Sunday, January 25, 2009

Riding the Thames

The South Sea Company – the latest and greatest investment opportunity.  You can’t go wrong.  We trade in the far south of the new land of America, an investment opportunity as vast as the great South American Sea – we are the South Sea Company. 

As almost a premonition that naming a company after a fictitious body of water will bring fictitious results, this scandal led to arguably the worst financial meltdown for a country’s population.

The scheme consists of this:

The British Government, having just come off the War of Spanish Succession, came up with a solution to get rid of the national debt.   They could not create another bank, as the Bank of England was the only stock bank.  Instead, a trading company, called the South Sea Company was created, with the purpose of funding government debt.

The Government and Company then issued stock to prospective ‘holders’.  These ‘holders’ would also assume the appropriate share of Government debt.  In doing so, whatever profits the company made by trading in the South Americans Seas would be used to grow the value of the company, and therefore 'holders'.  One ship a year was granted, and would help the Spanish colonies develop with the arrival of slaves. 

The Government promised a payment of 500,000 pounds every year to pay off the assumed debt.  The Government would also provide loans of up to 10 million pounds at 6% interest payback (in essence, take all our debt, and pay us another 6%).  The government would also put a tariff, or tax on all items shipped to the South Seas (in essence, more government funding).

In total, approximately 31 million pounds of debt were assumed from the government to the company.    Stocks were issued, paybacks were made – but another step can make this thrive even more. 

Ai – ja heir? Da preisse o dat South Sea jus wen up agin?  Days tradin with a furry dems afriks day is.  Im gon’ go git me sum rite dis instant I is..

The speculation was imaginative, fantastic, astronomic.  The price was driven up fictitiously, just like the serendipitously named company.   Those at the top, executives, politicians, were offered to buy the shares, but rather than actually buying them, the politicians never paid, and were actually allowed to ‘hold’ the shares in a long position and sell them off when they pleased.  The money transfer was fantastic.  So they were given a value of 100 pounds per share, pocketed 900 pounds per share, and handed the 100 pounds per share back to the lender.

The price of the stock went up over a year from 100 pounds to 1000 pounds at the peak.  The speculation worked.  Banks set up tables on the street, criers proclaimed: “all Peasants and lords funnel yourselves into the scheme, take your life savings and get rich quick.  Others are doing it – why can’t you?”  

With a rate of profit inflating this fast – an image of a bubble is conjured.  The bubble grows in unnatural beauty reflecting all that it has been created by – but at some instant in time – it bursts – and explodes in a fury of waste only to spill the mess on those that created and made it grow.

The rich got rich quick – the poor assumed the meltdown.  After the peak, the true corruption in this scheme had run its course, or perhaps there were no more poor to fool, the company crashed.  Right back down to 135 pounds per share.  Those that bought at or near the top lost everything.  Those that bought the shares on credit were bankrupt.  Those that knew the system kept up the greed by short-selling the downturn.  

The failures reached the banks and goldsmiths – the money they had leant out the peasants and lords could not be repaid.  Suicide rates surged.  Corruption, bribery, fraud was being rampantly exposed in the government.   A suggestion was made that those who’ve conspired and perpetrated this scheme should be thrown into the Thames. 

 It was truly the ugliness of human nature.  

No comments:

Post a Comment