Books that give thumbnails of interesting characters are always interesting.
Heroes and Villains of Finance does exactly that—provides sketches of the lives and ideas of the 50 chosen characters from the history of finance. While the stories of famous people in finance like Warren Buffett, George Soros, Muhammad Yunus, Bernard Madoff, Charles Ponzi and others are known to many, it’s the other, lesser-known, colourful characters (to the current generation) that make this book interesting. Take a brief look at a few of them.
‘Junk Bond King’ Michael Milken was an American bond trader well-known for his role in the development of the market for high yield bonds. He started work as a bond researcher and was reportedly so dedicated to his work in the first year that he wore a miner’s headlamp while commuting on a bus early in the morning so that he could read company accounts. With his huge knowledge of the bond market and razor-sharp mind, he was the ‘go-to’ man for raising money quickly. On one occasion, he reportedly raised $1 billion for MCI Communications in less than an hour! He is the man responsible for garnering funds for Ted Turner when nobody would fund Turner’s idea of a 24-hour news channel called CNN. At the peak of his career, he was reportedly earning over $500 million per year. However, in a twist of fate, he had to spend 22 months in prison after pleading guilty to charges brought against him for violations of US securities laws. After his release from prison, he added a new dimension to his life by funding medical research. In 2004, Fortune magazine called him ‘The Man Who Changed Medicine’.
When you think of billionaires, what comes to your mind is a flamboyant lifestyle characterised by luxury yachts, villas and glitzy parties. But what if somebody told you that a female tycoon of the Wall Street was a miser? Hetty Green refused to use hot water or heating. When her son broke his leg, she admitted him to a free clinic for the poor! When she developed hernia, she refused to treat it, as its treatment was a pricey $150. She reportedly amassed a fortune of $200 million ($4 billion in terms of current purchasing power). When she died, she left one of the largest inheritance packages in the history of the US. Her investment strategy consisted of conservative buying backed by substantial cash reserves to cover any movements in her positions. She invested in railroads, mines and real estate and lent money while acquiring mortgages.
If you thought that private banking is a concept pioneered by modern bankers, think again! The Medici family, which operated the largest bank in Europe, acted as private bankers for most European royalty and nobility. In a sense, they acted as central bankers when there were no central banks. At one point, the currency issued by Medici Bank was accepted tender throughout Europe. Non-performing assets (NPAs) were a problem in the 15th century too. The Medici family had their tryst with NPAs when they found that many of their high net worth (HNI) clients were unreliable. Connoisseurs of art and architecture would have to be thankful to the Medici family who sponsored Renaissance artists like Michelangelo, Leonardo Da Vinci and Raphael. They contributed to the development of the double-entry system of accounting that is a norm throughout the world.
Sir John Blunt:
The phenomenon of stock price speculation and manipulation, boom and bust is not limited the modern era. Sir John Blunt created the South Sea Company in 1711. The crash in its stock price bankrupted thousands of investors; hundreds of investors committed suicide. The ‘greater fool theory’, where speculators buy stocks in the hope that ‘a greater fool’ will pay even more for them before the bubble bursts, led to the South Sea bubble. Sir Isaac Newton, after losing huge money in the company, famously said, “I can calculate the movement of the stars but not the madness of men.”
The pitfalls of leverage are apparent from the story of Goldman Sachs employee Waddill Catchings who came very close to bankrupting the Goldman Sachs Bank during the stock market crash of 1929. He created an innovative structure—fund of funds—with leverage. He convinced Goldman Sachs Bank to open a closed-end fund, called Goldman Sachs Trading Corporation (GSTC). Catchings was hailed as a financial genius when these funds performed exceedingly well. However, the problem is that leverage works both ways—it magnifies profits as well as losses. The GSTC stock crashed from a high of $280 to $1.25 in 1932.
US economist Hyman Minsky’s work centred on debt. He theorised that during prosperous times, i.e., unusually long periods of economic stability, a speculative level euphoria develops, where investors are lured into taking excessive debt which metamorphoses into a financial crisis. A ‘Minsky Moment’ occurs when over-indebted investors are compelled to sell good assets to repay their loans, leading to sharp declines in financial markets and a sudden, inexplicable, major collapse in asset values. His theories about debt accumulation became popular during the global financial crisis in 2008.
Amadeo Giannini’s frustration with banks lending to only wealthy clients led to the creation of the Bank of America. He was determined to fight for the ‘little people.’ In the wake of the San Francisco earthquake in 1906, he went down to the beachfront, setting up shop by placing a plank of wood over two barrels. He started to lend money to small businesses and individuals desperately in need, without collateral in many cases. From these humble beginnings, he developed his Bank into a nationwide system of branches. Bank of America went on to become the largest bank in USA at the time of Giannini’s death. Movie enthusiasts have a lot to thank Amadeo Giannini for, as he funded many Charlie Chaplin films and Walt Disney’s early movies. He left much of his fortune to a foundation for medical research.
The Order of the Knights Templar:
Multinational banking is not something that happened in the modern age. The Order of the Knights Templar, in the Middle Ages, was the world’s first multinational corporation. The Order generated letters of credit for pilgrims journeying to the Holy Land. Pilgrims deposited their valuables with a local Templar before embarking and received a document indicating the value of their deposit. The pilgrims used that document upon arrival in the Holy Land, to retrieve their funds. This innovative arrangement was an early form of banking and was perhaps the first formal system to support the use of cheques.
The book consists of many other stories including those of the biggest scamsters and stock price manipulators—John Law, Charles Ponzi, Alves dos Reis and Bernard Madoff. Why read this book? Because these stories are fascinating and history has a habit of repeating itself.