Crises and opportunities the shaping of modern finance

CRISES AND OPPORTUNITIES This page intentionally left blank Crises and Opportunities The Shaping of Modern Finance YOUSSEF CASSIS Great Clarendon Street, Oxford ox2 6dp Oxford University Press is a department of the University of Oxford It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide in Oxford New York Auckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto With offices in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland Thailand Turkey Ukraine Vietnam Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries Published in the United States by Oxford University Press Inc., New York # Banque Pasche, SA 2011 The moral rights of the author have been asserted Database right Oxford University Press (maker) First published 2011 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, or under terms agreed with the appropriate reprographics rights organization Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this book in any other binding or cover and you must impose the same condition on any acquirer British Library Cataloguing in Publication Data Data available Library of Congress Cataloging in Publication Data Data available Typeset by SPI Publisher Services, Pondicherry, India Printed in Great Britain on acid-free paper by MPG Books Group, Bodmin and King’s Lynn ISBN 978–0–19–960086–1 10 Contents Foreword Preface Introduction Pre-War Crises Post-War Crises Banks Governance Regulation International Cooperation Balance of Power Conclusion Notes Index vii xv 31 53 70 88 113 131 150 159 191 This page intentionally left blank Foreword One hundred and twenty-five years of history can seem like both a short and a long time Short when you consider that the history of private banking can be traced back almost four hundred years Long when you consider that the Pasche group has successfully lived through eight major global financial crises, astutely examined in the pages of this book by Youssef Cassis, Professor and Director of the Department of Economic History at the University of Geneva Despite some upheavals in its time, the firm has nevertheless managed to draw strength from some of these financial crises Now, on the strength of its tightly knit global network and its business model founded on international private banking, the Geneva-based bank is enjoying a period of rapid expansion, with excellent prospects of long-term, sustainable growth in the years to come The Pasche group has experienced three major phases in its history These stages are referred to as ‘origins’, ‘transformation’, and ‘expansion’ in what follows; each of these cycles is specific to the international financial situation of the time ORIGINS It all started back in 1885 with the foundation of ‘Messieurs Girard Roux & Cie’, a foreign-exchange office in Geneva At the time, the world of finance was about to experience its first-ever truly ‘global’ crisis as a result of countries defaulting on sovereign debt, in Argentina and Uruguay in particular Despite this period of international financial instability, the first solid foundations of the group had been laid in Geneva But it did not yet have the title or go by the name that makes the Banque Pasche group what it is today These were to come fifty years later with the arrival on the scene of Geneva banker and former representative of Lombard Odier: Albert Pasche Upon his appointment as an associate of the company in 1935, the new institution first changed its name to ‘Girard Pasche & Cie’, before opting for the more elegant ‘Messieurs Pasche & Cie, agents de change’ As the last part of the name would indicate, the company also offered its management skills as brokers and foreign-exchange agents Very rapidly, it earned itself a good reputation on the more promising markets of the time, such as those in South America and Russia, by offering its clients shares in bond debt This viii Foreword phase of growth came to an end in 1957 with a last change of status, which transformed the institution into a joint stock company It was at this time that the firm started to consolidate its activities from its base in Switzerland It was also as a result of this most recent transformation that Prince Louis Napoléon (a descendant of Jérôme Bonaparte, the King of Westphalia and youngest brother of Napoléon Bonaparte), Lyonnaise de Banque, and the Italian group Banca Nazionale del Lavoro took a stake in the capital of the new entity Thus, in 1957, the final building block was put to the edifice of what we know today as Banque Pasche At the time, the group had all the necessary skills at its disposal to begin to establish itself in the field that has now come to be known as international private banking TRANSFORMATION In 1981, when the Left won the elections in France, Prince Louis Napoléon, sensing that nationalization was on the horizon, sold his stake in the bank to CIC Lyonnaise de Banque Frightened by this prospect, the French clients who had sought a safe haven in Switzerland were handed over to another private bank in Geneva Moreover, this fear proved to be well founded as CIC was nationalized by the French government the following year Despite intimations of a possible privatization by Jacques Chirac (French Prime Minister from 1986 to 1988) several years later, these clients were never to return to the group In 1988, four years after the death of Albert Pasche, CIC used its new-found freedom resulting from partial privatization to acquire the entire stake held by Banca Nazionale del Lavoro As a result, it became the majority shareholder in Banque Pasche It was only later, after several changes in ownership in 1994, that CIC handed over control of the bank, in two phases, to a number of its management staff, itself retaining only a per cent share in the capital EXPANSION When CIC reassumed control of Banque Pasche at the end of 1996 (fully privatized this time), the synergies existing between the two entities were clear to see In particular, this gave the group the opportunity to regain a foothold in international asset management Importantly, while the acquisition did require an injection of funds of 75 million francs to be made by CIC, this investment was more than compensated for by the resulting increase in Foreword ix the valuation of Banque Pasche The acquisition thus proved to be a very profitable operation At that time, it is also worth recalling that the core activity of CIC was retail banking, while the activity of Banque Pasche was rooted firmly in private banking CIC’s portfolio consisted mainly of clients from the trade and business sector It was, of course, also serving private customers but essentially with a retail banking profile In contrast, Banque Pasche could boast a loyal international client base, spread over more than seventy countries, and this is where its strength lies today When I joined the bank in 1998, first as Senior Vice-President, before being promoted to the position of President and CEO of the Banque Pasche group in 2000, I embarked upon a programme of sustained expansion with the full support of the shareholders and my teams We started to deploy a business model, the relevance of which continues to be seen today This was to mark the start of a period of regular and powerful growth, based on a perfect synergy with our parent company, which has always been exemplary in its support for our ambitious project to embody a bold, new, more straightforward, and transparent vision of private banking Today, this desire to extend its activities to all four corners of the globe is something that is clearly at the heart of the group’s approach Starting in 1998 with the inauguration of an office in Monaco, Banque Pasche went on to establish a presence in Nassau the following year Development beyond the confines of the Geneva marketplace soon put new financial resources at the group’s disposal It was only once this period of drastic restructuring was complete in 2000 that we could allow ourselves to focus on a strategy of external growth, in Europe in particular We can now safely say that this strategy was the right one But it took a few years to turn the vision into reality So, in 2005, with Banque Pasche reaping the rewards of its successful, organic growth, the decision was taken to build on that base by making external acquisitions further to accelerate its development This led to the acquisition of Swissfirst Bank in Zurich in 2007 Why did we specifically choose that institution? Quite simply because it has a very well-diversified client base, one that is essentially onshore and that we can deploy on the trading market The fusion of the two banks thus proved to be a profitable initiative, the jewel in the crown being the Swissfirst building in Zurich, a veritable architectural masterpiece In the same year, the group completed the acquisition of Agefor Subsequently, the bank also opened a branch office in Montevideo, giving the group excellent access to the asset-management market in Latin America This external growth was not to stop there On the strength of our success, we decided to pursue the policy of external acquisitions further In 2008, our ongoing expansion was underlined by the takeover of the Liechtenstein bank SFL This operation led to an increase in managed assets To some Banque Pasche may have seemed reticent about going ahead with this acquisition 186 Notes See Y Cassis, Capitals of Capital: A History of International Financial Centres, 1780–2005 (Cambridge, 2006); R Roberts (ed.), International Financial Centres, vols (Aldershot, 1994) In 1870, the United Kingdom’s GDP, measured in dollars of 1985, came to $82 billion and that of the United States to $90 billion In 1913, the figures were $184 billion and $472 billion respectively Even in terms of per capita income, while Britain retained a small lead over the United States in 1870 ($2,610 compared with $2,247), this was no longer the case on the eve of the war ($4,024 to $4,854) (A Maddison, Dynamic Forces in Capitalist Development (Oxford, 1991), 6–7, 199) See S B Saul, Studies in British Overseas Trade, 1870–1914 (Liverpool, 1960), and F Crouzet, ‘Commerce extérieur et empire: L’Expérience britannique du libre-échange la Première Guerre mondiale’, Annales ESC, 19/2 (1964), 281–310 United Nations, International Capital Movements during the Interwar Period (New York, 1949); M Simon, ‘The Pattern of New British Portfolio Investment, 1865–1914’, in A R Hall (ed.), The Export of Capital from Britain 1870–1914 (London, 1968) Cassis, Capitals of Capital; D Kynaston, The City of London, ii Golden Age 1890–1914 (London, 1995); R Michie, The City of London: Continuity and Change, 1850–1990 (Basingstoke and London, 1992) See above, Chapter 3, p 60 10 A Plessis, ‘When Paris Dreamt of Competing with the City ’, in Y Cassis and E Bussière (eds.), London and Paris as International Financial Centres in the Twentieth Century (Oxford, 2005) 11 The law of 1896 (Börsengesetz) put in place new supervisory bodies, including a government commissioner, a stock-exchange board, and a tribunal, and considerably limited forward transactions, prohibiting them on securities in mining and manufacturing companies and authorizing them in other sectors on shares only in companies whose capital exceeded 20 million marks (R Gömmel, ‘Entstehung und Entwicklung der Effektenbörse im 19 Jahrhundert bis 1914’, in H Pohl (ed.), Deutsche Börsengeschichte (Frankfurt am Main, 1992), 135–210) 12 See L E Davis and R J Cull, International Capital Markets and American Economic Growth 1820–1914 (Cambridge, 1994) 13 The Banque russo-asiatique (7th), the Russian Bank for Foreign Trade (14th), and the Russian Commercial and Industrial Bank (24th) (Banking Almanac, 1913) 14 R Michie, The Global Securities Market: A History (Oxford, 2006) 15 V I Bovykin and V Anan’ich, ‘The Role of International Factors in the Formation of the Banking System in Russia’, in R Cameron and V I Bovykin (eds.), International Banking 1870–1914 (Oxford, 1991), 157–8; Notes 16 17 18 19 20 21 22 23 24 25 26 27 28 187 R Girault, Emprunts russes et investissements franỗais en Russie, 1887– 1914, (Paris, 1973), 497–503 M.-C Bergère, L’Âge d’or de la bourgeoisie chinoise, 1911–1937 (Paris, 1986), R Brown, ‘Chinese Business and Banking in South-East Asia since 1870’, in G Jones (ed.), Banks as Multinationals (London, 1990) See Cassis, Capitals of Capital, 60–5 See L Einaudi, Money and Politics: European Monetary Unification and the International Gold Standard (1865–1873) (Cambridge, 2001) See K Burk, Morgan Grenfell 1838–1988: The Biography of a Merchant Bank (Oxford, 1989), 111–23; Kynaston, City of London, ii 222 See W L Silber, When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America’s Monetary Supremacy (Princeton, 2007) Quoted in Silber, When Washington Shut Down Wall Street, 160 C Feinstein and K Watson, ‘Private International Capital Flows in Europe in the Inter-War Period’, in C Feinstein (ed.), Banking, Currency and Finance in Europe between the Wars (Oxford, 1995), 98 H Wixforth, ‘German Banks and their Business Strategies in the Weimar Republic: New Findings and Preliminary Results’, in M Kasuya (ed.), Coping with Crisis: International Financial Institutions in the Interwar Period (Oxford, 2003), 138 M Myers, Paris as a Financial Centre (London, 1936); E Moreau, Souvenirs d’un gouverneur de la Banque de France: Histoire de la stabilisation du franc (1926–1928) (Paris, 1954); K Mouré, Managing the Franc Poincaré: Economic Understanding and Political Constraints in French Monetary Policy, 1928–1936 (Cambridge, 1991) See Cassis, Capitals of Capital, 154–67 The foreign issues floated in New York and London amounted to $969 million and $592 million respectively in 1924, to $1,337 million and $676 million in 1927, and to $671 million and $457 million in 1929 (K Burk, ‘Money and Power: The Shift from Great Britain to the United States’, in Y Cassis (ed.), Finance and Financiers in European History, 1880–1960 (Cambridge, 1992), 364) See M Wilkins, ‘Cosmopolitan Finance in the 1920s: New York’s Emergence as an International Financial Centre’, in R Sylla, R Tilly, and G Tortella (eds.), The State, the Financial System and Economic Modernization (Cambridge, 1999) The sterling area was made up of a certain number of economies with political and/or economic ties to Britain whose governments decided to maintain a fixed exchange rate with the pound, even at the cost of exchange control At the outset, it comprised the Commonwealth countries (except for Canada), which were joined in 1933 by the Scandinavian countries and Siam, as well as by associate members such as 188 29 30 31 32 33 34 35 36 37 38 39 40 41 Notes Argentina, Bolivia, Greece, Japan, and Yugoslavia The sterling zone also constituted a trade block after Britain’s changeover to protectionism at the end of 1931 and the adoption of a preferential imperial tariff in 1932 Imperial issues represented 17% of the total amount of issues placed in London between 1932 and 1938, as against 3% for the foreign loans outside the empire (£28.5 million) (T Balogh, Studies in Financial Organization (Cambridge, 1947), 250) Some $5.5 billion worth of short-term capital was transferred to the United States between 1934 and 1937; around $4 billion to the United Kingdom between 1931 and 1937; and respectively $340 million and $290 million to Switzerland and the Netherlands (C Feinstein and K Watson, ‘Private International Capital Flows in Europe in the Interwar Period’ in C Feinstein (ed.), Banking, Currency and Finance in Europe between the Wars (Oxford, 1995), 116–18) Figures from A Maddison, Dynamic Forces in Capitalist Development: A Long-Run Comparative View (Oxford, 1991), 198–9 See, in particular, M J Hogan, The Marshall Plan: America, Britain, and the reconstruction of Western Europe, 1947–1952 (Cambridge, 1987); R Girault and M Lévy-Leboyer (ed.), Le Plan Marshall et le relèvement économique de l’Europe (Paris, 1993) M Nadler, S Heller, and S Shipman, ‘New York as an International Financial Center’, in The Money Market and Its Institutions (New York, 1955), 290–1; R Orsingher, Les Banques dans le monde (Paris, 1964), 140–1 International issues amounted to $1,064 million in London and $882 million in Zurich between 1955 and 1962, as against $4,171 in New York (J Mensbrugghe, ‘Foreign Issues in Europe’, International Monetary Fund Staff Papers, 11 (1964), 327–35) Nadler et al., ‘New York as an International Financial Center’, 294–5; Cassis, Capitals of Capital, 205–8 See Cassis, Capitals of Capital, 209–13; D Kynaston, The City of London, iv A Club No More 1945–2000 (London, 2001); R Michie, The City of London: Continuity and Change, 1850–1990 (Basingstoke and London, 1992); C Schenk, The Decline of Sterling: Managing the Retreat of an International Currency 1945–1992 (Cambridge, 2010) See J Jonker, Merchants, Bankers, Middlemen: The Amsterdam Money Market during the First Half of the 19th Century (Amsterdam, 1996) Figures from Maddison, Dynamic Forces in Capitalist Development, 6–7 P Bairoch, Victoires et déboires: Histoire économique et sociale du monde du XVIe siècle nos jours, vols (Paris, 1997), iii 414–18 Bairoch, Victoires et déboires, iii 420–1; G Jones, The Evolution of International Business: An Introduction (London, 1996), 46–58 The Banker (June 1971, June 1981) Notes 189 42 C Schenk, ‘The Origins of the Eurodollar Market in London, 1955– 1963’, Explorations in Economic History, 35/2 (1998), 221–38 43 Regulation Q limited the interest rates paid on bank deposits within the United States British banks, which were able to offer higher interest, particularly because of the high interest rates prevailing at the time in Britain, managed to attract funds to London, mainly from American multinationals present abroad, which they could then use in various national and international operations The Interest Equalization Tax was a tax on foreign loans issued in the United States This measure, intended to curb the export of American capital, increased the cost of foreign bond issues in the United States and made that of Eurobonds even more attractive 44 The issue of Eurobonds increased from $258 million in 1963 to $6,490 million in 1972 and $136,543 million in 1985; that of foreign bonds from $1,804 million, $4,357 million, and $31,229 million during the same period (OEEC, International Capital Markets Statistics, 1950–1995 (Paris, 1996)) 45 M Baker and M Collins, ‘London as an International Banking Centre, 1950–1980’, in Cassis and Bussière (eds.), London and Paris as International Financial Centres, 248–53; the gap narrowed in the following years, with 328 foreign banks in London and 234 in New York in 1979 46 Consortium banks were institutions set up by groups of banks of different nationalities within the framework of strategic alliances The Orion Bank, founded in 1970 (Chase Manhattan Bank, the National Westminster Bank, the Royal Bank of Canada, the Westdeutsche Landesbank Gironzentrale, the Credito Italiano, and the Mitsubishi Bank were its main shareholders), became the most important among them Most disappeared in the 1980s, victims of their parent companies’ diverging goals; see R Roberts, Take your Partners: Orion, the Consortium Banks and the Transformation of the Euromarkets (Basingstoke, 2001) 47 Figures from Maddison, Dynamic Forces in Capitalist Development, 198–9 48 S Eken, ‘Integration of Domestic and International Financial Markets: The Japanese Experience’, International Monetary Fund Staff Papers, 33/3 (1984), 501–3 49 K M Dominguez, ‘The Role of the Yen’, in M Feldstein (ed.), International Capital Flows (Chicago, 1999), 145 50 See K Burk, ‘Money and Power: The Shift from Great Britain to the United States’, in Y Cassis (ed.), Finance and Financiers in European History, 1880–1960 (Cambridge, 1992), 359–69 51 See D R Lessard, ‘Singapore as an International Financial Centre’ in R Roberts (ed.), Offshore Financial Centres (Aldershot, 1994), 200–35 190 Notes 52 These measures included abolishing the 40% withholding tax on income from investments by non-residents in 1968, the 20% liquidity ratio imposed on Asian currency units in 1972, which brought them into line with current practice on the European Eurocurrency markets, and, more generally, the controlled opening-up of borders to foreign banks and financial institutions 53 The first issue of Asian dollar bonds took place in Singapore in 1971— $10 million on behalf of the Development Bank of Singapore, a publicly owned bank—followed in 1972 by an issue for $100 million on behalf of the Republic of Singapore 54 Lessard, ‘Singapore as an International Financial Centre’ 55 Y S Park, ‘A Comparison of Hong Kong and Singapore as Asian Financial Centres’, in P D Grub et al (eds.), East Asia Dimension of International Business (Sydney, 1982), 21–8 56 Y C Jao, ‘Hong Kong as an International Financial Centre: Evolution and Prospects’, in The Asian NIEs: Success and Challenge (Hong Kong, 1983), 39–82; R Roberts, Inside International Finance (London, 1998) 57 See Roberts, Inside International Finance; Cassis, Capitals of Capital 58 M Obstfeld and A M Taylor, Global Capital Markets: Integration, Crisis and Growth (Cambridge, 2004), 53 59 Financial Times 60 World Bank, World Development Indicators (various years) 61 See N Ferguson and M Schularick, ‘The End of Chimerica’, Harvard Business School Working Paper 10-037 (2009) 62 For a discussion of this challenge, see M Wolf, Fixing Global Finance (New Haven and London, 2009) Index Abu Dhabi Investment Authority 147 accepting business 83, 134 Ackerman, Josef 173 Agefor ix agency problem 82 AIG 50, 169 Akzept-und Garantiebank 26 Aldrich, Nelson W 91, 179 Aldrich, Winthorp 82 Alleghany Corporation 74 Alternative Gestion x American Panic 1907 4, 5, 8, 13–17, 114, 136 effect on banks 58, 59 institutional changes 72, 90–1, 105, 126, 154 Amsterdam 17, 146 Anan’ich, V 186 Angell, Norman 18, 19 Aozora Bank 56 Ardant, Henri 62 Argentina vii, 24, 48 Baring Crisis 9, 10, 12, 55, 90, 96, 98 debt default 39, 40, 94 depression 178 IMF loans 125 Argentine Funding Arrangement 178 Asia 135 Asian crisis 45, 128 Asian dollar bonds 190 Asian dollar market 145 Asset-Backed Securities (ABS) 103 asset-price bubble 43 assets, toxic 50 Association Nationale des Porteurs Franỗais de Valeurs Mobiliốres 11 Australia 24, 98, 145 Austria 19, 25, 38, 44, 116, 119 Austrian National Bank 25 Autostrade Italiane 37 Bagehot, Walter 5, 159 Baker, George 16, 80 Baker, James 127 balance of power 131–149, 157–8 Banco Ambrosiano 94 Bank of America 50, 67, 68, 132, 141, 172 Bank of China 147 Bank of Credit and Commerce International (BCCI) 31, 129 Bank of England 16, 17, 34, 35, 63, 83, 110, 160 Baring Crisis 9, 12, 54–5 gold reserves 114 international cooperation 114, 115–17 lender of last resort lifeboat 36, 76, 123 nationalized 108, 170 pre-WWI 20, 21, 72 Bank of France 76, 109, 117, 119, 120 see also Banque de France bank holidays 29, 55, 57, 120 Bank for International Settlements (BIS) 33, 95, 101, 119, 122, 124, 125, 130, 184 Bank of Japan 43, 45–6, 48–9, 77, 112, 143 Bank of London and South America (BOLSA) 38 Bank of Manhattan 63, 132 Bank One 64 Bank of Tokyo 64 Bank of Tokyo Mitsubishi (BTM) 64 Bank of United States 24, 57 bankers bonuses 78, 81–2, 87, 130, 177 cosmopolitan 85–6 income 81 Jewish 62, 75, 85, 86, 151, 172 malpractice 77 remuneration 156–7 salaried 80, 81 wealth of 83 Bankers Trust International 38 Bankers Trust 63, 67 Bankhaus Herstatt 93 banking crises xii, 3, 14, 33 Germany 152 secondary 28–9, 33–5, 76, 123, 125 US 24 192 Index banking relationship 44 banks bailout 54–56, 58, 126, 129, 150 branch 106 capital requirements 173 central 5, 49, 110, 113–21 chain 14 clearing 132 commercial 68, 132 complex management 86 consolidation 59–64 consortium 189 credit 132 internationalization 41, 156 investment 5, 15, 61, 81–4, 132 joint stock 54, 79, 80, 176 long-term credit 56 losses 68 main 43 malpractice 73 managerial enterprises 79 merchant 19–20, 79, 83–4, 132, 171 nationalized 50, 170 nature and role 71 ownership and control 79–85, 156 performance 65–9 private 57, 79–80, 82, 83, 171, 176 profits 173 savings 181 secondary 33, 36, 58, 76, 123, 125 separation of investment and commercial 54, 153, 154 size and presence 132; mediumsized 170; small 57–8, 59; too big to fail 54–9, 156 universal 84, 107–8, 132, 154 see also financial elites Banque de France 21, 30, 57, 100, 154 see also Bank of France Banque de l’Union Parisienne 30 Banque de Paris et des Pays-Bas 54 Banque Nationale de Crédit (BNC) 29, 66 Banque Nationale pour le Commerce et l’Industrie (BNCI) 30 Banque Pasche x–xi business model viii–x expansion viii–x origins vii–viii transformation viii vision for the future xi–xiii Barclays Bank 61, 63, 66, 82, 171, 177 Baring, Thomas Charles 71, 170 Baring Brothers & Co 9–10, 12–13, 79, 81, 83, 84, 91, 96, 129, 132, 160 Baring Crisis 1890 xii, 4, 9–13, 52, 59–60, 95, 97, 113, 135, 154 bank bailout 54–5 and bank governance 71, 79 and regulation 105 responsibility for 71, 89–90 Baring, Edward, Lord Revelstoke 54, 71 Barney, Charles 15, 72 Basle Accords 47 Basle Agreements 110, 127 Basle Committee 124, 128, 130 Bear Stearns 49, 65 Belgium 54, 108, 115, 116, 134, 136, 153 Berlin 21 Berliner Handels-Gesellschaft 56 Bernanke, Ben 92, 179 bill market 19 Black, Fisher 102 Blankfein, Lloyd C 78, 175 BNP Paribas 48, 65 Boden-Credit-Anstalt 25 Boer War 136 Bombay 135 bonuses 78, 81–2, 86, 130, 177 Brady, Nicholas 127 Brazil x, 39, 94, 125 Bretton Woods system 31, 32, 48, 125, 126, 139, 153 end of 140–4, 153 established 121–2, 165, 184 BRICS 131, 148, 185 Britain 5, 24, 31, 32, 33, 50, 59–61, 183 1844 Bank Act 20 banks: clearing 19; mergers 63; regulation 108; performance 66; secondary 58, 76 bankers: responsibility 70–1, 76; wealth 80–1 Banking Acts 110 Company Act 100 currency 27–8, 92, 120 economic and financial power 133–4, 146 financial innovation 97–8 foreign direct investment 141 GDP 186 gold reserves 154 gold standard 116; return to 183; suspended 20, 28, 120 government of national unit 27 Index post WWI 137–8 Select Committee on Loans to Foreign States 90 sterling crisis 120 Treasury 21, 63, 108 British Empire 138 brokers 182 Brown, Gordon 130 Brüning, Heinrich 25, 75, 164 Buenos Aires Water Supply and Drainage company 12 Buffett, Warren 51 Bundesbank 110, 111, 123 Calcutta 135 Caldwell & Co 24 Canada 90 capital adequacy 129 exports 98 international flows 32 oversupply 51, 151 ratios 68 requirements 94, 173 short-term 138–9, 188 Capital and Credit Control 34 capitalism, types of Cedar Holdings 34 Celman, Júarez 11 central banks 49, 110 international cooperation 113–121 Central Hanover Bank 63, 67, 132 chain-banking 14 Charles, Prince of Wales 78 Chase Manhattan Bank 64, 67, 141, 172 Chase National Bank 61, 63, 66, 73, 74, 82, 132 Chase Securities Corporation 73 Chemical Bank 36, 64 Chicago 146 Chicago Board Options Exchange 102 Chicago Board of Trade 102 Chicago Mercantile Exchange 102 Chile 17 China x, 51, 136, 145 economic rise 146, 147 GDP 148 China Construction Bank 147 China Investment Corporation 147 Chirac, Jacques viii CIC Lyonnaise de Banque viii 193 Citibank 38, 67, 86, 132 Citicorp 41, 64 Citigroup 49, 50, 64, 68, 78, 146 City of London 17 bankers remuneration 80–1, 82, 86 Big Bang 111 international role 14, 36, 79–80, 90, 100–1, 132, 134, 135, 146, 157 City of New York 16 Collateralized Debt Obligations (CDO) 103 Commerz-und-Privat Bank (ComprioBank) 61 Commerzbank 50, 55, 75 Common Market 121 Compagnie des Agents de Change 21 Continental Illinois 31, 67, 94 convertibility see gold standard convoy system 43 Copenhagen 17 corporate governance 70–87, 174, 176 Corporation of Foreign Bondholders 11 Cortelyou, G 16 credit availability 104 credit crunch 47 Credit Default Swaps (CDS) 103, 104 Crédit Lyonnais 5, 31, 54, 60, 61, 66, 132 Crédit Suisse 54 credit unions 45 Credit-Anstalt 25, 119, 184 credit-rating authorities 151 crises anatomy of currency 26–8 definition 3–4 ‘never-again’ feeling 89, 96, 104, 106, 112 and regulation 88 warnings of 99 see also banking crises; financial crises currency crisis 26–8 devaluation 32 reserves 122, 133, 141 stabilization 121 see also dollars; gold standard Dai-Ichi Kangyo Bank 64 Daladier, Édouard 75, 175 194 Index Darmstädter und National Bank (Danat) 25, 27, 55, 61 de Larosière, Jacques 125 De-Di Bank 164 debt default 93–4, 97, 125, 152 excessive accumulation fatigue 127 swaps 103, 104, 122, 127, 180 Third World xii, 38 US 147 see also loans demergers 53, 65 Deng, Xiaoping 146 Deposit Insurance Corporation of Japan (DIC) 77 deregulation 47, 111–12, 151, 155, 157 derivatives 51, 102–3, 104, 151 Deutsche Bank 54, 55, 60, 66, 75, 132, 170, 171 Deutsche Bundesbank 40 Dillon, Clarence 73 Dillon Read & Co 73, 84, 132, 177 Dimon, James 78, 175 Disconto-Gesellschaft 55 discount houses 19 dollars Asian 144–5 convertible 139 glut of 122 held by China 147 petrodollars xii, 38 reserve currency 120 dot-com bubble 48 Dow Jones index 49, 68, 168 Dresdner Bank 26, 27, 55, 75, 132, 164 Dubai x East Asia 48, 95 economic power 132–3 economic profession 95 efficiency versus stability 89 Eichengreen, Barry 23 Elizabeth II 96 Emminger, Otmar 40 Equitable Trust 61 Eurobonds 37, 38, 142, 166, 189 Eurocredits 100, 142, 145 Eurocurrency 36, 37, 93, 100, 168, 190 Eurodollars 32–3, 35, 37, 38, 101, 123, 144 Euromarkets 93, 97, 100–1, 124, 151 European American Bank and Trust Company 36 European Central Bank 48 European Coal and Steel Community (ECSC) 121 European GDP 141 European Union 129, 130 Eurozone 129 exchange controls 32 exchange rates 32, 143, 184 Fannie Mae 50 Farrer, G 19 Federal Deposit Insurance Corporation 35 Federal Reserve 38, 48–9, 92, 169 bank bailouts 35, 50 control on foreign-exchange trading 109 interest rate rise 28, 40 international cooperation 117, 118, 121, 123, 140 restrictive policy 24 Federal Reserve Board 105–6, 125 Federal Reserve System, created 13, 92, 105, 154 Finaly, Horace 17 Financial Action Task Force (FATF) 128 financial architecture financial crises perception of 89–96 types of Financial Crisis 1914 4, 8, 9, 18–22, 56, 61, 91, 152, 154 Financial Debacle 2007–8 1–2, 3, 4, 31, 47–52, 53, 147–8, 155 bank performance 66 bankers, responsibility 77–8 causes 101–2, 150–1 consolidation 64 international organizations 129, 130 perception of 95, 96 rescue costs 58–9 financial elites 85–7 see also bankers financial innovation 47, 51, 96–104, 151, 157 Financial Instability 1970s 4, 31, 32–6, 58, 97 bank consolidation 59–61, 63 banks’ performance 66, 67 Index international regulation 124 mergers 63 and regulation 109 financial power 130–3 financial sector growth of 47–8, 150 and politics 92, 154 Financial Stability Board (FSB) 130 Financial Stability Forum (FSF) 128–9 Finland 31 First Chicago 67 First National Bank 16, 63 First National Bank of New York 80 First National City Bank 35–6, 38, 172 First National Finance Corporation 34, 36 Foreign and Colonial Government Trust 97 foreign direct investment 141, 161 foreign issues 187 foreign loans 83, 133 foreign-exchange transactions 168 Fortis 65 Founders’ Group 99 France 11, 24, 27, 31, 32, 48, 54, 146, 153, 154 bankers’ responsibility 75 banks: consolidation 60, 62; performance 66; private 57 banking crisis 29 currency 21, 116, 137, 148 deregulation 111 doctrine Henri Germain finance minister 114 financial power 132, 133 haute banque 76, 80, 85 ownership and control 32, 80 regulation 100, 108, 109 scandals 92 state control 109 Frankfurt 146, 149 Franklin National Bank 35–6, 67, 76, 93, 123 Franz Ferdinand, Archduke of Austria 19 Freddie Mac 50 FTSE 100 Index 49, 68, 168 Fuji Bank 64 Fukuda, Kazuniro 77 futures 102 G7 128, 129 G8 131 195 G10 127, 128 G20 113, 130, 131 Galbraith, J K 2, 99 GATT 121 Geithner, Tim 181 general arrangement to borrow 122 General Motors 23 Geneva 146 Genoa Conference 115 Germain, H Germany 23, 24, 27, 31, 33, 44, 50, 54, 57, 60, 67, 100 Bank Enquête 75 bankers: responsibility 74; wealth 81 banking crisis 26, 55, 152 banks: consolidation 60, 61–2; performance 66; universal 107 convertibility suspended 21 deregulation 111 domestic issues 143 economic and financial power 132, 146, 194 Federal Banking Supervisory Office (BAKred) 76 Federal Supervisory Office 110 financial power 134 foreign exchange 110 hyperinflation 137 international cooperation 119–120 Nuremberg Laws 172 ownership and control 80 reparations 92, 117, 137 reserves 137 Giscard d’Estaing, Valéry 129 globalization first 8, 133–6 second 32, 37, 150 see also internationalization Glyn, Mills, Currie & co 12, 160 gold pool 122 gold reserves 90, 114 gold standard 23, 152, 154 restored 92, 126 suspended 20–1, 28, 116, 122, 141 United States 114, 116, 118, 136 Goldman Sachs 50, 68, 78, 84, 132 Goldman Sachs Trading Corporation 99 Goodenough, Frederick 82, 214 Great Depression 1930s xii, 4, 8, 9, 22–30, 52, 82, 151–14, 155, 156, 157 bankers’ responsibility 73–4 196 Index Great Depression 1930s (cont.) banks: ownership 83; performance 66–67; small 57, 59–60, 62 effect on balance of power 138 international cooperation 118, 119–20 perception of 89, 92–3 and regulation 106–7, 108–9 Great Recession 22, 23, 96 Greed 151 growth, stable 32–3 guarantee fund 12 Guarantee Trust 61, 63, 67 Hale & Co 12 Hambros Bank 34, 81, 83, 84 Hamburg 17, 146 Harrison, George 120 HBOS 50, 65 hedge funds xi, 101, 102, 104 Heinze, F Augustus 14, 15, 72 Herstatt, Iwan 36 Herstatt Bank 76, 123 Hokkaido Takushoku Bank 45–6, 56, 77 Holden, Edward 80, 91 Hong Kong 132, 135, 145, 146 Hoover, Herbert 28 Hottinguer & Co 55 HSBC 68, 146 Hungary 116 hyperinflation 26, 116 I D Herstatt 35, 36, 37 India x Industrial Bank of Japan 64 Industrial and Commercial Bank of China 147 industrial output 23 industrial revolution 156 inflation 37, 143 insurance 155 inter-bank lending market 48 interest rates LIBOR 166 low 51 rise 40, 44 International Association of Insurance Supervisors (IAIS) 128 international cooperation 113–21 International Debt Crisis 1982 xii, 4, 32, 37–41, 52, 56, 70, 97, 141, 152 bank performance 65–6, 67–8 criticism of bankers 76–7 international organizations 126, 128 perception of 94, 95 and regulation 105 International Financial Conference 115 International Monetary Fund (IMF) 38, 40, 68, 95, 121, 125, 129, 165 adjustment programmes 40, 94, 125, 126–7 increased resources 130 Special Drawing Rights (SDR) 122 International Monetary Market 102 International Organization of Securities Commission (IOSCO) 128 international organizations 120–130 internationalization 93, 95 see also globalization Investment Bankers Association of America 100 issues foreign 187 imperial 188 international 188 issuing business 79, 83 Italy 108, 136, 153 J P Morgan & Co 63, 64, 73, 78, 79, 84, 107, 132, 136 J P Morgan Chase 49, 65, 68 Jackson, Frederick Huth 18–9 Japan 33, 58, 136, 146, 147 bankers’ responsibility 78 banking crisis 56 Big Bang 111 economic power 142, 143–4 foreign direct investment 141 GDP 141 keiretsu 42 long-term credit banks 42 mega-mergers 63 Ministry of Finance 95, 143 Japanese Banking Crisis 1997–8 4, 5, 32, 42–7, 59, 64, 94–5, 111–12, 129, 144, 155 jobbers 182 Kahn, Albert 73 Kamoshida, Takayuki 77 Kawatani, Sadamasa 77 Keynes, John Maynard 21, 72, 92, 108, 115, 121 Index Kidder Peabody 83, 132 Kindleberger, Charles 2, 3, 6, 97 Kleinworts 79, 83 Knickerbocker Trust Company 16, 58, 72 Kroszner, R S 182 Kuhn Loeb & Co 73, 80, 83, 132 Lamont, Thomas 73 Latin America vii, x, 67 Debt Crisis 94 Latin Monetary Union 136 Lazard Speyer Ellissen 62 League of Nations, Economic and Financial Organization 115, 124 Lee Higginson 83 Lehman Brothers xi, 38, 50, 55, 58, 78, 96, 131, 132 Leichtenstein x Lend-Lease 139 leverage 99, 104, 151 Lex Herstatt 110 LIBOR (London Interbank Overnight Rate) 166 Lidderdale, William 12, 54, 114 Lincoln Trust Company 16, 58 liquid assets rule liquidity bill market 19 central banks increase 49 crisis 56 Lloyd George, David 91 Lloyds Bank 60, 61, 63, 66, 68, 124, 132 Lloyds TSB 65, 170 loans bad 94, 166 non-performing 45, 47, 147 syndicated 40 see also debt London City and Midland Bank 91 London Clearing House 60, 171 London and County Banking Company 54, 161, 169, 171 London and County Securities 34 London Stock Exchange 20, 108 London and Westminster Bank 54, 161, 170, 171 Long-Term Capital Management (LTCM) 31, 103, 105, 129, 180 Long-Term Credit Bank of Japan (LTCB) 46, 56, 77 Luther, Hans 99 Luxembourg 101, 124, 146 197 McAdoo, William 136 McDonald, Ramsay 27, 75 McGarrah, Gates W 118 Mack, John J 175 McKinsey 86 Madoff, Bernie xi Manufacturers Hanover 36, 64 Manufacturers Trust 63, 132 ‘Market Discipline’ 128 Marshall Plan 139 Martins Bank 63 Mercantile National Bank 14, 15 mergers 58, 59–60, 63 Merrill Lynch 49, 84, 170 Merton, Robert 102, 108 Mexico 17, 22, 37, 48 debt swaps 127 default 93, 94, 97, 124, 152 IMF loans 125 suspends debt 39 Midland Bank 60, 61, 66, 80, 132 Minimum Capital Requirements 128 Mitchell, Charles 73, 74, 82 Mitsubishi Bank 64 Mizuho Financial Group 64 Monetary Authority of Singapore 145 monetary stability 116, 121, 148 Moore & Schley 16, 72, 161 moral hazard 53 Moreau, Émile 117 Morgan, Stanley & Co 107 Morgan Grenfell 79, 83, 84, 132 Morgan, Jack 73 Morgan, John Pierpont 16, 58, 72, 81, 91, 114 Morgan Stanley 50, 84, 132 Morse, Sir Jeremy 124 Morse, Charles W 14, 15, 72 mortgage companies 45 mortgage-backed securities (MBS) 48–9, 103 mortgages xii, 151 Moscow 149 Mumbai 149 Murieta, C de & Co 171 N M Rothschild, Sons & Co 13, 54, 160 Nakaso, Hiroshi 45 Napoleon, Prince Louis viii National Bank of Commerce 15 National Citibank 80 198 Index National City Bank 16, 29, 54, 60, 61, 63, 66, 73, 74, 82, 161 National City Company 73 National Credit Corporation 28 National Provincial Bank 54, 61, 63, 169 National Westminster Bank 63, 86, 132 Netherlands 132, 134, 139 New York 132, 138, 146, 149 New York Clearing House 15, 16, 24, 161 New York Stock Exchange 16, 23–4, 25, 73, 100, 118, 136, 140 crash 152, 163 New Zealand 145 Neymarck, Alfred 179 Nikkei Index 43, 44 Nippon Credit Bank 56 Nixon, Richard 141 Nordwolle 27 Norman, Montagu 83, 116, 117, 119 North Pacific Bank 56 Northern Rock 49, 170 Norway 31, 147 Obama, Barak 65, 112, 130 OECD 33 oil shocks 22, 33, 37, 38, 93, 94, 141 Onigi, Katsunobu 77 OPEC 33 options 102 Orion Bank 189 ORIX 56 Ospel, Marcel 78 Otto Heinze & Co 14 Oustric bank 73 Overend, Gurney & Co 5, 159 Palgrave, Inglis 179 Paris 21, 109, 146, 149 partnership model 84 Pasche, Albert vii, viii Pecora, Ferdinand 73 Pellegrini, Carlos 11 petrodollars xii, 38 Philippines 145 Plaza Accord 43 Poincaré, Raymond 137 Poland 116 politics 92, 154 private equity 104 profit-sharing 81 prudential supervision 110 Prussia 136 Public National Bank 63 public opinion 73, 74, 75 Pujo, Arsène 72 RCA (Radio Corporation of America) 23 Reading, B 162 Reagan, Ronald 110 recession 13, 22, 37, 44, 96 Reconstruction Finance corporation 29 Regan, Donald 110 regulation 104–112, 153, 156, 157 debate over 88–9 international 110, 123, 155 self- 151 Reichsbank 21, 26, 27, 55, 57, 75 Reid, M 110 Reinhart, Carmen 3, Reparations Declaration 27 Resolution and Collection Corporation (RCC) 77 responsibility 70–78, 123, 156 Richardson, Gordon 35, 36, 123, 124 Riesser, Jakob 179 Rio de Janeiro x Ripplewood 56 risk 35, 40–1, 51, 52 Rist, Charles 116 Robert Fleming 81 Roca, Julio 10 Rogoff, Kenneth 3, Roosevelt, Franklin Delano 29, 121 Rothschild, Lord 13 Rothschild Committee 90 Rothschild Frères 54 Rothschilds 9–10, 25, 79, 83, 132 Royal Bank of Scotland (RBS) 50, 68, 209 Russia viii, 1, 2, 48, 55, 95, 136 Sakura Bank 64 Sampson, Anthony 41 Samuel Montagu 81 Sanwa Bank 64 Sanyo Securities 45 Sao Paulo x, 149 Schacht, Hjalmar 61, 75, 116 Scholes, Myron 102, 217 Schroders 81, 83, 84, 132, 163 Scottish American Investment Trust 98 securitization 101–4, 151 Security Pacific 67 Index Serbia 19 SFL x Shanghai x, 135, 149 shareholders, institutional 156 Shimizu, Y 167 Shinsei Bank 56 shocks oil 22, 33, 37, 38, 93, 94, 141 types of SIMEX (Singapore International Monetary Exchange) 145 Sindona, Michele 35 Singapore 145, 146 Société Générale 54, 132 Société Générale de Belgique 54 Softbank 56 Soros, George 103 South Korea 145 Spain 31, 127 Sprague, Oliver M 17 stability versus efficiency 89 stagflation 31, 34, 93 Standing Committee on the Eurocurrency Market 101 state intervention 21, 153, 155 Stavisky, Alexandre 175 Stavisky affair 75 sterling area 187 Stillman, John 16, 80 stock exchanges London 20, 108 New York 16, 23, 24, 73, 100, 118, 136, 140 role of 90 Switzerland 21 see also Dow Jones index; FTSE 100 Index; Nikkei Index stock market bubbles 97 structured investment vehicles (SIV) 104 Sumitomo Mitsui Banking Corporation (SMBC) 64 Supervisory Review Process 128 Suzuki, Yoshiharu 77 Sweden 31 Swiss Bank Corporation 177 Swiss National Bank 21, 100, 173 Swiss stock exchanges 21 Swissfirst Bank ix Switzerland viii, 50, 59, 108, 122, 124, 132, 134, 136, 166, 174 Sydney 146 199 Taiwan 145 Tennessee Coal, Iron, and Railroad Company 16, 72 Thailand 145 Thatcher, Margaret 110 Third World xii, 38, 76, 100 Tobin, James 185 Tobin tax 130 Tokai Bank 64 Tokuyo City Bank 45 Tokyo 146, 149 Tokyo Kyodo Bank 168 Tokyo Metropolitan Government 45 Tokyo Stock Exchange 143, 144 Toronto 146 Travelers 64 Treaty of Versailles 115, 183 Troubled Assets Relief Program (TARP) 130 trust companies xii, 15–16, 90, 161 Trust Company of America 16, 58 trusts, investment 97–8 UBS 50, 68, 78, 86 Uehara, Takashi 77 UFJ Bank 64 unemployment 17, 93 Union Bank of Switzerland 166 Union Générale 5, 159 United Copper Company 14 United Nations 121 United States 3, 32, 38, 50, 51, 146 agriculture 114 Aldrich–Vreeland act 90 banks: consolidation 61, 62; performance 66, 67; small banks 57, 58 bankers criticized 73 Banking Acts 106 banking crisis 24–5, 28, 33, 35, 152 bubble 23 Comptroller of the Currency 35, 76 debt 146 Depository Institutions Deregulation and Monetary Control Act 111 domestic issues 143 economic power 157 Emergency Banking Act 29 federal deposit insurance 107, 109, 155 Federal Reserve 92 Financial Crisis Inquiry Commission 78 200 Index United States (cont.) financial innovation 96–97 Financial Modernization Act 111 financial power 133, 134, 139–40 foreign direct investment 141 Garn–St Germain Depository Institutions Act 111 GDP 186 Glass–Steagall Act 64, 111, 153, 154 gold standard 136 International Banking Act 110 International Lending Supervision Act 127 Investment Companies Act 100, 107 investment trusts 98, 99–100 liberalization 111 mergers 63, 64 National Association of Securities Commissions 100 National Banking Act 172 National Monetary Commission 91 New Deal 74, 107 ownership and control 79–80 Pecora Commission 78 pre-1914 148 Pujo Committee 72, 91, 109 Regulation Q 32, 100, 107, 111, 142, 189 Riegle–Neal Interstate Banking and Efficiency Act 64, 111 Securities Exchange Act 107 Securities and Exchange Commission (SEC) 107, 111 Senate Committee on Banking and Currency 73 subprime mortgage market 48, 148 unemployment 17 WWI 135, 137 see also American Panic 1907; Federal Reserve; Wall Street United States and Foreign Securities Corporation 74 United States and International Securities Corporation 74 Uruguay vii, x US Steel Corporation 72 Valeroso x Volcker, Paul 40, 125, 126 Volcker rule 65, 155 Wachovia 65 wages 13 Wall Street 14, 83, 86, 105, 136 crash 13, 22, 93 power 91, 131, 157 Warburg, Sigmund 37 Washington Mutual 65 wealth 81 Wells Fargo 65 Westdeutsche Landesbank 166 Westminster Bank 61, 63, 171 Whitney, Richard 73 Wiggin, Albert 73, 74, 82, 120 World Bank 38, 95, 121 World Monetary and Economic Conference 121–2 World War I 8, 18, 72, 91, 97, 106, 115, 152, 154, 157, 183 balance of power following 139–3 World War II 108, 139, 155, 157 Wriston, Walter 41 Yamaichi Securities 46, 56 Yamauchi, Hiroshi 77 Yokohama 135 Young committee 118 Zurich 146 ... assessment of the risk, and a slowness to react on the part of the authorities So there are some similarities between each of these crises In this history of the trials and tribulations of the world of. .. British and a French affair Yet their significance in the shaping of modern finance should not be overlooked 6 Crises and Opportunities The way financial crises have contributed to the shaping of modern. .. interested mainly in speculative booms and the financial crises they provoked, the panics that followed, and the role of the lender of last resort.3 Moreover, the crises of the late twentieth century have