000. In this example, deposits are fully covered by the combination of bank reserves plus partner contribution. The bank could implode and no depositor would care: there would be enough money available to make everyone whole. Pro-ration of losses, and the guaranteed loss it implies, would not be an issue.

Alternatively, if the bank had reserves of $40,000 and the general partners had total net assets of $60,000 (total: $100,000 to self-insure $125,000 of demand deposits), somebody is not going to get all their money back. After John Sr. died, effectively removing his assets from the self-insurance pie, the depositors no longer had confidence in the bank’s ability to self-insure. Depositors immediately began moving their money to another bank of their choice.

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Hetty Green

When fifty-one-year-old, Hetty Green tried to withdraw her assets (at that time, over $25 million in securities and $500,000 in cash deposits) the pending loss was calamitous to the bank of John J. Cisco and bankruptcy was declared. Its assets were assigned to the trusteeship of Lewis May, a man who listened carefully to Mrs. Green’s demands, and then ignored them. He refused to accommodate her wishes on the grounds that Hetty’s former husband owed a large debt to the bank. She would get not a cent until that debt was retired. 

Hetty was certain Lewis May misunderstood his options. In fact, she argued that Mr. May had the details totally reversed. Under common law at the time, upon marriage the husband acquired his wife’s accumulated property as well as her obligations. Marriage became a type of annuity: the understanding was, “I will give you my net worth as a dowry, but in exchange you must take care of me the rest of my life”. This was a one-way street: there was no provision in common law for a wife to be responsible for the obligations of her deadbeat former husband. Hetty reminded Mr. May of this for several hours every business day, reportedly in an “obdurate, emotional, and vituperative” manner. This went on for two weeks while she continued to demand the entirety of her money on the reasonable grounds that the bank should have been more selective regarding its borrowers. But Hetty was no fool and she kept both eyes open. During her harangues, she saw Mr. May continue to write checks to pro-rata reimburse former depositors and, consequently, the reimbursement fund dwindled at a shocking rate. Recognizing the obvious, Hetty capitulated and wrote a check for a little over $400,000 to settle her former husband’s debts And with that, Hetty bundled her remaining bonds, stocks, leases, and deeds into a cab and trundled down the block to Chemical Bank.


Hetty’s Background

Hetty Green (1834-1916), of New Bedford, Connecticut, was born into wealth. In 1865, at age 31, she inherited $5 million from daddy (who owned the largest whaling company in New Bedford) and began her investment career. She later received an additional $2.5 million from mummy (mummy’s family was in whale oil) and over the next half-century multiplied the combined $7.5 million enormously. There are many guesses, but nobody really knows what she was worth when she died. Those were the days before income taxes, the days of meaningful financial privacy, the days of bearer bonds and of unrecorded loans. And there’s the fact that poor people have money, but rich people have assets. The difference is that money can be quantified: “I have $10,000 under the mattress”. That’s pretty definite, and if it changes you know it. 

Assets:  There’s much less certainty surrounding the worth of assets, whose values fluctuate and can only be speculated upon, moment by moment. The value of an asset can change without the owner being aware. “I own 26% of the Cullinan diamond”. No dollar amount was provided because the value of 26% of that 530 carat asset is subject to both known and unknown vagaries. If a larger, more perfect diamond were found the Cullinan’s value might be significantly diminished. If another economic Panic forced a distressed sale of the diamond, there’s really no robust way to estimate in advance what it would sell for. And then there are interest rates with their constant ebb and flow, and every change moves the value needle one way or the other.

Given such uncertainties it’s not difficult to understand why, in 1905 (forty years after Hetty got Daddy’s $5 million) the Seattle Republican could only guesstimate her net worth at something less than John D. Rockefeller’s, but considerably higher than King Edward VIII of Britain. She was said to be the richest woman of her time.

Many references speculate that Hetty’s net worth at death (1916) was around $2.5 billion. One presumes that is in 1916 dollars. In today’s money, the National Park Service once estimated that she died with a net worth of $17 billion. On-line inflation calculators show those numbers to not be mutually supportive, and suggest the NPS estimate might be optimistic. It just goes to show the difficulty of establishing asset values.

Hetty developed her wealth partially as an early value investor and partially through parsimony. There is no evidence she was liked among her counter-parties, but her money was sufficient to buy her a seat at any table she wished to join. Remembering the collapse of John J. Cisco and Son, she was the only woman invited to J.P. Morgan’s gathering of near-peers that ultimately resulted in the creation of the U.S. Federal Reserve. The Federal Reserve is the banker’s bank, where banks go to borrow money. This arrangement is especially handy when there’s a run on deposits. It’s conceivable that had the Fed been active when John J. Cisco & Son experienced their final difficulties, Hetty Green’s life might have turned out quite differently.

Value Investing:  Hetty Green invested after the Civil War but before WWI, a period when America’s domestic economy was rapidly industrializing. Naturally, she sought assets that would benefit from the industrialization in progress, investing primarily in railroads, banks, commercial properties, and bonds. 

Hetty used her 1865 inheritance to purchase post-civil war reconstruction bonds issued by the Federal government. This was at the end of the Civil War and the sense of the investment community was that the Federal government was unstable. Hetty thought otherwise. Within ten years her investment added $1 million to her net worth.

The same people who lacked confidence in the post-Civil War reconstruction bonds invested heavily in railroads. Railroad bonds imploded in 1872, causing three banks to collapse. Hetty bought as many railroad bonds as she could at their depressed prices.

While Hetty drove famously hard bargains and was a stickler for details, she carried with her only a minor record of lying and cheating, limited mostly to the occasional forgery, which was almost certainly accidental. In 1864 she challenged her grandfather’s will (dated that year, just before he died), claiming the $2 million her grandfather left for his daughter (Hetty’s aunt) was really Hetty’s by right of a prior will (dated 1862) that stated that all subsequent wills were null.

The expected course would be for a new will to declare that all prior wills were voided, but this one said all subsequent. The executor noted the irregularity, accused her of forgery, and rejected her claim.

As a private investor, she had the ability to make significant decisions and to honor her commitments without being second-guessed by a committee from the home office. In 1900 she bought all the bonds underwriting Tucson, Arizona’s, water and sewage system.

Hetty acquired most of her commercial properties at quarters on the dollar by (i) being the lender of last resort to (ii) desperate owners (iii) with the property as security for the loan and (iv) subsequently using every opportunity to foreclose on the mortgage. In this manner she was able to acquire a large number of income producing properties prior to, during, and following the Panic of 1907.

Two large New York brokerages went bankrupt between October and December of 1907. A Panic ensued and resulted in a run on banks. Depositors closed their accounts and demanded their deposits be returned immediately and in full, something the pre-Federal Reserve fractional banking system of the time was not prepared to do. This placed banks, both great and small, at risk of collapse. To resolve the issue, J.P. Morgan called a meeting of his wealthiest colleagues (an assembly that led to the passage of the Federal Reserve Act in December, 1913), and Hetty Green was the only woman invited. Still not liked, but certainly respected.

Parsimony: The stories of Hetty’s thriftiness are legion. She would pay the laundress to wash only the hem of her long black dress, since it soiled faster than the bodice. She sent her children to school in used clothes. While the children were at school, she conducted her business from a bank lobby rather than renting an office. Wishing not to pay New York City rents, she and her children lived in a series of boarding houses across the Hudson River in New Jersey. And then there’s the odious story of her refusing to pay fifty cents to doctors to tend to her 14-year-old son’s dislocated knee. The leg later had to be amputated, the rumor was, at a charity hospital.

Over time, she became one of the richest women in America, but never really learned to enjoy her great wealth. She continued to lunch on oatmeal warmed on room heaters. She once spent two days searching for a misplaced postage stamp. There is no evidence she ever felt loved.

Hetty Green was simultaneously an example of careful investing and poor living. It’s reasonable to wonder how much more gratifying might her life have been if she’d been able, like other successful investors, to peacefully enjoy her income from interest, rents, and dividends. An aphorism comes to mind: “It’s ok to spill the milk, just don’t kill the cow”.

More, later.


This article is for informational purposes only and is not intended as professional advice. Klarise Yahya is not a financial planner. Nothing in this article is presented as investment guidance. For specific circumstances, please contact an appropriately licensed professional. Klarise Yahya is a Commercial Mortgage Broker specializing in difficult-to-place mortgages for any kind of property. If you are thinking of refinancing or purchasing real estate, perhaps Klarise Yahya can help. For a complimentary mortgage analysis, please call her at (818) 414-7830 or email [email protected].