Cut-Throats and Brigands: Blood on the (Wall) Street.

The history of financial sector failures is long. When the first official stock market was created in the early 1600s (it's still operating today) prices were always subject to rumour. 

Setting the 1907 novel "Friday the Thirteenth" by Lawson in context, Nigel Morris-Cotterill shews a broad range of risk factors which, amazingly, are the same as cause concern in today's markets. 

Crashes and manipulation have been a feature of financial markets since the first stock market opened in Amsterdam in 1602. London's formal market was formed in 1773 although shares had been traded long before that. 19 years later, the New York Stock Exchange opened at 68 Wall Street.

The exchanges were private ventures in the nature of a club. To trade stocks and shares one was required to be a member, to pay a fee and to abide by the rules of the club. On the one hand, they created a closed shop not of shareholders but of those entitled who made deals with each other to the exclusion of everyone else. On the other hand, they created a regulated market which would protect investors from chicanery of many kinds.

But as concentrations of wealth, inequality of information and a mix of personalities developed, markets rapidly became a place where competition was fierce and underhand tactics became commonplace.

Market crises were not limited to stocks and shares. The infamous Dutch Tulip Crisis was started in the early 1630s, boomed for a surprisingly long time – generally considered to be from 1634 – and ended with financial catastrophe in 1637 leading to ruin for many with bankruptcies and suicides being a cause.

The South Sea Bubble was in the shares of The South Sea Company traded in London. The company was formed in 1711, at a time when company's could only be formed by Act of Parliament and its shares offered and traded in the informal market that grew up in the City of London. The bubble was important because it showed how contagion works: as shares in The South Sea Company appreciated it pulled along all manner of other shares and encouraged the formation of many highly speculative and fraudulent companies. Again, the results of the crash were ruin and suicides and, it is rumoured, not a small number of murders. The origins of the crash boiled down to over-optimistic management, the creation of a giant Ponzi scheme coupled with extraordinary market manipulation in the form of bribery, rumour and lies. The crash happened in 1720 when the shares fell from about GBP1,000 to less than GBP125.

In 1720, there was the beginning of a Franco-American crisis, the Mississippi Bubble. This, like one of the phases of The South Sea Bubble, worked because the name of the monarch was attached to the scheme. Its architect was John Law, who is, in many ways, the father of modern banking and who was, at the time, on the run from a capital charge in London having killed a man in a duel. Law was an extraordinarily far-sighted son of a Scottish banker and it was the combination of banking and trade that formed the attraction of Compagnie d'Occident, more popularly known as "The Mississippi Company" which had extraordinarily large amount of territory under its control. Again, shares were boosted by rumour and lies and the grand scheme lasted from 1717 to 1720 when it came to light that many of the issued shares had been issued on a promise to pay so that the company's assets were dependent upon collection of money from people who didn't have the money to pay.

Both The South Sea and The Mississippi Bubbles were supported by what we would today call social media: unofficial "news" coming from afar, feeding the uncontrolled rumour mill of unregulated markets.

The creation of regulated markets, albeit by groups creating them out of self-interest while claiming it to be for public protection, was an inevitable consequence of these failures. The formation of companies became highly restricted. As a laissez-faire approach to business developed in the 19th Century, the restrictions on the formation of companies was loosened, banks began to finance ventures, venturers formed banks, concentrations of wealth began to form: those in the UK were tiny compared to those in the USA. The term "robber barons" was resurrected and applied to American industrialists which profited greatly from both business and share prices. It is this group that Thomas W Lawson and several of his contemporaries so despised.

Lawson was a very successful stock promoter on the New York Stock Exchange working from home in Boston. His reputation is that of someone willing to be aggressive in the market but also a moral man who campaigned for reform to make markets cleaner and fairer. His platform for reform was the media and he wrote two serialised stories for "Everyman's". He almost fathered a dynasty like his neighbours, the Kennedys. His daughter wrote of him "a millionaire at thirty and a thirty-times millionaire in the early 1900s," and The Oregon Encyclopedia says "he controlled all the copper in the United States. The family owned several yachts, racing boats, and the only seven-masted schooner ever built, the Thomas W. Lawson." Known as "The Copper King," Lawson might be seen as the prototype for John Deuss, an oil trader who started his own bank in the early 2000s.

In 1901, Wall Street had the latest in a series of hard-landing crashes. Indeed, the US Federal Reserve says of this "Gilded Age" - "In financial history, the term refers to the era between the passage of the National Banking Acts in 1863-64 and the formation of the Federal Reserve in 1913. In this period, the U.S. monetary and banking system expanded swiftly and seemed set on solid foundations but was repeatedly beset by banking crises.

Plus ça change, plus c'est la même chose.

In 1884, The Marine National Bank and the brokerage firm Grant and Ward collapsed when their owners put all available funds into speculative investments, losing their own and their customers' money. Not long afterwards, The Second National Bank failed when there was a run on the bank: its president had embezzled USD3 million and fled to Canada.

The Metropolitan National Bank shut up shop after a run was sparked by false rumours that its president was speculating on railroad securities with money he had borrowed from the bank. That failure caused contagion as rumour connected it to other banks in the region. The New York Clearing House recognised the risk of dominos falling, performed a rapid audit, published a report saying that The Metropolitan was in fact solvent and then, to underwrite the run, loaned the bank USD3 million.

In June, 1893, more than a hundred banks suffered runs and ceased payments out in a situation eerily similar to so-called hedge funds refusing to repay clients so called "redemptions" (the sector avoids the use of the term "deposit" which refers to banks) as the US's financial crisis, exported as the global financial crisis, took hold in the mid 2000s. It got worse: from the middle of July for a month, almost 350 banks saw their deposits drain and they in turn recovered their deposits from banks in New York which soon started to find their own reserves under threat. In an act of self-preservation the New York banks began to refuse requests for the return of deposits to country banks which then started to fail in significant number. The resulting slump lasted almost continuously until late 1897. This covered the first and second crises called "The Great Depression" which, to paraphrase the words of Deep Thought, "in my circuitry, I can calculate that there must one day come a crisis that is bigger than me" and it did. While the name has stuck at 1929, the fact is that the global financial crisis that began more than two years before Greenspan's Fed noticed was deeper and wider than anything that had gone before.

Back to 1900: memories are short.

Lawson's stories were published in 1902 and appeared as a novel in 1907 which, coincidentally, was the year that Lawson's flagship, named after him, sank off the British Coast dumping 2.25million gallons of oil into the sea and, perhaps not so coincidentally, another banking crisis happened. That, one has to be a little suspicious of, was reported triggered when F. Augustus Heinze and a group of others tried to corner the market in the shares of United Copper. This would have been of considerable interest to Lawson who, as noted above, was known as "The King of Copper". So, reportedly, was Heinze. The attack failed and caused a run on the banks which had supported the raiders and contagion set in causing "The Panic of 1907."

Keppler: "Always the same" May 1901, courtesy US Library of Congress

One of Lawson's targets was Standard Oil created by John D. Rockerfeller in 1870. By 1897 he was the USA's richest man, reportedly the first American to accumulate more than USD1,000 million and retired from active business and spent the rest of his life spending his money and using his influence for a wide range of beneficial purposes, almost single-handedly creating the cult of "philanthropy" (so long as it has one's name on it) in the USA.

Lawson had a front row seat to the US Stock Market crash of 1901 and through his stories sought to effect change and also to warn the public that far from a society of gentlemen, those pulling the strings in the markets were cut-throats and brigands who would profit at every turn, profiteering (as he saw it) and even controlling the organs of government and the government itself. He was not the only one: early regulators in banking - but not the stock market - were anxious to create a regulatory regime that would protect the banking system against failures and contagion. By the time the First World War started, they had had twenty years of failure to get any significant measures into force.

But what his stories, for example, Friday the Thirteenth show are far more than a political polemic. They show weakness in both systems and controls, why such systems and controls are business critical rather than a matter of compliance (there being no compliance 120+ years ago) and show a truth that no one want to accept: even good people go off the rails and companies must prepare for the possibility that a trusted person will make bad decisions.

When I found Lawson's novel with a factual historical background, it was, in some respects, a bolt-on to my work on Trade Based Financial Crime and the Financial Crime Risks of corporations, trusts and other business structures. It also demonstrates how little has changed in more than 120 years. Law, regulation and technology have, in turn failed to contain the bad behaviour and actually made it easier and worse.

My commentary on Lawson's novel demonstrates where these various matters remain present in today's operational, financial and financial crime risk and compliance environment. It's a starting point for readers to look at their own business areas in a different light – one that emphasises that the only way to protect organisations is a deep understanding of what they do, how they do it and what can go wrong; it is not lip-service compliance as demanded by current regulatory regimes.

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