windowthroughtime

A wry view of life for the world-weary

Double Your Money – Part Seven

1-overend-gurney-and-company

Overend, Gurney and Company

Sticking to you knitting is a wise adage, particularly in the financial world. Companies that have made a tidy business in a certain niche venture into pastures new at their peril. I worked for a company that was successful in its own way in a fairly limited sector but steady as she goes was too boring for the new Chief Executive. He moved the company into new, exciting areas but, inevitably, he managed to bring the whole company down.

Students of financial history will nod sagely and recall the story of Overend, Gurney and Company which for a while in the first half of the 19th century made a tidy business in the arcane world of bill discounting, where bills of exchange are traded prior to their maturity date at a value less than the par value of the bill. Thomas Richardson, a clerk to a London bill-discounter, spotted that whilst merchant banks engaged in bill discounting as an adjunct to their main business, there was room in the London market for a company that specialised in buying and selling bills of exchange at a discount.

Teaming up with John Overend and deploying capital supplied by Gurney’s Bank, the firm was formed in 1800. Samuel Gurney joined the firm in 1807 and took over in 1809. The company expanded rapidly, soon having a turnover twice that of all its other competitors combined, and was regarded as the greatest discounting-house in the world. During the financial crisis of 1825 it was able to make short-term loan to other banks, earning it the sobriquet, the bankers’ bank.

When Samuel Gurney died in 1856, instead of concentrating on what they did best the directors launched a new initiative, chasing attractive long-term investments like railway stock, plantations in Dominica and shipping lines that didn’t win any business. Three of their investments lost the staggering sum of £5.2m alone. Walter Bagehot commented, “one would think a child, who had lent money in the City of London would have lent it better”.

Their principal business required a high degree of liquidity and as the results of imprudent investment s came home, the balance sheet showed liabilities of £4 million and assets of £1 million. The business was incorporated as a limited company in July 1865 and taking advantage of a buoyant stock market the directors sold shares of £50 for a deposit of £15.

overendshares

Timing is everything and the bank’s timing was unfortunate. There was a rapid collapse in stock and bond prices, commercial credit was tightened and Overend Gurney and Company had no option but to go cap in hand to the bank of England. Central bankers were more hard-hearted in those days than they are now and refused to bail out the bank, causing it to suspend payments on 10th May 1866 and the shareholders were required to pay the balance of £35 on their shares to a company that was effectively bankrupt and had no prospect of generating profits.

Indeed, the bank went into liquidation in June 1866 precipitating a financial crisis which saw the bank rate rise to 10% for three months and driving many firms and other banks to the wall. Many of the Gurney clan lost their fortunes but the Gurney bank, a separate legal entity, escaped pretty much unscathed . Angry shareholder sought to bring the six directors of Overend Gurney and Company to account for fraudulent misrepresentations in their share prospectus. At their trial at the Old Bailey the judge, Lord Chief Justice Sir Alexander Cockburn, pontificated that they had been guilty of a “grave error” but not criminal behaviour and the jury acquitted them.

Karl Marx viewed the bank as the epitome of all that was wrong with capitalism.

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