LeoGlossary: Jay Cooke & Company (Bank)
This was a United States bank that was headquartered in Philadelphia. It was founded by Jay Cooke and William Moorhead. There were branches in New York and Washington, D.C.
While it was called a bank, it was a financing arm offering security services. Thus, it more closely resembled what is known as an investment bank.
Cooke is credited with a number of breakthroughs such as price stability in security offerings.
Jay Cooke and Company was also the first "wire" brokerage house, pioneering the use of telegraph messages to confirm securities transactions with clients.
Civil War Financing
The bank was started in 1861 after the Financial Panic of 1857. It quickly become known for its selling of bonds on behalf of the Federal Government to help fund the Union's efforts. During this period, it was able to sell hundreds of millions of dollars in bonds, many which other brokerage firms could not accomplish.
This led Secretary of the Treasury, Salmon Chase to ask Cooke to try to sell the new $500 million issue of 5-20 bonds. These paid six percent interest (in gold) and matured in 20 years, but were callable in five years. Cooke got creative and used numerous agents from a variety of professions to sell these bonds. Instead of going through traditional channels, he turned to small bankers, insurance agents, and real estate professionals. They were able to move the bonds on the Union's behalf.
This earned Cooke the nickname of "financier of the Civil War".
Railroad Financing
After the war, the bank still sold U.S. Treasuries but it became evident that it would have to find a new source of funding. The railroad boom was in full swing and Jay Cooke and Company decided to get involved.
In 1870, the Northern Pacific Railroad named the bank its exclusive bond agent. Here is where problems arose. There was difficulty selling the bonds meaning that most of the issue ended upon the bank's balance sheet. It compounded the problem by writing liabilities against the future returns from the sale of bonds.
The set off a bank run as people started to claim their money. Operations of the bank were suspended.
Bankruptcy ensued for Cooke and company but not before setting off a series of bank runs and failures. When the New York Stock Exchange got the new, equities dropped causing the Panic of 1873.
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