May

10

 The Rothschild dynasty famously got one of its big breaks following Wellington's victory at Waterloo. With an information network, backed by his four brothers spread across the Continent, Nathan Meyer was able to receive news of the victory twenty-four hours ahead of everyone else. He then either (i) bought the British bond market, (ii) bear raided it and then bought it, or (iii) was really short (as the tale is untrue) and lost money, depending upon which version of history you want to believe. To finance the trade, Nathan Meyer utilised OPM. He had been elected fiduciary of Prince William's fortune. This should have been invested in gilts, but instead was used to back the Rothschilds' speculation.

But the Rothschilds were far from the only banking family to sprout up in the era. Constant European conflict provided repeated demand for sovereign capital. For example, 1715 and 1745 (eerily familiar dates) saw domestic invasion of Britain by the Old Pretender and Bonnie Prince Charlie.

Some useful lessons can be learned from the Goldsmid banking family. Led by Benjamin and Abraham Goldsmid, they were essentially on the other side of the Rothschilds' famous trade.

According to historian Derek Taylor, the Goldsmids got their start as London bill brokers to provincial banks. They moved into forex and loan raising, and eventually received an appointment as the Government's preferred banker alongside Baring Brothers. The Goldsmids were granted British preference by breaking a City cartel. The Government had historically raised funds on the back of gold reserves, but towards the end of the 1700s reserves had dwindled and brokers were demanding high discounts on underwritings. By fully extending their resources and forgoing substantial discounts, the Goldsmids broke the cartel.

Leadership of domestic financing led the Goldsmids to capital raisings for British supported activities in Russia, Prussia, Austria, and Hanover. The Goldsmids, not wanting to loose their preferred status, continued to back operations to the hilt.

 Sadly, the strain from it all led to the suicide of Benjamin Goldsmid inv1808. Abraham Goldsmid continued operations, but in 1810 was caught with £800,000 of an unsaleable new issue, at which point the bond market dropped heavily in value. Abraham continued to back the deteriorating position, to great cost. He eventually committed suicide as well. The tragedy came only a few years from the nadir of the bond market and the Rothschilds' huge coup.

We might draw some useful lessons from the comparison:

1. If you accrue a fortune by repeatedly backing an attractive risk, at some point, stop doing that and diversify.

2. If you're leveraged in a position that's breaking down and could take you under, get out no matter what the emotional or reputational cost.

3. Make sure you have sufficient reserves to survive the nadir of the market in order to prospect in the rebound.

4. If it all blows up, dust yourself off and try again. People hated you for your success on the way up and hated themselves for their schadenfreude on the way down. Either way, suicide is not the answer!

John Tierney, the President of the Old Speculator's Club, writes in:

It seems there are several other useful lessons here. First, bankers with "skin in the game" will tend to be far more scrupulous in their lending practices than those utilizing other people's savings and backed by government deposit insurance. Second, shame and disgrace, once as fundamental to business as honesty and integrity, has been supplanted by bailouts and reinstatement.

Richard Owen replies: 

I dig that people want to see bank CEOs disgraced, so these are great points.

I away wonder though, given there is a banking crisis approximately every decade, and without central bank support, e.g., in the 19th century, thousands of banks went poof every crisis, the only logical conclusion would be that no rational individual should become the CEO of a massively leveraged carry trade, as is will automatically lead to disgrace at some point. Nature is pretty smart for solving solvable problems by iteration, it has failed to do so for banking so far. Which gives pause for thought. [*Pulls out narrow banking manual*]. The only banks that seems to survive century to century are places like Moses Mocatta, which don't run a real balance sheet.


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