The first rule of bank runs is: "If you are going to panic, panic early." And watch who is trying to elbow their way to the front of the line. In the case of Britain's Northern Rock:
September 15, 2007
Northern Rock (LON: NRK) Updates
When I read that The City's Stockbrokers and Fund Managers were queuing up to withdraw their deposits, well, it gets your attention.
Which is why, when ZeroHedge updated their SVIB thread we went with it, no ifs, ands, or buts: "SIVB: Venture Funds, Y Combinator Advising Portfolio Companies To Pull Cash From Silicon Valley Bank" and mentioned:
Huh.
Shades of Senator Chuck Schumer when he caused the bank run that led to the collapse of IndyMac in 2008.
The fact of the matter is, there was no reason for SVIB to fail. The money peeps of Silicon Valley could have put a halt to what became the biggest run (I think) in history, $46 $42 billion, by putting up $3 billion with maybe a stand-by facility of another $1 or 2 billion. That's chump change to the venture capital tycoons on Sand Hill Road. But they didn't want to.
Now they are looking at some truly impressive tertiary and quaternary effects including bankruptcies among their portfolio companies and a possible doubling of the California budget deficit, from $23 - 24 billion to maybe as much as $50 billion as all the taxable activities grind to a halt and most importantly, the fountain of capital gains the state has become addicted to just stops cold.
So Governor Newsom and the legislative gang in Sacramento will do what they always do, they will trim around the edges of the expenditure side of the budget, float some debt at comparatively high interest rates and tax the state's highest earners, including those very same VC's, at higher and higher rates until the deficit, which by law must be filled, is filled.
Knowing some of the history of runs would have helped Andreessen and Khosla and Jurvetson and the whole bunch of them realize just how important fast, very fast, action would be.
But instead they thought about it and the opportunity to halt the panic passed by.
And Elon Musk is building a town in Texas and Warren Buffet, who could have made the correct split-second decision, wasn't involved. From a 2020 post:
I've mentioned how fast the old boy can move when he spots an opportunity.
In September 2008, two days after the Lehman collapse, his then heir apparent David Sokol pitched Mr. B. on buying Constellation Energy. Warren looked at it for an hour, sent Sokol to Baltimore to pitch the Constellation board who liked Warren's idea and signed on.
The stock had traded as low as $13 and change—a price it had not seen in 25 years, and it traded there for all of about 90 minutes before news of the deal at $26.50 was announced.
ya snooze ya lose.
Constellation subsequently backed out of the deal but the $1.2 billion break-up fee was pretty good pay for Warren's hour of analysis....
Oh well, here's a story about a bank run that has stuck with me for many many years. Posted during the Northern Rock run, Sunday, September 16, 2007:
A RUN ON THE BANK.
New York Times Headlines-
Nov 19, 1890; Brothers Embarrassment
NEWARK, Nov. 18. -- Monday morning the officials of the Howard Savings Institution in Newark observed that more depositors than usual were presenting themselves at the teller's counter to close their accounts. Yesterday morning when the bank doors were opened, a score or more of them awaited the arrival of the teller. The run increased as the day went along, and by the time the bank closed for the day $30,000 had been withdrawn.
Two days earlier:HELP FOR THE BARINGS; NO FURTHER DOUBT OF THE FIRM'S PERFECT STABILITY. AID STILL COMING FROM THE BANKS OUTSIDE OF LONDON -- THE CONDITION OF THE MARKET.
LONDON, Nov. 17. -- The Scotch banks will have a meeting to-day for the purpose of adding to the Barings' guarantee fund. The whole banking world has shown alacrity in subscribing, and when all the provincial and other subscriptions have arrived the total will be such a sum as will make the whole incident a brilliant triumph for the organizers of the fund.
STRONGER THAN BEFORE; HEAD OF THE BARINGS' HOUSE TO RETIRE AS CHIEF. THE BANKS TO GUARANTEE ALL THE ACCEPTANCES -- EUROPEAN FINANCIAL CENTRES ARE NOT YET EASY.
LONDON, Nov. 17. -- At the banking house of Baring Brothers & Co. this morning everything was quiet and there were no internal or external signs of disturbance. The members of the firm stated that all their acceptances and other liabilities would be met as they fell due. They also said that the position of the firm, with the Bank of England at its back, was stronger now than ever before.
Nov. 16, 1890 THE BARINGS IN TROUBLE; WALL STREET LOSES ITS HEAD WHEN THE WORST IS OVER. STOCKS TUMBLE WILDLY IN THE BREAK RESULTING FROM THE DIFFICULTIES OF THE GREAT ENGLISH HOUSE.
Before the market opened yesterday, the Street was flooded with abounding rumors intended to create distrust and accomplishing all that was intended. For a long time the Stock Exchange district has been flooded with tales of dire distress in high financial quarters. Not one house, but many, rumor has declared to be in difficulties threatening disaster.
Nov. 15, 1890==NOW IT IS PACIFIC MAIL; THAT STOCK A CENTRE OF WALL STREET INTEREST. VILLARD AND HIS COMPANIES ALMOST DISAPPEAR FROM SIGHT FOR ONE DAY -- RUMORS ABOUT BARING BROTHERS.
Another version:...Only one Baring received a peerage principally because he was a banker: Edmund, otherwise known as Ned. The others had been politicians or public servants. Ned became Lord Revelstoke in 1885, when London was the undisputed financial capital of the world. Revelstoke father and son ran Barings for fifty years, and Ziegler describes them as a formidable pair.
`Both were intelligent and cultivated, self-confident to the point of arrogance. They were dignified in manner and imposing in appearance, men accustomed to demanding the deference of their inferiors, putting into that category the generality of mankind.' But Ned Baring also had a streak of recklessness inherited from his grandfather, and a gambler's instinct (his father won his Mayfair house at a game of cards). He was a generous man, and he could afford to be: his annual income was 100,000[pounds sterling], worth 6,100,000[pounds sterling] today.
Revelstoke's enthusiastic embrace of Victorian capitalism red in tooth and claw was best illustrated by the flotation of Guinness shares in 1886. So over-subscribed was the issue of 4.5 million [pounds sterling] of ordinary and preference shares that the price of 10[pounds sterling] ordinary shares rose to 16[pounds sterling] 10s when the market opened.
No fewer than one-third of these shares had been allocated by Baring Brothers to members of the family and their intimates; 800,000[pounds sterling]-worth was reserved for the bank itself; and another 800,000[pounds sterling]-worth was allocated to partners, their friends and close contacts in the City. The profit attributed to the house and the partners alone was in excess of 500,000[pounds sterling]. `Even among insiders who had benefited from the operation, there was a feeling that it had gone too far,' said Ziegler.
Revelstoke's Guinness triumph misled him. He came to believe that public confidence went so deep that Barings' name on a share issue was enough to guarantee its sale. Revelstoke took an enormous punt in Argentina, and it went badly wrong. Tom Baring, one of the partners in New York at the time, wrote: `Verily, "a great Nemesis overtook Croesus." The line has never been out of my mind since the Guinness success.'
What Revelstoke did was to underwrite a 2 million [pounds sterling] share issue by the Buenos Aires Water Supply and Drainage Company. That meant that Barings sent the money to Argentina before it had sold the shares, and the shares subsequently proved virtually impossible to sell.
Much of Barings' capital was tied up in South America, and since the continent was going to pieces, questions of confidence in the bank were raised. It was committed to paying bills amounting to millions of pounds, and there was not enough money to meet the debt. Moreover, interest rates were rising and money was tight. This was a classic recipe for a bank failure.But this crisis was not about one bank. David Kynaston says it could have shaken international confidence in the City.
There was no getting away from the almost unthinkable consequences if Barings did go down: not only would the failure of the City's leading acceptance house inevitably bring down a host of other firms, including all the discount houses, but the very status of the bill on London would be threatened, and thus the preeminence of the City as an international financial centre.Because the stakes were so high, Barings was bailed out in November 1890 by a consortium organised by the governor of the Bank of England, William Lidderdale. The consortium drew on money from the bank itself and from the government of the day. Once the government was committed, Rothschilds joined in, the rest of the City followed, and a fund finally amounting to 17,326,000[pounds sterling] - worth more than a billion pounds 100 years later - met Barings' commitments. But it had been a close-run thing. Ziegler believes that, had the governor of the Bank of England been less courageous, Barings would have failed.
Although it was the end of Lord Revelstoke's career and the partnership was wound up, the bank survived as Baring Brothers & Co. Ltd, with a paid-up capital of 1 million [pounds sterling].
Since the individual partners were responsible for all its debts, everything had to go: lands, houses, pictures, horses. Revelstoke's country estate at Membland in Devon (which had a special larder big enough for 2,000 head of game) and his Mayfair mansion at 37 Charles Street both had to be sold, along with the French furniture and objets d'art. Even the children's nanny went.
...Barings' Nemesis arrived in the form of CH Sanford, an American quack who had come to London selling Florida Water, and who had transformed himself into a director of the finance house SB Hale. With Hales, he lured Barings into a joint finance of Buenos Aires Water and Drainage.For $21m, payable in three installments, Hales bought the water works lease and building contracts from the Argentine government. Hales the formed Buenos Aires Water Supply and Drainage to run the works, fulfil the management and construction contracts and make the three payments. Perfect privatisation...
(anyone else reminded of Enron's dip into the water biz. with Wessex becoming Azurix?)
Peerage.com on "Baring, John, second Baron Revelstoke 1863-1929, merchant banker".
Finally, my favorite sentences on Barings, anywhere, author unknown:
This was the opportune moment when the Barings resolved to put upon the market the Guinness's Stout Corporation securities. Guinness's XX. was a commodity known and appreciated by everybody in Great Britain and her colonies who had arrived at the years of discretion, and the shares were known to have for their basis one of the best properties in all the British dominions.
