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UNIVERSIDAD CARLOS III DE MADRID
Working Papers in Economic History
UNIVERSIDAD CARLOS III DE MADRID c/ Madrid 126 28903 Getafe (Spain)Tel: (34) 91 624 96 37
Site: http://www.uc3m.es/uc3m/dpto/HISEC/working_papers/working_papers_general.html
DEPARTAMENTO DE
HISTORIA ECONÓMICA
E INSTITUCIONES
July 2007 WP 07-12
Bonds and Brands: Intermediaries and
Reputation in Sovereign Debt Markets 1820 -
1830
Marc Flandreau and Juan H. Flores
Abstract
How does sovereign debt emerge and become sustainable? This paper provides
a new answer to this unsolved puzzle. Focusing on the early 19th century, we
argue that intermediaries’ market power served to overcome information
asymmetries and sustained the development of sovereign debt. Relying on
insights from corporate finance, we argue that capitalists turned to
intermediaries’ reputations to guide their investment strategies. The outcome
was a two-tier global bond market, which was sustained by hierarchical
relations among intermediaries. This novel theoretical perspective is backed by
new archival evidence and empirical data that have never been gathered so far.
Keywords: financial history, information asymmetries, financial
intermediation, financial crises, sovereign debt.
JEL Classification: F37, G15, G24, N20, N23 D24
Marc Flandreau : Sciences Po - Chaire Finances internationales -, 27 rue Saint-Guillaume,
75007 Paris, France.
Email: marc.flandreau@sciences-po.fr
http://financesinternationales.sciences -po.fr/fr/bio/bio_flandreau.htm
Juan H. Flores : Departamento de Historia Económica e Instituciones, Universidad Carlos III de
Madrid, C/Madrid 126, 28903 Getafe, Spain.
Email: Jhuitzil@clio.uc3m.es
http://www.uc3m.es/uc3m/dpto/HISEC/English/faculty/Personal_Juan_Flores.html
Bonds and Brands:
Intermediaries and Reputation in Sovereign Debt Markets
1820-1830
Marc Flandreau and Juan H. Flores
Sciences Po, Paris Universidad Carlos III, Madrid
June 2007
Abstract
How does sovereign debt emerge and become sustainable? This paper provides a new answer
to this unsolved puzzle. Focusing on the early 19th century, we argue that intermediaries’ market
power served to overcome information asymmetries and sustained the development of sovereign
debt. Relying on insights from corporate finance, we argue that capitalists turned to
intermediaries’ reputations to guide their investment strategies. The outcome was a two-tier global
bond market, which was sustained by hierarchical relations among intermediaries. This novel
theoretical perspective is backed by new archival evidence and empirical data that have never been
gathered so far.
JEL classification: F37, G15, G24, N20, N23
Keywords: financial history, information asymmetries, financial intermediation, financial crises,
sovereign debt.
. Financial support from Sciences Po (Paris), Universidad Carlos III (Madrid), the Bank of France and NSF
is gratefully acknowledged. This paper developed over a number of years and places. The authors are grateful to
archivists from ING-Baring, Guildhall Library, Rothschilds London, and Euronext (Paris Bourse) for their kind
cooperation. We especially thank James Khedari for excellent research assistance, as well as Matthias Morys.
Larry Neal helped us locate Wetenhall’s Course of Exchange, and in many other ways. Lars Frederik Oksendal
kindly provided data for Danish bonds quotes in other markets. Angelo Riva opened the door to the Paris Stock
market listings. Finally, Olivier Accominotti, Vincent Bignon, Jorge Braga de Macedo, Jerry Cohen, Barry
Eichengreen, John James, Clemens Jobst, Pilar Nogues, Stefano Ugolini and Frédéric Zumer volunteered
comments, insights, as always, and they should be thanked for their contribution but absolved from our
shortcomings.
Email: marc.flandreau@sciences-po.fr,jhuitzil@clio.uc3m.es
“And thus it is that the credit of a foreigner, namely that of the House of
Rothschild, not that of the Kingdom of Naples, was responsible for the rise of
Neapolitan securities. Hence, the value of public securities does not reflect
the prosperity of a country … Naples itself had very little to do in all that
beyond punctually paying coupons…” Austrian Ambassador Ficquelmont
reporting to Metternich in February 1822 on the causes of the surge of
Neapolitan bond prices (quoted in Gille 1965:98)
“I cannot consent to risk my name when I see no positive indication of
the actual fulfilment of the promises and pledges which would be given
through my intervention as agent of the government”. Alexander Baring,
June 1829, refusing Mexican Agency (Quoted in Costeloe 2003:164)
How does sovereign debt emerge and become sustainable, when there are information
asymmetries, when countries have reasons to renege on their commitments, when intermediaries have
incentives to cheat investors? This paper provides a new perspective to this fascinating puzzle. The
context is that of a quasi-laboratory experiment: we study the early 19th century, at a time when
information asymmetries were enormous, when a sovereign debt “bubble” resulted in a wave of
failures, and when intermediaries attempted to sell to the public the securities of a fictitious state,
known as “Poyais”.
The theoretical answer to the sovereign debt puzzle we articulate is that market structures helped
overcome information asymmetries and sustained the development of sovereign debt. Specifically, we
argue that, given the dearth of information on sovereign borrowers, capitalists turned to
intermediaries’ reputations to guide their investment strategies. When borrowers accessed global
capital markets through the agency of a highly capitalized underwriter, investors were prepared to pay
a higher price. Therefore, leading banks “owned” a “brand” that could grant favourable borrowing
terms. Since they earned their income from their sustained ability to deliver value to their customers,
they had strong reasons to make a careful use of their reputation: A wrong choice would reverberate
on market share and profitability. Conversely, because these banks controlled access to liquidity,
borrowers had powerful incentives to refrain from defaulting, and this contributed to protect the
credibility of intermediaries. Finally, because borrowers faced switching costs when shopping around,
incumbent intermediaries managed to retain market predominance. The outcome, we claim, was a
highly hierarchical, highly concentrated global bond market, which turned out to be sustained by its
very monopolization.
This view represents a radical departure from current literature in both methodological and
substantive aspects. From a methodological point of view, we demonstrate the relevance of the tools
of modern finance theory in the study of key aspects of the international financial organization. In
particular they provide adequate tools to understand the emergence of what political scientists call
“private authorities”. From a substantive point of view, our central contention is in blatant contrast
with existing views emphasizing the association between sovereign debt and good governance
embedded in institutions such as constitutions, commitments or the rule of law. Finally, and perhaps
most importantly, we find that ignorance, or more adequately the monopolization of high quality
lending and its companion effect, the monopolization of knowledge, were decisive factors in the
development of financial globalization. This is an obvious challenge to the modern contention that
globalization and the spread of information go hand in hand.
Because we start from a different benchmarkthan has been used in previouswork, and because this
implies that readers be familiar with much material, historical and theoretical, she may not be aware
of, the remainder of the paper is organized in a somewhat non-conventional way. We do not begin
with the usual survey of the literature for recent research has thoroughly neglected the question of
intermediaries’ reputation in the sovereign debt market. Rather, in an inductive fashion, we begin with
providing background information, then move to theory, which we introduce in an intuitive way, and
then, marching to and fro between facts and concepts, make our way towards demonstrating that
empirical evidence is consistent with critical predictions of our argument. This leads us to spell out the
main contours of a new hypothesis, which has a potential, we argue, to open new research avenues.
Indeed, it is quite radically at odds with current understanding efforts.
The remainder of the paper is organized as follows. Section I discusses the 1820s foreign debt
boom-bust cycle, surveys the enormous information problems that ought to have undermined the
development of sovereign debt, and reviews the process of debt issue. Section II introduces the reader
to the microeconomics of bond underwriting and discusses for the first time a number of implications
from finance theory to the field of sovereign debt. Section III examines those theoretical predictions in
light of empirical evidence. We find that underwriter’s prestige emerged as a proxy for information on
sovereign record, enabling investors to screen borrowers indirectly, and providing for crisis
prevention. Section IV explores the vicissitudes of the policies adopted by the house of Barings and
shows how intermediaries’ prestige can become an instrument for debt crisis resolution. Section V
provides a statistical test of the views developed in this article. We show how information
asymmetries were responsible for contagion effects that operated across securities underwritten by
ordinary intermediaries but affected much mess those sold by prestigious ones. In Section VI, finally,
we turn back to take stock of the distance travelled by providing a discussion of our main findings in
the light of modern literature on sovereign debt and macroeconomic monitoring. We end with
conclusions.
Section I. The First Foreign Debt “Bubble” (1820-1826)
a-The Boom
During the 18th century, a foreign exchange network ensuring the circulation of liquidity between
European cities had consolidated around Amsterdam (Flandreau, Jobst and Galimard 2006). It was in
Amsterdam that the embryo of a sovereign debt market developed (Riley 1984).1However, following
the French wars, storming of Amsterdam by French Republican armies, Berlin decree and imposition
of trade controls, capital flight to London, and finally, ascent of England to absolute commercial pre-
1. London only played an occasional role in 18th century’s foreign bond issues Dawson (2002: 15).
eminence, Europe’s financial geography shifted and with the restoration of peace, London -- seconded
with Amsterdam until 1820 (Buist, 1974) and Paris afterwards (Gille 1965: 79-80) -- became the
centre of this still highly integrated European system (Neal 1991). Other important regional or national
centres such as Hamburg, Frankfort, Vienna, Milan, Madrid or Naples also participated. Cross listing
of securities facilitated arbitrage operations and contributed to reinforce market integration, just as had
happened in the 18th century (Neal 1991, Baltzer 2006).
Between 1815 and 1820, the main items that stirred activity in the restored global market place
were indemnity loans and war debt settlements among former allies. There were some short-term
lending operations, with banks holding sovereign debt in their books. Finally, and most importantly,
there were a few stabilization loans to European governments. But after 1820, a considerable
expansion of the issue of international bonds took place. Figure 1 documents the evolution of a
number of indicators of this activity.2Subsequent edition of Fortune’s Epitome, a leading market
handbook, show one such security in 1820 but 23 in 1826. Wetenhall’s Course of exchange shows
quotes for foreign government securities rising from almost nil in 1820 to 35 in 1825. This increase
benefited from – but was not limited to – the inclusion of Latin American securities.Their numbers in
Wetenhall rises from zero (1820) to 12 (1825).
Figure 1: Number of foreign governments’ stocks traded in London
(Ex USA), 1818-1833
Source: authors computations, from Fortune’s Epitome and Wetenhall.
2. We define as “foreign securities” bonds issued for the account of other governments than those of Britain,
France and the US. In 1820, the other foreign securities were the French 5% rentes , US 3% and US 6% :
Fortune’s Epitome, 1820. The reason for excluding US securities from the chart is that during the period under
study, they were all introduced through cross listing and never actually formally introduced in London.
0
5
10
15
20
25
30
35
40
1818
1819
1820
1821
1822
1823
1824
1825
1826
1827
1828
1829
1830
1831
1832
1833
Wetenhall: LatAm Quoted
Wetenhall: LatAm Listed
Wetenhall: Foreign Listed (Ex USA)
Fortune (Ex USA)
The interest for foreign securities was truly international, and a similar trend is observed in the
Paris Stock Market List.3It had one foreign security in 1820, two in 1821 and 1822, nine in 1823,
thirteen in 1824, and twelve in 1825. Primary sources suggest that active trading in foreign securities,
most probably in the curb market (or “coulisse”) began in late 1822. We also have evidence that Paris
speculators closely monitored what was happening in other markets.4
And thus was started the sovereign debt boom of the 1820s, which earlier writers have occasionally
referred to as the first “Latin-American” debt crisis, although the phenomenon was wider. In London,
on which we focus, the 1822 Colombian 6% loan opened the ballet.5The same year saw loans to
Chile, Peru, imaginary “Poyais” as well as to European countries: Spain, Russia Prussia, Denmark,
and the Kingdom of Naples. Complications in Spain rocked markets and there were massive decreases
in the prices of all traded securities (Figure 3).6The Congress of Verona in late 1822 gave a mandate
for France to intervene. The constitutional Cortes government issued a last loan in early 1823, before
collapsing following France’s military intervention in April (Nicolle 1945). This led to the restoration
of Ferdinand as absolute monarch, and to an eventual debt default, for Ferdinand refused to recognize
the securities issued by the Cortes. The risk of a global political crisis was avoided and European
lending resumed. In late 1823, there were two more loans, to Austria and Portugal, issued in October.
In 1824, Buenos Aires, Brazil, Colombia, Mexico, as well as Greece and the Kingdom of Naples
borrowed; In 1825 Brazil, Mexico, Greece, a Danish conversion, and in August, Guatemala.
b-The Bust
In July 1825 foreign funds began to slide. In December 1825, events were amplified by a financial
storm that ravaged the City. “The Panic” was a run on London banks that reached its apex on
December 11th when the scramble for liquidity led to bank failures. The Bank of England came close
to suspend specie payments. Fire sales started and the prices of Latin American and South-European
securities plummeted (Figure 2). The collapse reverberated on financial intermediaries. In February
1826, B. A. Goldschmidt, a large London bank that had heavily underwritten foreign government
securities, suspended payments (Gille 1965: 159).7It was reported holding large amounts of unsold
3. Cours des effets commerçables à la Bourse de Paris, kept in Euronext, Paris.
4. Note that French business newspapers aloes reported quotations for foreign sotcks in London, e.g. The Journal
du Commerce, which gives quotation for exchange rates government securities in various markets, e.g. July
1826: London, Antwerp, and Vienna. The London section provides substantial coverage of foreign government
stocks (13 listed, 8 quoted). Reports from the Paris brokers’ association contain echoes of concerns about
speculations on foreign stocks “La semaine dernière les fonds étrangers ont envahis le parquet…. La Conseil
Supérieur pourra demander le dépôt de couvertures proportionnelles aux dangers” (Procès Verbaux Conseil
Supérieur 12/10/1822).
5. It was issued at the price of 84 (yielding 7,14%) and entirely sold (Dawson). On Colombian prospectuses, see
Rothschild archives, Box: XIII/230/78-95.
6. On October 20, 1822, the Congress of Verona, the last of the series of international congresses initiated by the
Congress of Vienna had met to consider action against the liberal government in Spain.
7. According to Gille (1965: 159) Nathan Rothschild would have offered support to B. A. Goldschmidt, although
the conditions are not known. The day after, B. A. Goldschmidt died, “of chagrin”. Guardian, Thursday February
23, 1826 : “The following gentlemen have undertaken to act as its trustees for the settlement of the affairs of
Messrs. B. A. Goldschmidt and Co., viz .- Mr. Rothschild, Mr. S. Samuel, Mr. D. Barclay (of the house of
governments’ bonds leaving, at market value an imbalance between assets and liabilities as large as £
0.4 m or 30%. Its collapse had ripple effects in Paris, Frankfort, Leipzig, Vienna and some weeks
later, in May 1826, failures extended to Bologna, Forli and Rome. The domino effect reveals the
international reach of the 1820s sovereign debt bubble and sheer interdependence of financial
networks (Gille 1965 : 159-160 and 162). Barclay, Herring Richardson and Co.,another London house
also involved in Mexican loans collapsed in July 1826 (Costeloe 2003:22).
As these events unfolded, sovereign defaults began spreading. The first to suspend the payment of
coupon was Peru, in April 1826, followed in May by Colombia. After that date, bad news
accumulated, although only gradually, through a fairly long process that extended over almost two
years. Chile defaulted in September 1826, Greece in January 1827, Mexico in October 1827,
Guatemala in February 1828, Buenos Aires in January 1828, Portugal in June 1828. By the end of
1829, the sovereign debt issues of the early 1820s had turned into a disaster. All Latin American
countries, except Brazil, and all Southern European countries, except the Kingdom of Naples, were in
arrears.
Figure 2. The 1818-1826 Boom-Bust Cycle: Evidence from Bond Prices
0
20
40
60
80
100
120
140
160
jan-1820
may-
sep-
jan-1821
may-
sep-
jan-1822
may-
sep-
jan-1823
may-
sep-
jan-1824
may-
sep-
jan-1825
may-
sep-
jan-1826
may-
sep-
jan-1827
may-
sep-
jan-1828
may-
sep-
jan-1829
may-
sep-
jan-1830
may-
sep-
French 5% Rothschild
French 3% Rentes
Austria 1824 5%
Rothschild
Brazil 1824 5%
Buenos Aires 6% 1824
Chile 6% 1822
Colombia 6% 1822
Colombia 6% 1824
Denmark 5% 1822
Denmark 3% 1825
Greek 1824 5%
Greek 1825 5%
Guatemala 6% 1825
Mexico 5% 1824
Mexico 6% 1825
Napoles 1821 5%
Napoles 1824 5%
Naples Paris 5% Rentes
Peru 6% 1822/24
Poyais 1822 6%
Portugal 5% 1823
Source: Authors, from Wetenhall.
Sovereign defaults had followed, not preceded, intermediaries’ failures. In many cases, the actual
decision to suspend payment was the appendix of a long process of price declines. And defaults might
be said to have occurred when there was no more confidence. Moreover, Figure 2 shows a large
amount of co-movements across bond prices of present and future defaulters. Finally, we remark that
Barclay, Herring and Co.), Mr. S. Gurney, and Mr. Richardson. Their appointment has given much satisfaction
on the Exchequer. The trust deed, we believe, is not yet prepared, but as the consent of the parties has been
given, no difficulty is anticipated in its completion”. Interestingly, among the various bankers involved, we find
three houses involved in sovereign lending, Rothschild, Barclay, Herring, and finally Richardson.
the crisis of 1825-26 acted as a catalyst that precipitated a number of securities down while others
managed to remain afloat. Such borrowers as Prussia, Austria, Russia, the Kingdom of Naples and to
some extent Brazil, fared relatively well and seem to have managed to escape the effects of this
“Southern states” debt crisis.
c -Historical literature, theoretical questions
As said, the sovereign debt crisis of 1825-26 was only one part of a broader financial panic. Earlier
research has discussed the debt disaster from various vantage points. The accounts by Gille (1965) and
Neal (1998) provide balanced perspectives. Other, more focused, studies look at Latin American
loans. Dawson (1990) provides the most exhaustive account. Other sources include Ferns (1960),
Jenks (1927), Platt (1983), Fodor (2002), Marichal (1989), Costeloe (2005). These authors discuss the
reasons for the initial enthusiasm and eventual disappointment. The usual suspects are found:
Irrational exuberance and investors’ appetite for risk, bound to be met with disappointment (Ferns
(1960), Jenks (1927), Platt (1983)); Excess liquidity reflected in declining interest rates, followed by
restriction imposed by the Bank of England.8Connected lending since contractors of the Latin-
American bonds were often promoters of mining companies (Marichal 1989)9; Bail out expectations
for Britain had sponsored the independence movements in Latin America and it recognized the new
republics in October 1822. Following this line of reasoning, the trigger of the crisis was Lord Canning
eventual insistence that Britain’s foreign policy and the interests of the bondholders were different
things (Gille 1965, Ziegler 1988, Dawson 1990).10
There are also a few outliers. Alexander Baring’s pet theory was that the crisis had been caused by
the Corn Laws (Fulford 1953). An intriguing paper by Fodor (2002) challenges the notion of a
“bubble”. The crash, he argues, was not preceded with a genuine boom, and many of the securities
never found a market. His account suggests (although he does not use that language) that Latin
American debts were a lemon market that never took up presumably because the price at which
securities were sold did not compensate investors for information asymmetry. Perhaps Fulford (1953:
8.Irrational exuberance and excess liquidity are for instance pointed out by Chateaubriand: “Le crédit ne me
paraît pas être l’expression de l’opinion publique et je crois qu’il naît bien plutôt de l’agiotage et de la
surabondance des capitaux que de la confiance dan s la stabilité des gouvernements de Colombie ou du Pérou”
Quoted in Gille 1965: p. 110). Gille (1965 : 156) quotes the views of Ouvrard, a French banker who suggested
that the contraction had been driven by the exports of numéraire to the New World : “Les emprunts de tous les
gouvernements et particulièrement ceux des Etats du Nouveau Monde ont diminué le numéraire d’Europe, ont
produits en Angleterre l’effet des subsides de la dernière guerre et ont contribué à la baisse des fonds ; il est très
probable que cette baisse se prolongera plus ou moins jusqu’au retour de l’équivalent du montant des sommes
disséminées ; et ce retour, la paix se maintenant aura infailliblement lieu avec un grand avantage pour les fonds
publics”, Gille (1965 : 156), see also Ouvrard’s memoirs (Ouvrard : Vol. III : 237-9). On credit tightening by
the Bank of England, see Gille 1965, Neal 1998.
9. Dawson (1990 : 26) indicates that the Colombian loan was contracted to consolidate short-term advances and
debentures issued to pay for imports of British military equipment.
10. This may have fuelled a belief that the British government would be concerned with making sure that debts
would be paid back (Dawson 1992: 35). A supporting element, underlined in early editions of Fenn’s is that
British authorities had been directly involved in the protection of purchasers of the Spanish loan of 18?? [check]
providing explicit threat of military interventions in case Spain would not pay. As it turned out, such a policy
course was soon reversed and investors were left dealing with the mess (see Platt 1968 for details).
108) is closest to truth: “No doubt that all these and other causes played their part, but perhaps the
most significant reason (though it has been least explored) lay in the volatile and unaccountable nature
of man”.
In this article we are not interested in explaining the dynamics of the bubble, nor in determining
why it crashed when it crashed, nor in discussing whether a bubble there was, let alone dissertating on
the Nature of Man. Rather, we use the event as a laboratory experiment in intermediaries’ moral
hazard. In addition to the fraudulent Poyais loan (Jenks 1927, Dawson 1992) intermediaries were
reported to have issued several loans with the complicity of the borrowing countries’ ministers in
London who “forgot” about securing formal approval of the respective governments (Mathew (1970),
Fodor (2002) and Dawson (1992)).
Table 1. Debts of Kingdom of Naples, Portugal and Chile, from Carey (1825?)
Source Carey [1825?], p. 120, 125, 126, 127.
The fact is that the direct evidence on which ordinary investors had to take decisions was thin.
First, the press was obviously suffering with the same incentive problems as borrowers and
intermediaries. It was usual for sellers of securities to pay journalists for writing articles or pamphlets
encouraging investors to buy. In 1826 for instance, in the midst of the sovereign debt collapse, the
young Disraeli was hired to argue against the possibility of a bubble.11 Second the few dependable
sources that existed did not provided much detail, for there was not much that was known to anybody,
anyway. The two main stock market compendia Thomas Mortimer’s Every man his broker, first
released in 1761 (continued by [Robert?] Carey, under the title Everyman his own Stock -Broker)12 and
Thomas Fortune’s rival Epitome of the Stocks and Publick Funds13 known as “Fortune’s Epitome”
were somewhat detailed for British, French, or American stocks but the actual content, for more exotic
instruments was small. Table 1 shows the Chilean, Neapolitan and Portuguese sections of Every man
His Own Stock-Broker. We see they provide details on when, where and by whom, the coupon was
being paid. Only in the case of the Kingdom of Naples are we treated with an estimate of the “total
debt” (but: Overall? External?). Later editions of market compendia made additional efforts to
document fiscal outlooks, but results remained wanting. Fortune’s Epitome, edition of 1851, indicated:
“No official account of the revenues of [Central-American] States has been published, but they are
calculated to approach as follows, etc.”14 Investors could not know how governments were doing.
Section II. Wildcat Underwriting: Lecture Notes
a- The Game They Played
We saw in Table 1 that indication of the banks where interest are paid was one of the few things
people were told. Carey also indicates who were the “contractors” of the bond: N. M. Rothschild for
the 1824 Neapolitan loan, B. A. Goldschmidt for the Portuguese 1823 loan.15 The various mechanisms
through which banks were “associated” with certain securities or countries thus seem important to
contemporaries and we must discuss them now.
In the 19th century, “typical” international sovereign bond issues were as follows. Once a relevant
authority (“the government”) had identified the need for fresh capital, and once it had decided on ways
to raise funds (maturity of the bonds, coupon etc.) it had to select a method for choosing an
underwriter. That agent could be one or several syndicated banks and/or venture capitalists prepared to
11 . See Buckle and Monnypenny, 1968 : chapter 5, and Fodor (2002) The literary vein was often used to paper
off the gaping cracks of financial knowledge. The appendix on Spain in the 1833 edition of Fortune’s Epitome,
contains, in lieu of facts and figures, the following: “Oh Spain! Who hast bartered thy former heroic valour and
chivalric prowess for beads relics and pilgrimage, where are now thy gains? Where is the noble Castilian blood
that once flowed in thy veins? etc.” (Fortune’s epitome, 1833:121). Nicely put, but what should we do?
12 . Of these, the first two editions were authored by one Carey, and the third one, whose date of publication is
unsure (probably 1825) was anonymous although it may be attributed to Carey.
13 . We were unable so far to locate the first edition. The second edition was released in 1796.
14 .Fortune’s epitome 1851, p. 200. Similar problems persisted well into the 1890s and beyond (Flandreau
2003a)
15 . The 1821 Neapolitan loan had been contracted by Rothschild frères in Paris, and was subsequently cross
listed in London.
bear the risks of buying the bonds from the issuer and selling them to the public.16 Two main systems
emerged. A first was a sealed bid auction where, following preliminary exchanges, a number of
selected syndicates were invited to submit formal tenders in closed envelopes. The envelopes were
opened and the best offer retained. The other method we call an “open bargaining” system. It was
largely informal. A number of bankers were invited to participate or in cases invited themselves.
Tenders were communicated to the government and counter-offers could be made. Competitors
occasionally merged, or split. The winning group was eventually chosen.17A critical difference
between the two systems was the degree of control regarding the identity of the winner, which
borrowers retained in the second case. If they had a preferred intermediary but wanted to extract the
highest price, authorities might have preferred what we call open bargaining. Of course, this regime
enabled bidders to observe each others’actions and may have led to moreconservative offers.
However, this was only the first stage of a bond issue, or “contracting”. Another aspect was
“distributing”: securities were sold to investors. This required facilities, the employment of clerks,
transfers of funds, etc. A bank (or possibly group of banks if the issue was on several markets) was
chosen to serve as “window”. Bonds were sold in installments, and installments were spread over a
number of weeks or months. Only once the last installmentwas paid did governments receive the total
amount of the subscription. Special arrangements between the bank and the government could advance
or delay the date when authorities got their cash. Finally, someone had to take care of coupon
payments. It involved managing transfers from the borrowers to the creditors as long as the debt was
not fully reimbursed. The risks, and therefore the revenues, of the last two operations were much
smaller than those from the first, but “leads and lags” could nonetheless create trouble, as we shall see.
Nothing required that the same institution perform these various tasks. If it did, then the signal to
the market that the bank or syndicate “sponsored” the said issue was strong. But there were cases, as
will be discussed later, where distributing banks emphasized that their association was only partial.
They distributed the securities and paid the coupon but were not involved as bankers. Conversely, a
bank could accept participate in the underwriting of a given security but manage to keep this
involvement secret. For all relevant purposes, one may thus identify two relevant levels of banker’s
association. In one case, the intermediary “did it all”, acting as contractor, window and coupon payer.
We refer to this situation as one where the bank acts as an “issuing-underwriting entity” and has a
16 . Of course the separation of stages suggested here is somewhat artificial since bidders competed on borrowing
terms, and often provided advice to borrowers so that the « bond characteristics selection » stage and the
« auction » stage intermingled.
17 . Vickrey (1961) suggested that under certain assumptions sealed bid first price auction and open ascending
auctions are equivalent from the point of view of the seller. Gille (1965) does remark that the sealed bid system
predominated among “sound issuers” such as Britain and France. On the one hand Denmark relied on it, lending
support to Gille’s remark: Denmark, a constitutional monarchy with parliamentary control over finances, had
managed to protect the interests of foreign investors when financial catastrophes following the French wars
forced a debt restructuring (Riley 1980). On the other hand, one Peruvian issue that relied on this system, and
later one credit poor Spain also relied on this system. We think that understanding the reasons for the choice of
alternative bargaining methods would be an important advance.
strong association with the government. Alternatively the bank acted merely as window and/or coupon
payer. We refer to this situation as one where the intermediary had a weak association with the
government as simple “issuing entity”.
Consider now an ideal world where information is perfect and markets competitive. Issuers
(“governments”) sell bonds to atomistic buyers (“investors”). To make matters simple, they sell
sterling denominated 5% perpetual securities. These securities are distributed through intermediaries
(“banks”). The “banks” charge a fee. Everybody knows exactly how good borrowers are. Differences
in bond prices reflect known relative default risks. The fees collected by intermediaries are charged
competitively and equalized to marginal costs of distribution. With a linear cost function, equilibrium
fees are a fraction a of the bond price. Governments receive the value of their securities, minus the fee
(a). If PIiis the issue price of country i’s securities and PG
ithe amount received by the government:
PG
i=(1-
)PIi(1)
If things were so simple, intermediaries would essentially be ATM machines. However, a more
adequate description should be as follows. There were governments who knew how good or bad they
were. But if they were bad they had reasons to claim they were good. And there were intermediaries
who had some information on borrowers (if nothing else, they had an idea of how much information
was available at all). But they earned fees from selling the stuff: just like governments, they had
incentives to claim that bad issuers were really good ones. McGregor, self-appointed cacique of the
imaginary Kingdom of Poyais had merely pushed the idea to its logical conclusion. You do not need
Poyais to exist for you to sell its bonds.
In reference to the behavior of some banks of issue during the age of “free banking” in the US
(1837-1865), we suggest describing the phenomenon as “wildcat underwriting”.18 Wildcat banks were
established in the Midwest to circulate their notes, collect real resources and disappear with the
gains.19 Similarly, we identify as “wildcat underwriters”, intermediaries who contracted loans, sold
them to the public and left lenders deal with default.
b- Under-pricing and Run-Ups
Given the underwriting fee, an important ingredient of costing for governments is the “issue
discount”. Modern finance literature recognizes that, nowadays, issuers and underwriters of corporate
securities deliberately under-price their issues, a phenomenon originally identified in studies of Initial
Public Offerings or IPOs. This under-pricing is known as the IPO discount puzzle (Carter and
Manaster 1990).20 This phenomenon is not limited to genuine IPOs and more broadly, researchers
have identified the existence of a “price run-up” after an issue occurs. Historians (e.g. Gille 1965) also
18 . See Briones and Rockoff (2005) for a recent survey of free banking.
19 . According to Dwyer (1996), use of the word wildcats bank to mean ”reckless” or “financially unsound”
institutions apparently arose in Michigan in the 1830s, when bankers supposedly established free banks in
inaccessible locations, “where the wildcats roamed”.
20 . Empirical identification of the “IPO puzzle” for corporate securities goes back to the work of Logue (1973),
Ibbotson (1975) and Miller and Reilly (1987).
note the existence of such a discount in 19th century sovereign bond markets and also imply that
setting of the primary-secondary market discount was a critical part of the business.
Calling E(PS
i)the secondary market price at which a security issued by country i is expected to
trade after the issue has occurred, and PI
ithe subscription price, the existence of under-pricing means
that:
PI
iE(PS
i)(2)
And therefore in principle:
PG
iPI
iE(PS
i)(3)
So that finally:
PG
iPI
iPS
i
n
i1
in
(4)
b) Where the Wildcats Roam
Recent research on IPO discounts and price run-ups in corporate debt markets (Rock 1986, Ritter
1987, Allen and Faulhaber 1989) interprets the under-pricing phenomenon as a “lemon’s premium”,
which has to be given to investors for the issue to succeed. In a world where there are both informed
and uninformed agents, under-pricing compensates uninformed investors for the risks of trading
against superior information.
In these models, the extent of under-pricing is increasing in the degree of information asymmetry
between informed and uninformed agents (Allen and Faulhaber 1989, Carter and Manaster 1990,
Chemmamur 1993 Chemmamur and Fulghieri 1994). These models also imply that under-pricing
decreases with the reputation of the investment bank underwriting the issue: more prestigious
underwriters are able to provide good issuers with lower discounts.
The validity of this result hinges critically on the extent to which there is competition among
prestigious underwriters. When there are many prestigious houses, they compete for the securities of
the good countries and in equilibrium the issue price must be close to the secondary market price
(Carter and Manaster 1990). But if the prestigious underwriter is a monopoly firm, it can extract a rent
from the labeling service. This can take the form of a higher issue discount, which has the advantage
of giving to the prestigious firm the ability to share in the gains of the issue with its clients. This has
value for her, for it feeds-back on the scope of her investors’ base and further consolidates her market
power. Finally, because good issuers derive value from getting access to the market, they are prepared
to leave money on the table. This is especially so because, by signaling their worth, good countries
improve their future borrowing prospects leading to better borrowing terms in future issues.
Obviously, mediocrity is free entry and ordinary houses are left to compete for bad countries. But
uninformed investors understand that prestigious underwriters are not involved and consequently
refrain from buying the bonds. This generates two possible outcomes. If information asymmetries are
only partial, then ordinary underwriters can issue bad securities at a low price and high discount
(Carter and Manaster 1990). On the other hand, if asymmetries are large, uninformed investors abstain
from dealing in securities issued by ordinary houses. These securities are essentially lemons, traded by
speculators who play on volatility. In the historical context of this study, initial subscription of
securities only required a down-payment of about 10% of the value of the bond, after which the
purchasing certificate or “scrip” could be traded. The leverage from investment in a scrip was thus
very large, and, given the underlying volatility associated with “bad” securities, a potentially
interesting, if dangerous, instrument for sanguine speculators (Fodor 2002).
Finally, a suggestion from modern theory is that competition among ordinary underwriters ensures
that the issue price should be equal to the expected secondary market price so that on average the run
up is zero. This is so, because all participants to that market share the same information. If it were not
(if a bad security were sold below expected secondary market price) then another wildcat underwriter
would approach the government with a better offer. In the end, under monopoly, one expects a
separating equilibrium to prevail, with stable, low yield, high run-up, serious issues underwritten by
prestigious underwriters, and volatile, high yield, junks issues underwritten by anybody else.
How does one secure a prestigious position? Chemmamur and Fulghieri (1994) develop a model of
reputation acquisition by investment banks in an asymmetrically informed market.21 They show that
the ability of financial intermediaries to acquire a reputation for veracity mitigates the moral hazard
problem in information production. Carter, Dark and Singh (2002) show that over the long run, issues
managed by prestigious houses outperform those managed by ordinary ones. A useful insight from the
literature is that prestigious underwriters who try to overprice to generate short-term gains by
increasing the amount of issues risk damaging their reputation.22 The suggestion from this family of
models is that the ability of financial intermediaries to acquire a reputation for veracity mitigates the
moral hazard problem in information production.
c) Credibility: Borrowers vs. Intermediaries
The previous discussion has implications for research on sovereign debt. Current models follow the
idea from Bulow and Rogoff (1988) according to whom countries have no incentive to repay their
debts when markets are perfect, because they can borrow in one place, transfer the funds to another
market and default. This result, known as the “sovereign debt puzzle” has cast doubt on the ability of
repeat play to build and sustain credibility – in effect to build and sustain public debt. On the other
hand, Flandreau and Zumer (2003) report an incidence of past default experience on secondary market
bond prices. A similar result is found in Tomz (2007) who also argues that investors were “atomized”
21 .An early contribution in the literature on underwriters’ reputation is Hayes (1971).
22 . In the context of corporate IPOs, Beatty and Ritter (1986) have provided evidence that underwriters whose
offerings under-perform subsequently, lose market share.
and thus faced substantial collective action problems.23 The reasons why “atomistic” bondholders can
nonetheless inflict penalties to borrowers remain unclear (see Tomz 2007, for possible solutions).
Emphasis on the role of intermediaries provides a clue on why theoretical insights and empirical
evidence differ. The reason why borrowers could access markets is because intermediaries could
monitor them effectively, and the reason why intermediaries would monitor borrowers effectively is
because they were not an amorphous lot. In contrast with other researchers, we argue that
intermediaries were not at all like potatoes in a potato bag. There were higher rank underwriters and
those underwriters had the ability to signal good loans to uninformed investors. These intermediaries
could credibly commit to monitoring borrowers, because they were concerned with retaining their
rank. They would prevent countries from borrowing too much, suspend market access, and so on. And
they could never be held hostage by borrowers because as intermediaries, they were not buy-and-hold
types. Conversely, they had the power to improve borrowing terms as countries demonstrated their
good will. Borrowers, as a result, could credibly commit to repay their debts because they would
suffer from a market ban in case they did not behave. Or to phrase it more adequately, they could
return on the market, but under deteriorated conditions associated with lower ranking intermediaries.
This analysis has deep analogies with the literature on wildcat banks. Gorton (1996) relies on
insights from Diamond’s (1989) incomplete information model to suggest that a process of
intermediaries’ reputation formation may have deterred banks of issue during the free-banking era
from choosing to become wildcats. More generally, the mechanism that prevents wildcat banks to
become a serious problem is a mixture of repeat play and monopoly power. A bank with a large
market share will behave responsibly, because the one shot gains of cheating are offset by future
losses in market share. This is similar to the setting we consider here where imprudent underwriters
risk losing future business. And thus a sorting game emerges: Banks with a long time horizon support
borrowers with a concern about perennial market access. On the other hand, wildcat underwriters sell
the bonds of governments with a short horizon. Ittakes two to tango.
Section III. Intermediaries’ Prestige in the 1820s: Empirical Evidence
Previous discussions emphasized the importance of prestige and hierarchy among intermediaries.
“Prestige” and “reputation” in underwriting are notoriously difficult to measure (see Logue (1973) and
Beatty and Ritter (1986), Carter, Dark and Singh 1998). Carter and Manaster (1990) rely on the
“starring order” on stock offering “tombstone” announcements that are published in the press after
issues have taken place. However, there were no “tombstone” announcements back then. Perhaps an
equivalent criterion would be contemporary opinion, as captured in contemporary quotes despite it
being expressed in verbal ways and “without reference to any comparative data” (Chapman 1980: 17).
23.“For centuries, money flowed to sovereign borrowers via atomized bond markets, even though
cartelized banks could have linked issues more effectively and wielded greater punishment power”
(Tomz’s (2007) synopsis). Mauro et al. (2006) also view 19th century bond markets as displaying “atomicity”.
On the other hand, verbal evidence is unanimous which makes things easier. Around 1820, there were
two “market leaders: Rothschilds and Barings”(Chapman, 1980, Chapter 2: pp. 16-38).
While the Barings are seen as the incumbent around 1815 (Ziegler 1988), historians concur on the
basis of contemporary statements that during the period between 1815 and 1820 the Rothschilds took
an edge and became the market leader in sovereign debt (Gille 1965: 57-77). By 1820, literally
dozens of statements show that market participants recognized their ascendancy.24 It is also revealing
that historians of the House of Barings emphasize that by 1825 Barings were surpassed by
Rothschilds, although the prestige of Barings is still ascertained.25 By contrast one cannot find any
evidence of similar praise for the large number of other ordinary merchant banking firms. These
included such houses as Wilson and Co, Frederick Huth and Co, Hullett brothers and Co, Barclay
Herring and Richardson, Lizardi and Co, Reid, Irving and Co etc., of which some were undoubtedly
serious. But following contemporary opinion, Hidy (1941) calls them “second rank” institutions.
Table 3. Early Nineteenth Century League Tables:
Government Bonds Issued by Rothschilds, Barings and the Rest
Rothschilds Barings Others
Nb of Issues Amounts Nb. Of issues Amounts Nb. of I. Amounts
Flandreau
Flores Chapman Flandreau
Flores Chapman Flandreau
Flores Chapman Flandreau
Flores Chapman Flandreau
Flores Flandreau
Flores
1815-37 924 29.8 105.5 3 5 10 43.2 24 42.4
1839-59 516 13.1 106.8 3 8 7.8 20.8 13 30.6
Source: Authors’ database and Chapman (1980: ). We do not know how Chapman differentiated between issuing and
contracting. In effect it seems that this distinction was not in his mind when constructing his database. And of course he is at
the mercy of his source: For instance Fenn (1837: ) indicates that the 1824 loan to Buenos Aires was “contracted by Messrs.
Barings” while they did only issue it.
Megginson and Weiss (1991) use relative market share of the underwriters as an alternative
measure of reputation. In Table 3 provides information that is relevant to this issue, providing
indications on the number of sovereign issues underwritten or sold by alternative houses. Such
rankings are known today as “financial league tables”. We constructed this data from a variety of
sources listed in the appendix, which we occasionally corrected using archival evidence. We also
report the numbers coming from an earlier attempt by Chapman (1980). Chapman relies on Fenn’s
Compendium (editions of 1837 and 1857), which gives details for all loans traded in London,
regardless on their being issued there or merely listed. Another difference comes from the fact that
Chapman (1980) may have also included railway bonds and a few sub-sovereign issues with sovereign
guarantees, while we have tried to stick to the narrowest definition of sovereign debts. He also
includes numbers for countries such as Belgium or France, whose identification as an “emerging
24 . See e.g. Gille (1965: 84, from an Austrian official), July 1820: “La Maison Rothschild est incontestablement
l’une des plus puissantes et des plus sûres d’Europe”; (p. 88, from French envoy in Frankfort), March 1820: “En
attendant les Frères Rothschilds sont une veritable puissance”, etc., etc.
25 . Hidy (1949: 64): “By this time the house of Rothschild had assumed a marked ascendancy in floating issues
of securities for the established governments on the Continent. They had become “the financiers of legitimacy.”
The heads of national states were turning first to the new leader, and the Barings lust needs come into the
operations only upon invitation of Nathan Rothschild. The change had been great since 1818”. Ziegler (1988:
97) “By 1825 Rothschilds, when it came to international loans, were unequivocally the most powerful house in
Europe”. Compare Gille (1965: 105): “En 1824-5, on pouvait croire qu’elle avait supplanté les Baring.”
market” may be disputed. Finally, Chapman (1980) does not deal with other intermediaries than
Rothschild and Baring. All this points to numbers that should be vastly larger for Chapman, and they
are. Nevertheless, putting together the evidence, shows the dominance of the two leading banking
firms in emerging markets’ sovereign debt. Taken together, they reaped 50% of the market for
emerging market debt (Flandreau-Flores data) during the period 1815-1837, and 40% during the
period 1839-1859.26 Data from both Chapman and Flandreau-Flores also suggests a predominance of
the House of Rothschild over Barings.
Table 4. Capital of Various “Merchant Banks” (circa 1825)
Capital (million £)Bank Date in
London
(if applicable) 1810s 1820s and Beyond
Barings 1763 0.7-1.1 (1815-6) 0.49
Rothschilds:
Nathan (London)
Amschel (Frankfort)
Salomon (Vienna)
Carl (Naples)
James (Paris)
1805
1805
Frankfort
Vienna
Naples
Paris
1.8
0.75 (1818)
0.70 (1818)
n.a.
n.a
0.35 (1818)
4.37
1.14 (1828)
0.8 (1828)
0.8 (1828)
0.8 (1828)
0.8 (1828)
Frederick Huth & Co 1808 n.a. 0.3 (1845)
Antony Gibbs & Sons 1808
Brown, Shipley & Co 1810 0.12 (1815-6) 0.35 (1825-30)
Frühling and Goschen 1814 n.a. 0.04 (1830)
Glynn, Mills, and C° 1753 n.a. n.a.
B. A. Goldschmidt n.a. n.a. 0.22 (1826)
J. Henry Shröder & Co 1818 n.a. 0.26 (1852)
Liverpool Shröder firm n.a. n.a. 0.05 (1839)
Lizardi and Co n.a. n.a. n.a.
Wilson and Co n.a. n.a. n.a.
Reid, Irving and C° n.a. n.a. n.a.
Fletcher, Alexander and Co n.a. n.a. n.a.
Sources: Barings: Ziegler (1988); Rothschilds: 1810s (Ferguson 1998: 1039), and 1828: Gille (1965: p. 165: mild
difference with Ferguson arising from exchange rate; we neglected in the breakdown, capital held by Anselm Rothschild); F.
Huth: Chapman (1980: 40); Gibbs and Sons; Guildhall Library (MSS 11021-96, 11107-40, 11467-74, 16869-904, 19862-89);
B.A. Goldschmidt: estimated from total liabilities at failure date given by Gille (1965: 159), assuming capital asset ratio
similar to Rothschilds (capital/asset=0.33); Shröeder: Roberts 1992, p. 39 for Liverpool, and p. 527 for London (the two
Houses were independent from one another).
A third possible criterion of quality is banks’ capital. With a larger capital shareholders stand to
lose more and this provides incentives (Michaely and Shaw 1994). Table 4 shows that again,
Rothschilds and Baring, in that order, were exceptional. In the 1820s, taking the five branches
together, their capital was a towering £ 4.37 million, almost ten times the figure for the next best – the
Barings – who stood at about half a million sterling only. In fact the London Rothschilds alone are
26 . After 1806 Barings had gradually taken over the operations of the Hopes so that the two houses are separated
by a thin line (Buist 1974 : p. 524, Hidy 1949 : p. 53). It is therefore with the cooperation of the House of Hope
that Barings had taken a central role in raising funds for the French indemnity. In 1817 they had issued in
London and Amsterdam one loan for Russia, in 1818, they sold a second one and a loan for Austria and a third
Russian loan in 1820. Ziegler (1988), Gille (1965 : 103).
twice bigger than the Barings (about .5 million in the 1820s).27 Barings on the other hand were leading
the lesser houses, which had a capital that was typicallysmaller than £ 0.3 million.28 In summary, both
qualitative and quantitative evidence suggests that an adequate ranking of underwriters’ prestige, circa
1825, would be as follows: 1st The Rothschilds; 2nd (far behind) The Barings; 3rd: (behind) The rest.
Section IV. Good Banks Go to Heaven, Bad Banks Go Everywhere
1) Performance
Based on previous discussions, we expect securities underwritten by prestigious banks to
outperform others. Table 5 summarizes relevant information on emerging markets securities issued in
London after 1815. This list was established on the basis of the material provided in the 1820s editions
of leading stock market compendia.29 Entries are individual bonds, grouped by countries and
organized in two parts. The upper part of the panel includes securities that were in arrears at the end of
the decade, while the bottom part of the panel has those that were consistently serviced during the
1820s (and beyond).30 We identify (a) the country and issue characteristics (date, amount, yield at
issue); (b) the participants to the issue process (contractor, issuer, and where the coupon was paid); (c)
the type of involvement of the main bank (underwriter-issuer or issuer); (d) the status of the debt (in
arrears or not).
Table 5. End of paper
A number of features stand out. First, it seems that a lot of cherry picking was going on. No
Rothschild security was in arrear in 1829. Conversely, there were only three issues that did not bear
the Rothschild’s seal of approval among the non-defaulting group: two for Denmark and one for
Brazil. For Denmark, we have already suggested that, as a country with constitutional oversight of the
financial process, it did not need the Rothschild support as badly and as a result resorted to sealed
auctions. Moreover, we have evidence that Rothschilds had been bidding for Denmark in a sealed
auction, so that they tried to pick the cherry. Gille (1965) says their offer came ex aequo but with
27 . Interestingly, the Barings capital compares with that of Amsterdam’s leader, the House of Hope of which
several operations were taken over by the Barings, and whose capital was drastically reduced in the 1810s. The
Capital of the Hopes was 0.5 million in 1810 and even higher in the 1790s, but declined dramatically afterwards.
This number is computed from capital in Gulden Courant given in Buist (1974: p. 520-25), converted in pound
sterling from quotations of Gulden Banco and Agio on Gulden Banco.
28 . This conclusion is in stark contrast with Gille (1965 : 80) who claims that Rothschild’s superiority should
not be found in their capital stock : “Ce n’était point non plus un capital supérieur à tous les autres : s’il était
déjà d’importance, il n’était cependant pas gigantesque”. It was “gigantesque”.
29 . We started with Fortune’s Epitome and Carey’s Every Man to establish the list of securities. We then turned
to primary sources include the Rothschild Archive, the Baring Archive, the stock exchange lists of London, Paris
and Vienna (Wetenhall’s Course of Exchange, the Cours des effets commerçables à la Bourse de Paris and the
Wiener Zeitung). Other useful material included Gille (1965) and Dawson (2002). Less systematic or less
dependable sources are referred to when needed.
30 . This criterion is unaffected by the precise final date. Despite occasional arrangements that were never
respected Latin American debts that were in arrears in 1829 remained so until the early 1840s at the earliest.
instalments that were marginally longer than the winner’s.31 Similarly, Rothschilds did display an
interest in Brazil. As seen in Table 5, while they did not participate in the first issue they were
involved in the second one. Therefore, Rothschilds chased all good securities.
Conversely, it is interesting to see how they negotiated with bad issuers, which they occasionally
did. For instance, after 1823, they had extensive exchanges with officials from the restored absolutist
regime in Spain, with the explicit goal to reach an agreement for a major issue (Gille 1965). However,
they set conditions, such as a settlement on previous defaulted debts, which had been repudiated as
“odious” (a.k.a. republican), provision of collateral, administrative and fiscal reform etc. Spanish
authorities however would never be brought to reason and Rothschilds declined further participation.
Similarly, as we shall discuss later, they approached the government of Portugal, but with much lower
terms than those that were offered by other houses. Thus it is that when they dealt with lesser issuers,
which they occasionally did, they always sought to apply strict conditionality, take guarantees, and sell
the bonds at a price that would reflect more adequately the country’s worth. Of course, the bad
countries were not interested by such terms.
“Ordinary” firms such as B. A. Goldschmidt, Chapman and Fry, Hulett Brothers, etc., were not so
picky. They were happy to underwrite any bonds, and logically ended up with the defaulting ones. In
the only instance where there had been an association between a defaulting security and a prestigious
bank (Buenos Aires, with Baring) the bank had been a mere issuer, not an underwriter. Underwriting
of Buenos Aires, logically, was made by an ordinary firm. And then we saw that Barings were no
Rothschilds.
Table 6 provides a number of additional criteria to gauge the performance of the various issues. For
each security, and each time this is relevant, it reports: (a) The issue “run-up” or short-term
performance, which is the variation (in percentage) between issue price and the first quoted price: This
is the IPO discount dealt with in finance literature; (b) the short term performance or result after three
month; (c) The outcome of the issue, that is, whether it can be considered as a success or failure.
Failure is reflected as the inability to find a market. Complete subscription is not a sufficient criterion
to deem an issue to be a success for there were securities, which had been purchased by speculators
only in anticipation of a quick gain, but which failed to find “buy and hold” investors when
speculators began to sell. This resulted in price collapses and in cases, speculators were discouraged to
pay subsequent instalments, so that governments did not get the money.32 We also report a measure of
long term performance gauged as constant annualized returns to investors, between their respective
31 . Gille’s emphasis that sealed bid auctions were the Rothschild’s “worst enemy” is further proof of our central
contention. Without scope for a counter offer, the “good” firm is prevented from taking advantage of the lower
price run ups it can achieve.
32 . See Fodor (2002:14) for an example with Peru’s 1822 loan. To identify failure we relied first on
contemporary statements. For those issues for which we have no evidence apart from vague statement referring
to an alleged success, we examined post issue price variations. A failed issue is identified as one where the
quoted price does not recuperate the issue price level in the three months following issue.
issue date and the end of the decade (December 1829);33 The return is compared to that of an
alternative investment, made at the same date, on British consols, taken as riskless securities.
Table 6. Performance of Sovereign Loans in London during the 1820s (in %)
Country Year Int.
(%) Run
up
(%)
Short
Term:
3-mth
Placement
Result:
Succ./Fail.
Return
on
Security
Return
on
Consols
Excess
Return
Defaulting States
Buenos Aires 1824 61.47 -2.9 F -12.0 3.2 -15.2
Chile 1822 69.82 18.57 S -6.5 5.9 -12.5
Columbia 1822 60.3 -1.2 F -13.3 5.7 -19.0
Columbia 1824 6-2.0 -0.3 F -16.7 3.4 -20.1
Greece 1824 54.6 -17.8 F -5.2 3.9 -8.6
Greece 1825 51.3 -17.7 F -7.7 3.5 -11.1
Guatemala 1825 5-1.37 -9.6 F -28.5 5.0 -33.4
Mexican 1824 56.9 14.7 S -10.8 4.1 -14.9
Mexican 1825 63.6 0.8 S -18.1 3.6 -21.7
Peru 1822 6-8.2 -18.2 F -15.0 4.9 -20.0
Peru 1824 6-4.9 -31.7 F -20.1 3.3 -23.4
Peru 1825 6-5.7 -12.2 F -24.4 4.6 -29.0
Portugal 1823 5-0.3 0 S -3.8 5.1 -8.9
Spain 1821-2 52.2 21.9 S -21.2 5.5 -26.7
Spain 1823 5-10.7 -30.6 F -28.0 5.1 -33.1
Non-Defaulting States
Austria 1823 56.40 6.4 S 9.1 5.1 4.0
Brazil 1824 52.0 3.7 F 6.5 3.0 3.6
Brazil 1825 53.82 2.1 S 4.6 3.6 1.0
Denmark 1821-2 53.23 9.5 S 8.3 5.8 2.4
Denmark 1825 3-3.33 -4.7 F 5.4 3.4 2.0
Naples 1821 512.50 15 S 7.8 5.7 2.1
Naples 1824 50.67 1.8 S 6.9 3.3 7.1
Prussia 1822 52.83 6.6 S 8.0 5.0 3.0
Russia 1822 53.09 6.2 S 9.6 5.4 4.2
Source : Authors’ computations from Wetenhall and other sources.
Table 6 conveys a number of important messages. We see that securities underwritten and issued
by the house of Rothschild outperformed the rest. The average annual return ranges between 4.6% and
9.6% against 3%-5.8% for “risk-free” bonds (British Consols or French Rentes) and other securities
issued by entities with parliamentary control such as Denmark 8.3% and 3.4%). The only Rothschild
33 . The internal rate of return is computed as the constant compounded rate of return that equalizes, the product
of actual annual rates of returns and thus shows the returns to a buy-and-hold investor. The 1829 horizon is
suggested by Gille (1965) emphasis that this marked the end of the expansion-depression cycle, and before the
political turmoil of 1830. Other, longer, horizons yield identical results. Calling t0the date of issue ptthe price in
late December of year t, pt+1 the price in late December of year t+1, dt+1 the dividend paid during year t+1, we
have the annual rate of return or rt+1=(dt+1+ pt+1- pt)/ pt. We thus have 1
tt0
1830
1830t01r
t
tt0
1830
which can be
solved for (see Eichengreen and Portes 1989 for details). When a security was converted during the period, we
assumed that investors subscribed to the new security.
connected security with a more modest performance was that of Brazil.34 On the other hand it is clear
that despite the Latin-American debt collapse, Brazil’s securities held well. And thus the one Latin-
American security with a Rothschild’s connexion did outperform the rest.
Losses on defaulting securities, issued by ordinary houses were enormous.35 Table 6 shows the
numbers. The record was held by Guatemala (a compounded 28.5% annual loss), but all countries
revealed dramatic amounts of capital losses: 6.5% for Chile, 12% for Buenos Aires, 15% for Peru, etc.
It would be tempting to argue that Europe was less of a disaster (Greece and Portugal) if it were not
for Spain (21 and 28%). It is no surprise in this context that two of the houses that had been involved
in these operations failed as a result of the crash.
Interestingly, we can argue that the market understood this ex ante. Yields-at-issue were lower for
both “risk free” and Rothschild bonds. The implication must be that Rothschild securities were seen as
risk-free bonds. Rothschild securities dominate the lot, consistently with the notion that the market
expected their underwriting to be a signal of future performance. On the other hand spreads between
the bad and good securities are an imperfect indicator of market views. A security may be sold at a
high price, only to fail finding a market.36 Table 6 shows that in effect there were many failed issues
among the securities contracted and distributed by ordinary intermediaries. This is evidence that
ordinary investors were not fooled.37 They looked at labels and, not finding the brand they cared for,
put the stuff back on the shelves. We conclude that, in the surrounding information asymmetry, the
Rothschild’ label was used as a plausible guide.
Another way to explore the performance of Rothschild and non-Rothschild offerings is to
document the associated risks and returns (Figure 3). The horizontal axis reports risk or yield premium
based on issue price (Technically, yield-at-issue minus secondary market yield on British consols on
the same date). The vertical axis measures short-term returns or run-ups in percentage of issue price
(Technically, the spread between the issue price and the first quoted price). Obviously, Rothschild
bonds were not located in the same risk-return area than other securities. Rothschild issues display two
characteristics (Rothschild issues of the 1810s as dark blue triangles, issue of the 1820s as light blue
triangles). First, they reveal a positive relation between risk and return, which is unlike what we see
34 . But the association between Brazil and Rothschilds was not complete, as already said, and by the end of
1829, the Rothschilds retreated when a third loan was issued in 1829, again through the Wilsons, although, as we
shall see Rothschilds were keeping remote control of the operations.
35 . On 21 July 1826, the Morning Chronicle printed a table comparing the respective issue prices of the foreign
loans with their current quotations, and calculation of the investors’ loss on the value of their holdings: “The
difference between the issue price and the quoted bond prices were shocking. Brazilian bonds had shed 30 points
since their issue date, Buenos Ayres 36, Chile 37, Colombian 1822 bonds 58, Colombian 1824 bonds 60 ½,
Mexico 1824 bonds 50 and Mexican 1825 bonds 45…Investors probably derived scant consolation from
knowledge that Spanish and Greek bonds had performed even more poorly. Spanish 1822 bonds issued at 56
were now quoted at 7, while Spanish 1823 bonds had dropped from their issue price of 30 to 4. The 1824 and
1825 Greek bonds, issued at 59 and 61,5, had collapsed to 10 and 11 respectively” (quoted in Dawson 2002: 127
36 . Indeed some contemporary and modern authors have argued that the spread between good and bad securities
were far too small. This was reportedly the position of the House of Hope in Amsterdam regarding the issue
price of Buenos Aires’ securities (Ziegler 1988: ).
37 . Fodor (2002) argues that the actual amounts collected from naïve investors were very small.
for issues by ordinary banks (no relation, or possibly a negative one). In effect, a non-Rothschild issue
was a lottery ticket (highly volatile run-ups). Second, for any given level of initial risk, short-term
returns from Rothschild issues dominated all other ones. This means that for any level of risk,
Rothschild issues were costlier for issuers than non-Rothschild ones. Evidence of such large and
predictable gains suggests there was a free lunch. We think of it as a tribute to Rothschild’s monopoly
position, and also as a signalling mechanism.
Figure 3. Short-Term Risk and Returns: The Rothschild Frontier
-15
-10
-5
0
5
10
15
20
0 2 4 6 8 10 12 14
Risk (Spread at Issue over Secondary Price of Consols)
Source: authors’ computations and Table 6.
Cases where Rothschild’s were not involved but could have been provide additional anecdotal
evidence. Compare for instance Wilsons’ issue of Brazil 1824 with Rothschilds’ one in 1825 (Table
6). As seen, Rothschild’s issue experienced a price run-up while Wilson’s did not. This may be seen as
a tribute to Rothschild’s credit. Another interesting case is the Danish issue of 1825. As indicated, it
was sold to an ordinary bank (again, the Wilsons’) in a sealed bid auction. The Rothschilds had
participated to the auction and were prepared to sell it at almost the same price as Wilsons (Gille 1965:
). Thus we may predict that, had the Rothschilds been involved, a positive run up would have been
observed. But they were not and the Wilson issue experienced a price decline on the issue date (Figure
3). Controlling for all factors is difficult, but the general inference seems to be that uninformed
investors could tell that with Rothschild issues there would be substantial and predictable gains. By
contrast, with ordinary banks, they could not know how much they would make or lose. If that is so
we should expect a lot of non-Rothschild issues to fail, which is just what happened.
2) Commitment: The Visible Hand of the Market
Of course, securing stable and reliable returns for the securities it underwrote could not be
straightforward, even for a prestigious firm. Liquidity shocks, rumors, and their likes were always
possible: The market could reverse trend, unhappy competitors could cry down securities. These
complications required interventions in order to mimic the normal operation of the market and keep
customers satisfied. One example was Russia’s 1822 issue. Primary sources suggest it had
encountered difficulties, “much stock staying unsold” (Ziegler 1988:94). But Table 2 shows the issue
performing normally with a typical “Rothschild” run-up. It must be that someone was buying. And if it
were not the public of investors, it had to be the underwriters and their close clients. Indeed, relying on
primary evidence from Rothschild’s archive Gille (1965: ) argues that, from 81 (price of issue) prices
were “pushed” to 84 and 85. The point is that issuer-underwriters could not just walk away from the
countries they had sponsored, since their reputation was tied to the sustainability of these countries’
debt. We suggest describing the relation between prestigious underwriters and the countries they
issued as one of implicit insurance. Two case studies shall illustrate this point.38
a- The Kingdom of Naples.
New Neapolitan securities were introduced by the House of Rothschild in Paris in 1821 with cross-
listing in London.39 The new Rothschild Rente was issued in three batches, in May 1821 and
December 1821, with the third one being split in two tranches, respectively sold in January 1823 and
January 1824. The two issues of 1821 had been major successes with prices rising continuously. A
third agreement, signed August 1822, provided for what was essentially a forward underwriting
contract: it stipulated that there would be two further loans, sold at 73 and 75 in January 1823 and
January 1824 respectively. Figure 4, which extrapolates the earlier trend in Neapolitan bond prices at
the date of this latter agreement, suggests the kind of ideas that the Rothschilds were mulling over.
The bankers were betting on further price increases.
However, their play was disturbed by the events in Spain in late 1822, which reversed trends
temporarily. On the day the issue was supposed to take place, the price of the rentes was below the
level at which new securities should be bought. Nobody would subscribe and the bankers had to pay
the first installment, in effect becoming sole purchasers.40 The bond was not formally introduced in the
market. At the same time Rothschilds were intervening to support the securities, most probably
through forward purchases.41 There is a suggestion that they did so in partnership with Naples’ finance
38 Interestingly, the concern over making sure that there would be a positive run up was combined with the
concern that this run up should not be too big for fear of signaling a speculative issue. According to Gille (1965 :
184), the Rothschilds perceived this as a “great danger” and the bankers intervened when needed to prevent
excessive price increases
39 . Neapolitan rentes had been an instrument traded in the Paris market for quite a while See… In what follows
we use quotations for the so-called “falconet debts” which evidence suggests was used as benchmark for settling
transaction on other instruments. Data (available upon request) show that quotations on Falconet debts were
consistent with other sterling or franc denominated Neapolitan rentes when they are both available, and similar
as well to other instruments such as Sicilian rentes.
40 . From Select Committee p. 267, “Some Revolution took place, […] and if it had not been that my grand
father had paid the instalment and kept the stock, the Government would never have got their money”.
41 .Journal du Commerce reports quotations for forward prices on foreign securities in Paris. Neapolitan
forwards are the most frequently quoted ones.
minister, one Medici.42 Gille (1965: 97) argues that by July 1823, Medici and the Rothschilds “had the
situation under control” as can be seen in Figure 4.43 The January 1824 issue could also be floated and
in May 1824 another successful issue took place in London.44
Figure 4. Spot Prices of Neapolitan Rentes in London 1821-24
Trends and Issue Prices
55
60
65
70
75
80
85
may-182 1
jul-1821
sep-1821
nov-1821
jan-1822
mar-1822
may-182 2
jul-1822
sep-1822
nov-1822
jan-1823
mar-1823
may-182 3
jul-1823
sep-1823
nov-1823
jan-1824
"Paris 1821", Wetenhall, pre-
August 1822
"Paris 1821", Wetenhall, Post-
August 1822
Issue Prices in Paris: first two
contracts
Third Contract, August 1822
(forward issue prices)
Linéaire ("Paris 1821", Wetenhall,
pre-August 1822)
Source : Cours des effets commerçables à la Bourse de Paris, Wetenhall
Problems were renewed with the collapse of Latin American securities, which took their toll on
Neapolitan bonds. Market reports suggest the premises of contagion. Some investors sold Neapolitan
bonds forcing the Rothschilds to step in again. One of the few available balance sheets of the Paris
house, dated June 1826, shows Neapolitan bonds representing 15% of the total asset side. This
amounted to one fifth of the 1824 London issue.45 James wrote to Charles in Vienna that if it “had not
been for their purchases” Neapolitan funds would be trading much lower and perhaps “discredit would
be complete”.46 We conclude that concerns about brand promotion led under-writing by the house of
Rothschild to include extensive post issue services and in effect, market support.
42 . Gille (1965: 97)
43 . “Fin juillet [1823], le ministre et Charles de Rothschild paraissaient avoir les cours bien en mains, malgré
une certaine abondance de titres” (Gille p. 97)
44 . The low run-up that this issue experienced, however, may be seen as a reflection of the underlying travails.
45 . The asset side was million £ 3.8 of which million £ 0.5 Neapolitan bonds. Gille 1865:164-5.
46 . Gille (1965: ): “Il n’est pas douteux que depuis quelque temps un nouveau discrédit s’est attaché aux fonds
napolitains…. Sans les efforts que nous avons faits, nous ne savons trop où cette défaveur aurait pu s’arrêter et
nous craignons même que si l’on ne porte remède au mal, ce discrédit finisse par devenir com plet.” Support
operations continued when in October 1827, the House of Rothschild offered to buy future coupons thus selling
nothing short of an outright insurance against default Gille (1965: p. 168). There was also diplomatic
b- Brazil
The experience of Brazil also offers interesting perspectives. Following the failure of the Brazilian
debt issue in 1824 by Thomas Wilson and Co’s, the Rothschilds had been asked by the British
government to take care of the balance.47 They did it and acted as underwriters and issuers for the
remainder of the loan, which was successfully sold in 1825. However the situation soon deteriorated
and, following the Latin American bond debacle, the Rothschilds were concerned with dealing with
Brazil at arm’s length.48 Brazil had not defaulted on its bonds but in May 1828 its authorities declined
to pay the coupon on a Portuguese loan it had agreed to service in exchange for the recognition by
Portugal of its independence. The Rothschild consistently declined any new loan to Brazil. But they
were nonetheless keeping an eye.49
In 1829, as financial problems accumulated, the House of Thomas Wilson took a new issue on
board, which it underwrote and serviced. However the distribution was in effect taken care of by the
Rothschilds. There was no prospectus, or anything like that and the securities which were sold in May
1829 were distributed among Rothschilds close customers (Dawson 2002:181). The market recognized
the Rothschild’s heavy hand.50 Bull speculation followed, and the price of the 5% Brazilian bond
soared from 58.75 in May to 73 at the end of the year.51 And thus (although in a certainly much less
decisive way than it had done for Naples) the house of Rotshchild was signaling the worth of Brazil.
Dawson (2002 :182) has argued that “Brazil's continued solvency, made possible by the Rothschild
sponsored rescue ... affirmed once more the basic differences between the vast country and the former
Spanish colonies”. The most basic difference, our analysis suggests, was the involvement of the
Rothschild’s firepower. One cannot discount the fact that access to such a powerful support must have
weighed potently in the Brazilian authorities’ eventual decision not to default. After all, as we saw,
many decisions to suspend coupon payments followed rather than preceded the collapse of
intermediaries.
maneuvering: Naples was financing military occupation from Austria and the Vienna branch was in charge of
trying to persuade Metternich to put an end to it in order to alleviate Naples’ financial burden. It would be too
long to review here all the schemes that the Rothschilds implemented to support Naples.
47 . We follow here the explanation of Gille (1965 :). Other authors appear to ignore this connection and argue
that the reasons why the Rothschild engaged in Brazil are not precisely known (Marichal gives the Times and
Barroso, Gustavo as the references, p.35 ). Dawson (2002) speculates that Brazil was the only monarchy and this
special status as a stable land favoured the interest of the merchant house.
48 .Fortune Epitome (1833, p. 132-3) reflects the concern of investors: “Hitherto, Brazil has avoided launching
into the very vortex of revolutionary turmoil, and of downright republican principles; but there is no disguising,
to a common observer that it stands on the brink of the precipice, having already deposed in a manner their chief
authority and embarked on the doubtful sea of a Regency, with a long minority. It is to be hoped that they will
have the good sense to take warning from the events which are passing in the neighboring States, and keep from
the horrors of anarchy”.
49 . Dawson (1990:171) argues that this was damaging for Brazilian credit. Dawson he concludes that Brazil was
technically in default, although the CFB (1877) does not register Brazil as defaulter in those years (see also
Abreu (2006: 767)). They were eventually brought to reason (after years of dispute between both Governments,
the Times reported on the 28th January 1836 that Brazil accepted to repay the loan although at that date they still
had to agree on the exact amount).
50 . Some sources associate the Rothschilds to the Wilson (e.g. Gilbart 1837: p. 61).
51 . One interesting aspect of the episode is that it resulted in Brazil’s credit rising above that of Portugal.
3) Reward: Reputation Formation and Intermediaries
Equilibrium requires agents to find it in their interest not to deviate. Starting from the description
we have provided so far, we do find plenty of evidence that intermediaries, investors, and borrowers
found rewards in the existingsystem and thus incentives to keep it going.
Consider first the banks. The good ones had all reasons to be careful regarding the instruments that
they would bring on the market, for wrong choices would reverberate on future business. And thus the
Rothschilds cherry pick, while the Barings abstain. The bad ones had all reasons to be “betting for
existence”, i.e. try to break in the market by playing with neglected instruments and hoping that this
would turn out to work. They found possibilities in the emergence of new countries following the
collapse of the Spanish Empire. Table 7 organizes evidence on underwriting activity during the period
1815-1840. Most of the banks that had issued rotten securities during the boom of the 1820s
disappeared from the market in the subsequent period. Two went bust. Seven just got out. Those
capable to continue business were the Rothschild, the Barings, which interestingly intensified their
activity, the Wilsons, and Ricardo.52 For Wilson it was only for one loan (the Brazilian issue of 1829)
and interestingly, none of its issues had defaulted. Moreover that one issue had been conducted with
Rothschild’s backing. The case of the house of Ricardo is also interesting: as seen, Ricardo was among
the underwriters with the highest yield at issue during the first period (about 600 basis points). It
managed to introduce a substantial amount of loans during the second period, again at discount prices
(a more than 600 basis points). Ricardo, it might be surmised, was a self-confessed seller of junk
bonds. Finally there were three new houses that made their début during the second period. As can be
seen, wildcats came and went.
Consider now the public of investors. Global custody with a prestigious underwriter, during the
1820s, meant making huge gains. Earlier historians have emphasized that the Rothschilds managed the
portfolios of the “super rich” of the time who were in a large part the members of the former
aristocracy (Gille 1965: 77).53 We remark that Rothschild’s “convergence plays” were very profitable
for those who got involved in the “inner circle” on investment. In the Neapolitan 1823 rescue, they
bought at 73 and five months later when volatility receded (in May 1823) the price was 76.25. Assume
they sold at that point, and that’s a 9% annualized return. In the Brazilian operation of May 1829,
assuming that the securities were sold in December to buy and hold investors the gain was above 40%.
As said, an issue underwritten by the House of Rothschild was a guaranteed success so that it was
advantageous to be in a position to receive a substantial allotment. In summary, the Rothschilds’
52 . Baring’s fairly low yield at issues suggests that they made a quite aggressive come-back in the 1830s, after
having essentially abandonned the turf to Rothschilds.
53 . See Gille (1965 : 80) for an early intuition of this result: “La technique des grandes opérations financières, la
structure des capitaux font qu’une firme réputée pour ses succès et pour son habileté fait automatiquement
prime. Il suffit que son nom figure dans une compagnie financière pour qu’elle draine tous les capitaux
disponibles. Et, si elle tient, par le biais des commissions, par les facilités de placement, un certain nombre de
correspondants actifs, sa suprématie est assurée” (our italics)
operations may be said to have pioneered the actions of modern hedge funds with their sheer size and
ambitious bets.54
What benefits for borrowers? Obviously the de facto monopoly Rothschilds assumed had a cost
reflected in Figure 3 by the larger run-ups of their issues. This was money borrowers were leaving on
the table and we may ask why they were happy with that. Part of the answer is that obviously they
were not but did not have alternatives. Using other houses would mean a risk failure, greater price
volatility and in the end disappointment. On the more positive side, however, we remark that the costs
incurred by borrowers decreased over time. This is illustrated in Figure 4, which shows the evolution
of Rothschilds price run-ups in the two cases where we do have a list of subsequent issues for the
period under study, Prussia and the Kingdom of Naples.
Figure 4. Price Run Ups in Maiden Début and Seasoned Issues
0
2
4
6
8
10
12
14
16
Naples 1st issue: Naples
1821
2nd issue:
Naples 1821
3rd issue:
Naples 1824
Prussia 1st Issue:
Prussia 1818
2nd Issue:
Prussia 1822
Source: authors’ computations
As can be seen, run-ups for “maiden débuts” were larger than 10% of the value of the bond but
subsequent issue incorporated much lower discounts. These reductions reflected the fact that, having
exploited their monopoly position in bringing the first issue to the market and making it a success,
Rothschilds now had to take lower margins because they had revealed part of the issuer’s worth.
While they retained an edge that enabled them to defeat competitors in open auctions, there were now
a number of firms out there ready to enter the market Rothschilds had created, had they asked for too
54 . See e.g. Gille, p. 163 “Ce qui frappe au premier abord dans ces bilans, ce qui explique aussi la solidité de la
firme dans la crise, c’est le peu d’importance des d épôts”. Feed-backs on the activity and prestige of initially
prestigious underwriters could also derive from this situation. They identified various layers of investors, and
various degrees of appetite for risk (e.g. Gille, (1965: p. 165): emphasizes the importance of the Rothschilds
having in management the funds of a number of buy and hold purchasers). As a result, they could direct the fire
in the aftermath of new bond issues, involving clients at various stages of the process depending on resources
commitment and time horizons.
high a margin. Of course the signals competitors would send would be worthless, but then the very
fact that Rothschilds displayed interest was a guarantee.
The resulting situation may be thought of as an incentive system that shifted the returns from good
behaviour to a distant future while imposing short-term costs. This can be understood as an efficient
mechanism to encourage borrowers to reveal their true worth. A non-serious borrower would prefer to
run the chance of a non Rothschild issue sold at a lower run-up and higher price with an ordinary bank
that would be unconcerned with damaging its reputation, and then default. By contrast, an issue with
Rothschild meant heavy up-front costs. But then, there would be long run benefits. And in the end, the
enforcement of this system obviously rested in a very peculiar form of creditors’ coordination, namely
the monopolization of market access, achieved through prestige and reputation of intermediaries, in a
world of rampant information asymmetries.
An illustration is provided by the 1823 5% loan to Portugal, which some early authors have
mistakenly attributed to the House of Rothschild.55 This is because its archive contains a projected
contract that was submitted to the Portuguese government, for the sale of £ 1.5 m. nominal capital at
73 minus commission 3%. We ignore how much bargaining had taken place before but assume, upon
inspection of the document, and from comparisons with other cases, that this was Rothschild’s final
price. But a few weeks later, the loan was underwritten and issued by B. A. Goldschmidt, at 87, or
19% higher.
The involvement of the House of Rothschild in trying to underwrite a security that would
eventually default is interesting. As we can see Rothschilds priced Portugal much lower than a wildcat
did. Based on the empirical evidence from other contracts we may predict that Rothschilds would have
delivered a run-up of about 6% so that Portuguese bonds would rise to 77,45 (or a yield of 6.45%) on
the first day of trading (Figure 5).56 Even with the negative run-up of the Goldschmidt issue, the first
quoted price implied a yield of 5.76%. The 69 b.p. spread is one measure of the short run gains from
not using the House of Rothschilds. However, despite Goldschmidt’s efforts to push up the price,
Portuguese securities stood to decline inexorably. Ironically, in February 1826, when Goldschmidt
failed, it was trading at 73 -- Rothschild’s suggested IPO price. Moreover previous evidence on
Rotschild’s commitment to defend their clients suggests that, had the Rothschilds underwritten the
loan, (implying that Portuguese were serious about paying back) they would have supported it at that
55 . See Ayer (1904). The confusion is cleared by Gille (1965: 103), resurfaces Ferguson (1998: 142). The
reference of the contract in the London Rothschild Archive is 000/401 A. According to the terms of the contract,
the Rothschilds would be underwriters, issuers and coupon payers. Contract is dated from Lisbon, September 8,
1823.
56 . Another way to look at this is to consider that the pricing incorporated the standard début discount that had
been applied to Prussia and the Kingdom of Naples in which case the run up would have been closer to 10%,
bringing the security to about 80.5 or a yield of 6.2% In effect, archival evidence shows that the Prussian début
bond was used as a benchmark for the Portuguese issue. The contract was modeled after the Prussian of 1818,
and indeed it was stated that “The basis of the contract on which [the bonds] are founded, similar as far as
possible to those issued by the Prussian Government in 1818, of which a model is hereinto annexed.”
(Rothschild Archive, …). The existence of lien on public revenues is another similarity.
point. Instead, Portuguese bonds were sliding further (to 65, to 60, down to 40 in late 1830) and
eventually, Portugal defaulted. The episode illustrates a prestigious house’s concern about protecting
its reputation, a concern, which led it to try and bring securities at the right price that. Interestingly, the
modern literature on corporate IPOs for a contemporary parallel (Beatty and Ritter 1986). It
conversely illustrates that this entailed short run costs for the government, as well as long run benefits.
Borrowers, depending on the time horizon and thus commitment to repayment, associated with good
or bad intermediaries, and the sorting was done.
Figure 5. A counterfactual assessment: Portugal 1823
-15
-10
-5
0
5
10
15
20
0 2 4 6 8 10 12 14
Risk (Spread at Issue over Secondary Price of Consols)
Counterfactual Rothschild's Run-Up
Actual Performance of Portuguese issue
Source: Authors computations from Wetenhall and Rothschild’s Archive
And thus it is that bonds issued by Rothschilds were successes while bonds issued by ordinary
houses were failures. Rothschilds became a brand, and still is, to an extent. Contemporaries soon
recognized it and information on prestigious banks’ actions became a market driver (think of
announcements of new investments by Warren Buffett as a modern day equivalent).57 In Frankfurt and
Naples, people trading on volatility remarked that the numbers of messengers received by the House
of Rothschild was a signal of impeding market movements. In April 1822 a “mini-crash” was
triggered by arrival of an unusual number of Rothschilds couriers.58 It happened that in Naples,
57 . See e.g. Gille (1965: 166) and Moniteur universel September 22 1826, Journal du Commerce, September 23
1826. There were rumours that the Rothschild were betting on certain securities and “cette seule annonce, vraie
ou fausse, avait déjà provoqué un mouvement favorable de hausse”.
58 . Gille (1965 : 188), and Journal du Commerce (April 3 1822) : ”On surveilla donc attentivement la marche
des courriers R. En avril 1822, ils provoquèrent, par leur nombre, une petite panique à Francfort”
messengers had to change clothing to avoid disrupting the market.59 And of course, speculators tried
to plant rumors pertaining to Rothschild’s moves (Gille 1965: ). The Rothschilds, in turn, denied,
clarified, or ignored. A whole business of information collection, retention, and distribution was born,
and its focal point was not what the borrowers were doing but the actions of intermediaries. In the end
the material in Table 1 contained exactly what people needed to know -- that Goldschmidt had
underwritten Portugal, while Rothschild had underwritten Naples.
Section V. Speculative Grade: The House of Baring in Latin America
This section deepens our foray on the economics of underwriter’s prestige in a world of incomplete
information, showing that the prestige of certain firms acted as magnets for investors and could have
effects even when the firm did not get directly involved. In the previous discussion we lost sight of the
House of Baring. During the 1820s, they refrained from dealing with sovereign debt and adhered to
that policy consistently throughout the decade.60 Internal sources emphasize perceived risks (Ziegler
1988: 95). Swinton Colthurst Holland, a partner at Barings, reflected in 1821 that: “the Stocks for
Public securities of all countries … are a dangerous commodity to deal in, by those who do not
understand them … and the wisest are often deceived with regard to them” (see Ziegler 1988: p. 95).61
Considerations of Value-At-Risk and prudential management (translating volatilities into potential
losses and computing the amount of capital needed to absorb the shocks) may explain Barings’
reluctance.62 During that period their capital was on the ebb: in 1826, the amount of Neapolitan bonds
found in the Rothschild portfolio was equivalent to Baring’s total capital.63 However, given the
reputation of the Barings, even their reluctance was a signal and indeed, in February 1825, Alexander
Baring had spoken in the House of Commons against the sovereign debt mania as interfering with
“legitimate loan-making” (Hidy 1949: 67). However, despite their initial lack of appetite with
sovereign debt Barings nonetheless got involved. In this section, we study how what we conceive as
an evolutionary process of “self-discovery” occurred, and we do this by providing three snapshots
dealing respectively, with Buenos Aires (embryo of later day Argentina), Mexico, and the
Bondholders.64
59 . Gille (1965: 167): “Ainsi faisait-on attention une attention sans cesse plus soutenue, aux déplacements et aux
réunions des chefs de la maison Rothschild. Le monde financier européen, et cet aspect psychologique n’est pas
sans importance, paraissait vivre de suppositions a l’égard d’elle. La spéculation s’en trouvait affectée. Déjà se
constituait les éléments d’une légende qui depuis quelques années n’avait cessé de gagner en importance”.
60 . These have much intrigued historians, see Gille (1965), Ziegler (1980).
61 . Hidy (1949 : 499) quoting Nolte ( : 302-6) also argues that the Barings lost heavily speculating in French
rentes in 1824. Gille suggests this was in 1818.
62 . The House of Baring had lost money in1818 while playing with French sovereign debt (Gille 1965 : 77).
63 . In the words of Ziegler: “An unadventurous approach to foreign lending was no bad thing in the 1820s. The
cautious Barings eschewed such exotic delights and had cause to congratulate themselves when the financial
crisis of 1825 […] caused almost every borrower in Latin America to default on his payments of interests”
Ziegler (1988: p. 97-8).
64 .This involvement eventually led to the Barings infamous collapse in 1890. It seems ironic given Baring’s
initial reservations (Flores 2004, 2007). Hidy (1949 : 67) reflects that” later partners in the House of Baring
a) Buenos Aires
Barings were not averse in principle to investment in Latin America (Ziegler 1988:101). What was
attractive to them, as a merchant house with many dealings in the Americas, was the enormous trade
and growth potential of Latin American countries. Against this, stood political fragility and it was just
as large. The need to keep good relations with local communities made it difficult to abstain from
dealing with polities while sharing in commercial promises. The concern about not missing the coach
was particularly strong Ziegler continues, with “the River Plate [Buenos Aires] to which area the
British exported more than £ 1 m. worth of goods in 1824 alone.” (Ziegler 1988: 102)
The involvement of Barings occurred in just the reverse way we observed with the Rothschilds.
The Rothschilds brought debts to the market. The market was to bring Barings to the debts. The
contractor of the Buenos Aires loan of 1824, W. P. Robertson had approached Barings asking them to
become the window through which the loan would be distributed. Unsurprisingly, given what we have
argued so far, Robertson emphasized that “the Minister of finance in Buenos Aires had urged them to
involve Barings in the transaction if they possibly could, since nothing would help more to establish
the country’s credit”.65 The Barings accepted to be Buenos Aires’ portal and thus they became
distributors and advisors.66 But they waved their hands to the market, emphasizing they merely acted
as they would for any other commercial concern, acting as “depositary of subscriptions”. The
prospectus named Castro and Robertson as the issuers of the loan (Amaral 1984, p.18).
The issue (begun July 28, 1824) was far from satisfying. In the words of Ziegler (1988: 102)
“speculators briefly kept the price at a premium but they soon cut their losses and threw their stock on
the market”. Our data from Wetenhall shows the price run up to be a modest 1.25% (Table .),
declining to 0.5% after one month. After three months (late October 1824) prices were actually 2.5%
below issue.67 At that point, Robertson regretted, one was “under the necessity of considering the
Buenos Ayres loan a failure’” (Ziegler 1988: p. 102).
Intriguingly, despite Barings’ animadversions, they were reported as actually buying the bonds of
Buenos Aires and trying to limit their fall to the extent, says Ziegler (1988:102) “that they had an
uncomfortably large amount of capital locked up in virtually unsaleable bonds”. We ignore the extent
of these market interventions and of the losses that Ziegler claims were suffered, or if there were any
losses at all. In the following months the Buenos Aires loan rose again, and it may be that this enabled
the Barings to get out with a profit.
The point, however, is that we cannot avoid noting that their “exertions” bear some resemblance to
those of the Rothschilds with Neapolitan debt, although they were obviously much more limited. Later
especially in 1890, certainly had reason to wish most sincerely that relations with Argentina had never been
inaugurated”
65 . Ziegler 1988: 101:” Robertson spared no pains to bring this about. He assured Barings that the business was
absolutely safe: ‘In resources, in Government stability, in every regard Buenos Ayres holds a different rank from
the other Independent States’”.
66 . Ziegler says (1988 :102) that theyadvised contractors to sell the bond at a lower price.
67 . Authors computations, from Wetenhall.
Argentine historians have claimed that “the name of Alexander Baring … is worthy to figure among
the loyal servants of our country” (Leguizamòn 1924: quoted in Ziegler 1988). Similarly, Ziegler
writes that, for Barings, the eventual default of Buenos Aires in January 1828 “was the most painful of
the many shocks they had suffered in the previous two years” (p. 103). And thus, one is under the
impression that, apart from their being philanthropists, the Barings’ involvement in the debt of Buenos
Aires must have resulted from a concern about the adverse effects of Buenos Aires’ failure on their
brand.
b- Mexico
Similar insights emerge from an examination of the effects of the take-over by the Barings of the
agency of Mexican loans, following the failure, in August 1826, of Barclay, Herring Richardson
(Costeloe 2003, Dawson 2002, Ziegler 1988: 105-6). The market learned of it in September 1826 and
there again the Barings insisted that their acceptance to pay out dividends had no significance
whatsoever. However, the announcement triggered bull speculation in the market. The wording in
Dawson (2002: 128) suggests contagion, a point to which we return later: “All other bond issues were
temporarily buoyed by Baring’s designation as agent for the Mexican loan. Even Peru rose from 27 to
29,5, and buying orders for Mexican stock were received by post from ‘Hansa towns’ where the
appointment had ‘created a strong impression’”.
The fact is that, there again, the Barings were finding themselves drawn into the maelstrom of bad
debt management. Following delays in the transfer of funds from the Mexican government in March
1827, the April 1 coupon was paid “courtesy of Baring Brothers” and (Dawson 1990: 147) and so was
that of that of July (Dawson 1990: 148, Hidy 1949: 66, Costeloe ????: ). Technically, the House of
Baring was lending into arrears. The relation between Baring and the Mexican government
deteriorated and in August 1827, news that Barings were intending to transfer its Mexican agency to
Reid, Irving, another merchant house involved in trade finance with the Americas, but one of “second
rank” (Hiddy 1941), “precipitated a heavy selling wave” (Dawson 2002: 147).
The information was later disapproved but in late September “default and an agency change”
appeared inescapable (Dawson 2002: 150). Formal default was announced on October 1, 1827, and the
Barings gave up agency. According to The Times: “It was especially regrettable that Barings had lent
its name to the proceedings. Although all the firm’s partners had repeatedly stated that they had no
formal connection with the Mexican government and had agreed to pay out dividends as they would
[for?] any other commercial agency, the general public had received a different impression. Many
bondholders would never have retained their position in the loan but for the character which Messrs
Barings gave it by undertaking the agency’”. (18 September 1827, quoted in Dawson 2002: ; our
italics).
Figures 6 shows the effect on the price of Mexican securities of announcing Barings agency. As
seen, the bonus was a hefty 300 basis point. It vanished with news that the Barings were no longer
involved. Dawson suggests, following indications in The Times, that as a result of expectations of
Barings’ involvement, the shock of the Mexican default was a serious one catching many investors
wrong footed, including “Stock Exchange members” (Dawson 2002: p. 152).
Figure 6. Effects of Announcements of BaringAgency on Mexican Bonds
0%
5%
10%
15%
20%
25%
jan-1823
abr-1823
jul-1823
oct-1823
jan-1824
abr-1824
jul-1824
oct-1824
jan-1825
abr-1825
jul-1825
oct-1825
jan-1826
abr-1826
jul-1826
oct-1826
jan-1827
abr-1827
jul-1827
oct-1827
jan-1828
abr-1828
jul-1828
oct-1828
Mexico 5% 1824
Mexico 6% 1825
Source : Authors’ computations
c- Where the Buck Stops: Relations with Bondholders
As the first defaults took place, the blame game began. Bondholders blamed borrowing countries
and intermediaries and begged for government support. The British government blamed the
bondholders who had gambled, lost and were now whining. Financial intermediaries rejected any
responsibility: Thomas Kinder, contractor and issuer of Peru’s loan went as far as blaming the default
of Peru on investors, arguing that it occurred because “scrip-holders” of the second Peruvian loan
interrupted the payment of further instalments thus making interest service impossible.68
Investors then began creating “self-help” groups, and organized meetings on a borrowing country
basis to solve collective action problems in lobbying loan contractors, diplomatic representatives of
debtor states, and the British government.69 They appointed committees to draft letters and named
representatives to handle negotiations directly with the borrowing countries.70 These meetings became
68 . Of course, the reason why subsequent installments had not been paid was because the decline of the scrip
value was so large that it cost less to forego earlier payment than to continue subscription.
69 . For instance, Colombian bondholders tried, but failed, to secure the intervention of Foreign Secretary
Canning at a meeting alter Colombia’s default in July 1824.
70 The Committee of Mexican Bondholders was created in order to discuss the propositions of the Mexican
Government to resume payments the 26th may 1830 (Costeloe, p.28)
regular after 1827 (Dawson, p.195). The impetus for the formalization of common framework came
from the British Parliament itself and a general meeting of all bondholders organizations was
organized on May 2nd 1828 (Dawson, p.164). This led, under the name of “Spanish-American
Bondholders Committee” (then again there were also Spain, Portugal and Greece) to the creation of
the embryo of the 1868 Council of Foreign Bondholders Association.71 Not incidentally, this first
meeting was chaired by one Alexander Baring, M. P.
This participation was not isolated but rather typical. Following discovery of their ability to drive
the price of Mexican securities, the Barings took an active role in defending Mexican bondholders’
interests. Alexander Baring was the first chairman of the first Committee of Mexican Bondholders
(Costeloe, p.163). In this position he made his support conditional upon full commitment to punctual
payments and material guarantees. An eventual agreement was reached in 1831, although it lasted
until 1836 with a second Mexican default. Baring again resigned as the agents of the Mexican
government, never fully giving up but setting conditions for participation. Barings had again a
prominent role in 1862, becoming representative for Mexican bondholders72 and later also as the
Mexican agent in London 1864 (Costeloe, p.85). They also acted in Venezuela, proposing an
arrangement for the second Venezuelan default of 1847 (Dawson, p.199) and for Chile, intervening in
the arrangement of Chile’s 1826 default in 1840 (Dawson, p.207). Finally, Ferns (1992: 242)
emphasizes Barings’ persistent dedication to protecting the interests of holders of Argentine securities,
although agreement there was the longest to reach, in 1857.73 These actions were often a preliminary
to taking over debt service agency,74 or to restoration of market access, or both.75
A back of the envelope calculation of the average time before an agreement was reached with
bondholders for a debt restructuring following the defaults of the 1820s shows an average 16 years for
Baring protégés against 30 years for other Latin American defaulters. This is one, admittedly crude,
but nonetheless significant, measure of the influence that the House of Baring had on the operation of
the international bond market. And thus it emerged as a kind of “collection agency” in the foreign debt
market. Just like the Rothschilds, albeit on a wholly different market segment, which we suggest to
call “speculative grade”, they found themselves in a de facto monopoly position. Their brand now
signalled a very specific type of implicit contract. When a Rothschild contract included post issue
71 Dawson, p.195. We are amazed that recent research in economic history (e.g. Mauro and Yafeh (2003),
Tomz…) seems to have just missed out the predecessors to the CFB. The existence of such committees,
however, is well documented in earlier historians’ works. It is true, however, that unlike the CFB, they have not
left systematic annual report that are easy to consult. By contrast, we do not have much direct evidence regarding
the substance of Latin-American Bondholders meetings until the 1850s
72 See ING Baring archives, 204326, “Baring Accepts to Represent Bondholders”.
73 Ziegler is more prudent and emphasizes that it was owing to the Bondholders agitations that the Barings felt
they had to act in 1842 and 1843 and indeed secured an agreement that was ruined by the Anglo-French
intervention in the port of Buenos Aires (Ziegler p. 107). But why should the Baring s have felt compelled to act,
if it were not for the benefit of their reputation?
74 . See ING Baring archives, 205005, “Chile Appoints Barings as Agents for Servicing Debt, 1844”.
75 .For instance, following the settlement with Argentina, Baring issued a first loan on behalf of Argentina in
1866, for £ 0.5 m.
intervention, market support, convergence plays etc., as part of the basic “underwriting package”, the
Baring brand meant honest efforts at bringing borrowers who defaulted back to the negotiating table.
Of course, the very expectation that they could do that was a powerful argument, which would come at
a price.76
In the end, both Houses became fierce supporters of the “market mechanism” and strong opponents
to Government intervention. Alexander Baring publicly emphasized that bondholders were consenting
adults, who should not expect government to insure their “gambling losses” (Dawson, p.193).
Understandably so: after all, they should have read what was written on the label – as the label’s
owner reminded people. The early 18th century international financial architecture, we conclude,
provides a fascinating case of “governance without government” (Rosenau 2000).
Section VI. Spreads, Information and Contagion: a Test
The evidence reported points to a straightforward test. Our claim is that investors had limited
information on “fundamentals” and could only tell countries apart according to the identity of the
underwriter -- or, more rigorously, the underwriter was the fundamental. There were, we surmise, two
types of intermediaries: “value rich” intermediaries (in that period, Rothschild, since Barings
abstained) signaled investment grade. On the other hand, “value poor” intermediaries signaled a junk
bond. If our view is correct, then we should observe substantial co-movements between bonds falling
in the same issuing/underwriting entity group. Specifically, the spreads of countries underwritten by
good intermediaries should be correlated with one another but uncorrelated with the spreads of
countries underwritten by common ones. Similarly, we should expect co-movements among bonds
underwritten by ordinary banks. This is consistent with contemporary verbal indications suggesting
that rumors of Baring’s participation to Mexican debt buoyed all Latin-American bond prices (Section
V). The modern expression for this is “contagion”: shocks taking place in one country had an effect on
other countries. In the height of the East Asian Crisis of 1997, events concerning Suharto’s health
drove movements in Korean bond prices. To keep it simple: we predict contagion among non-
Rothschild securities, but not between Rothschild and non-Rothschild securities.
To begin, Table 8 reports a number of summary statistics. We first give evidence on the
commonality of “sharp changes” in “emerging countries” bond spreads during the 1820s (Period I),
without distinction in the identity of the underwriter.77 “Sharp changes” are defined either as a 200
76 . An indication of the gradual recognition of this may be found in the fact that the fees charged by the Barings
in return for selling given securities rose from a modest 1% for the first Buenos Aires issue to an average 2% in
subsequent operations.
77 . The recent macroeconomic literature on historical bond prices makes a somewhat lose use of the expression
“emerging market”, a modern word meant to characterize high risk, high growth potential market. It is not
entirely clear that this expression applies to Latin American or South European countries in the 19th century.
However, our point here is to compare results across periods for “similar” countries, and thus we are on the safe
side.
basis point change, or a 20% variation, in month-to-month bond spreads.78 A number of ratios are then
constructed. These include, first, the number of sharp changes in the total of observations, and second,
the proportion of months displaying (a) no sharp changes at all, (b) sharp changes in exactly one
country, (c) sharp changes in exactly two countries and (d) sharp changes in three countries or more.
Table 8. Co-movements in sharp changes for bond prices: Three Periods Compared.
Period I (14 countries,
1822:3-1829:12) Period II (15 countries,
1877:5-1913:12) Period III (8 countries,
1994:11-2004 :2)
200 b. pts 20% 200 b. pts 20% 200 b. pts 20%
Sharp Changes in percent
of Total Observations 5.83 4.54 1.4 2.2 13.2 12.9
Proportion of Months with Characteristics Listed
No Sharp Changes 37.2 51.1 85.4 74.7 43.2 44.1
Sharp Changes in
Exactly one Country 20.2 26.6 9.1 19.4 30.6 34.2
Sharp Changes in
Exactly Two Countries 16.0 11.7 4.6 4.6 15.3 7.2
Sharp Changes in
Three Countries or More 26.6 10.6 0.9 1.4 10.8 14.4
Total: Sharp Changes in
Two Countries or More 42.6 22.3 5.5 6.0 26.1 21.6
Contagion Ratio
Sharp Changes in More
than One country to
months with sharp
changes in at least one
country
67.8 45.6 37.5 23.4 46.0 38.7
Sources : Authors computations and Mauro et al. (2006). Period I : authors computations from Wetenhall. Periods II and III
from Mauro et al. (2006) : p. 115. The 14 countries for Period I are Austria, Brazil, Buenos Aires, Chile, Colombia, Greek,
Guatemala, Mexico, Naples, Peru, Portugal, Prussia, Russia, Spanish. This is very similar with the list of countries in Period
II. Because of missing observations, we may slightly under estimate the extent to which there were sharp changes.
Selection of these measures is aimed at facilitating comparison with other periods. Mauro et al.
(2006) have computed these ratios for two later periods i.e. 1877-1913 and 1994-2004 (we refer to
these periods as Period II and III respectively). Thus while we ignore “how large is large” we can
nonetheless identify what is larger and what is smaller.
Inspection of Table 7 reveals a substantial degree of similarity between results for Period I and
Period III that contrasts with results for Period II. Consider first volatility (or rather, frequency of
sharp changes). Changes in bond spreads bigger than 200 basis points were exceptional in Period II
(1.4%) but less so (6% and 13%) in period I and III. In addition, the proportion of months during
which there was no sharp was low in Periods I and III (37 and 43%) and large in Period II (85%).
Furthermore, co-movements in sharp changes were frequent during both Period I and III, in
contrast with period II. Moreover, a striking feature of our results is that the commonality of sharp
changes is even more marked for Period I. Consider changes larger than 200 b.p. There were 18 per
cent of the months with sharp changes in exactly one country, but 19 per cent with sharp changes in
78 . Mauro et al. (2006) also report changes that are larger than 2 standard deviations. However, the central limit
theorem suggests that, if bond spreads are Gaussian, then the distribution above the 2 std. dev ceiling is constant.
Such a measure is thus only interesting as test of non-normality.
exactly two countries and 26 per cent of the months with sharp changes in more than three countries.
The respective figures for Period III are 30, 15 and 11 per cent. This is reflected in contagion ratios
that are much larger for Period I than for subsequent epochs, but again more similar to what was
obtained in Period III.79 These results are in effect interesting in and for themselves, but also because
they suggest that, in attempting to draw lessons from parallels between the late 19th century or “first
wave of globalization” and today, recentresearch may be erring on the wrong side of comparison.
The next stage in our foray is to compute the same figures but take into account now that there
were really two groups of emerging markets, namely the “Rothschild” countries and the rest. This is
done in Table 9. We see that almost all of the underlying volatility comes from non-Rothschild
countries, which interestingly display the same proportion of sharp changes as in Period III in Table 8
(about 10%). Moreover, all the commonality in co-movements of bond spreads identified in Table 8 is
confined to non-Rothschild borrowers, with no spill-over to Rothschild ones. This is because
Rothschild borrowers exhibited a very limited number of sharp changes, which is indeed the essence
of our contention. Rothschild agency was an insurance against volatility and a sorting device that
enabled countries to escape contagion.
Additional evidence also reported in Table 9 reinforces our conclusion. First we see that the
average correlation between groups is quite large (supporting the notion of a group behavior), while
correlation across Rothschild and non-Rothschild borrowers is much smaller (supporting the notion
that agents could tell groups apart). This is particularly true for computations on levels but it also
shows up with changes. Changes between non-Rothschild countries are correlated with one another
(again, consistently with contagion), but loosely correlated with changes for Rothschild countries.
The predictions of our central hypothesis are thus fully borne out. When investors observed events
affecting a country underwritten by an ordinary intermediary, they tended to think that this was
relevant for all other countries underwritten by ordinary intermediaries, but irrelevant for the securities
of countries underwritten by prestigious intermediaries. This is either because investors expected good
underwriters to have sold good securities, or because they expected prestigious banks to intervene in
the open market in support of their customers, or both. The key information was the brand, and brand
effects explain much of the action.
We think that these results have lots of relevance, not only as an acid test of our central contention,
but also as a new insight on the economics of contagion. Because during the experiment under
discussion there was close to zero information on fundamentals (so that correlation cannot come from
there), the contagion we have identified must have been a pure product of market structure. The idea
that market set up produces contagion has been floated around repeatedly. However, our paper is the
79 . Mauro et al. (2006) conclude “in contrast [with the modern period], ‘contagion’ (the rapid spread of crises
across countries), was a relatively rare phenomenon before the First World War”. Our result shows that this
statement must be qualified. The contrast is not between the 19th century and the modern period, but between the
late 19th century and the modern period.
first to provide an actual test of that proposition. Whether this striking result carries on into other
contexts should be explored in future research.
Table 9. Decoupling: Sharp Changes and Correlations
Between and Within Groups of Borrowers (1822-29)
Periods Non-
Rothschild
Group
Rothschild
Group Between Rothschild
and Non-Rothschild
Sharp Changes Within and Between Groups
200
b. pts 20% 200 b.
pts 20% 200 b. pts 20%
Within Non-
Rothschild Within
Rothschild Between Groups
(Common Changes)
Sharp Changes in percent of
Total Observations 10.5 7.6 0 2.5 0 0.6
Proportion of Months with
Characteristics Listed
No Sharp Changes 37.2 45.7 0 90.4 100 99.3
Sharp Changes in Exactly
one Country 20.2 25.5 0 8.5
Sharp Changes in Exactly
Two Country 16.0 11.7 0 0
Sharp Changes in Three
Countries or More 26.6 8.5 0 1.1
Proportion of Sharp
Changes in More than One
country to months with
sharp changes in at least
one country
Proportion of Sharp
Changes Common to
Both Groups to Total
Months with Sharp
Changes in At least One
Country
Contagion Ratio 67.8 44.2 0 11.1 0 13.0
Average Correlations Within and Between Groups
Levels 0.83 0.53 -0.40
Differences 0.59 0.18 0.27
Source: Authors computations from data in Wetenhall: see Table 7 for details (list of countries and time
period). For correlations, the need to have overlapping data restricts the Rothschild countries to Russia,
Prussia and Naples. Non-Rothschild countries are Chile, Colombia, Peru and Spain. Computations for sub-
periods yield similar results.
Section VI. Alternative hypotheses
This paper has provided new perspectives on how sovereign debt can be sustained despite sheer
informational asymmetries. Our key insight is that those very informational problems and the corollary
risk of “wildcat underwriting” lead to the emergence of dominant intermediaries that have both the
means and the incentives to police borrowers. At an anecdotal level, our hypothesis departs from the
business history literature, which always emphasizes the “global” reach of the houses under study,
describing leading merchant banks as “bankers of the world”, and drawing enthusiast parallels with
modern International Financial Institutions. However, as we saw, the essence of the business of
underwriting as it developed during the 1820s, was precisely not banking on the world, but banking on
specific portions of the world only. An equally inadequate metaphor would be to liken prestigious
intermediaries to modern rating agencies, although we have seen that they filled some of the role today
devoted to Moodys, Standard and Poors, or Fitch. This is because rating agencies, unlike prestigious
investment banks, do not need to “put their money where their mouth is”. We have already suggested
thinking of prestigious underwriters in the early 19th century as forerunners of modern hedge funds. As
such, they could play some of the functions devoted today to IFI and rating agencies, thus making up
for their absence, because they could credibly drive markets.
a- Market Imperfections and Global Financial Integration
More fundamentally, our new hypothesis departs radically from other works in economics,
economic history, political history and political science that have explored the problem of sovereign
borrowers’ monitoring in various contexts. In what follows we review some features that characterize
current alternatives to our new hypothesis. The first alternative research hypothesis we consider is
derived from the theoretical result from Bulow and Rogoff (1988) that there cannot be incentives for
sovereign borrowers to repay their debts when financial markets are perfectly competitive. This is
because governments can borrow in one market, invest the proceeds in another market, and default.80
In consequence, some have suggested that one reason why sovereign debt could be sustained was the
existence of sanctions, military or commercial.
This hypothesis is at odds with features of the 19th century regime that have been emphasized by
previous historians. For instance, Platt (1968) emphasizes the reluctance of British authorities to using
power to enforce payment of international debts. They feared that relying on military force to bail out
creditors would encourage irresponsible behavior and cause ever rising levels of political involvement
(Platt 1968 pp. 34-53).81 Prime Minister Canning first defined this policy in the mid 1820s in reference
to the defaulted Latin American loans (Ziegler 1988: 107-8). As argued by Ziegler: “Not only would
he not send a gunboat to manifest British displeasure, he declined to allow British diplomats and
consular agents to bring pressure on the defaulters. If British investors chose to risk their money
overseas, then it was their own funeral if they lost it”.82
Focusing on the entire 19th century, Weidenmier and Mitchener (2004) identify 43 default event.
Out of the 18 cases when what they call “super-sanctions” were implemented there are 6 episodes of
private creditors’ sanctions, 7 episodes with foreign control over debts (6 by European powers, and
one by the United States), and finally 5 episodes of more or less direct military intervention. The vast
80 . On the theoretical limitations of this hypothesis, see Wright 2002 who provides a model whereby a country’s
concern for reputation can enforce repayment if there are incentives for lenders to tacitly collude in punishing a
country that defaults. In this case, switching to another market entails costs, which induces discipline in
borrowers’ behavior. Flandreau (2006) shows how market-specific ownership of a “repayment technology”
(whereby certain borrowers are forced to repay conditional on their borrowing in some markets), which also rests
on a critical amount of market level and inter-market collusion, generates a geography of finance whereby
governments borrow from one market only while investors diversify
81 . The same point was made more recently by Lipson (1991).
82 . As documented by Platt, this policy would recurrently come under attack and Prime Ministers would
occasionally display hesitation. Each time, the rationale for such a policy was rediscovered and the “normal”
policy course resumed.
majority of these interventions were from the US government, and occurred in Central America.
Britain, the leading power of the time, intervened on its own in two cases only: Egypt and Guatemala.
In Venezuela it sought participation of other countries such as Italy and Germany. This is 3 in 43
default events or slightly more than 6%. Britain was indeed very reluctant to intervene, and made such
a policy the exception and not the rule. It cannot be, therefore, that threat of military sanction led
countries to behave. The 19th century international financial system thus displayed a truly remarkable
ability at monitoring borrowers without recourse to hands-on actions. But if gunboats did not do it,
then who did?
The alternative hypothesis articulated in this paper suggests a possibility that is consistent with
actual historical evidence. Specifically, an implication of our analysis is that the bulk of monitoring
both ex ante, before loans were granted, and ex post, after default occurred was tightly coupled with
market access. This led to a form of conditionality (see e.g. Flandreau 2003). One result of the
emergence of a two tier underwriting structure with prestigious houses on the one hand and wildcat
issuers on the other hand, was that investors could tell the good from the bad and that issuers had to
ponder the adverse consequences they would have to suffer in case of a default, for this would mean
that their securities, instead of being recognized as adequate saving supports, would become
essentially, in the eyes of investors, lottery tickets. Of course this left room for a “junk” sovereign
bond market, for volatility is always a source of profitsfor speculators. But we found it to be a narrow,
dangerous place, and that everybody knew it. Why should the Her Majesty’s Government have ever
cared? Gunboat diplomacy was obviously a way to make things worse, not better, for it would
encourage further risk taking and actually facilitate market access by undeserving entities. Very
specifically, it would undermine the ability of good intermediaries to play their roles as gatekeeper of
liquidity. Lord Canning and his successors must have realized this. More recent research must have
forgotten it.
B- Brands vs. Signals
The second hypothesis pertaining to monitoring systems in the 19th century is known as the “good
housekeeping seal of approval” hypothesis (Bordo and Rockof (1996)). According to this view,
adoption of certain institutional devices such as the gold standard acted as badge of honour that would
then have facilitated sovereign borrowing. This hypothesis shares with the one we develop here the
notion that, in a world of imperfect information, borrowers must somehow signal their worth. The gold
standard was both a domestic institution and a policy so that gold convertibilitywas to some extent the
result of government actions: to that extent, it did reflect a “policy choice” and could be used as a
signal of financial rectitude. 83
83 . For a criticism of the “good housekeeping” hypothesis see Flandreau and Zumer (2004); Rockoff (2005)
provides a critical discussion. This hypothesis would require severe amendments to be applied to a historical
context where the gold standard was the exception rather than the rule (Flandreau 2003). Moreover, at the time,
several “good” issuers such as Austria or even Britain (before 1821) had inconvertible currencies.
But the parallel with bankers’ delivered seals of approval stops here. The signal that one could
garner from observing adherence to gold also aggregated information from other investors’ beliefs and
actions. For some reason that is unrelated to government actions, a confidence crisis may have
triggered a capital flight that would have forced suspension of the gold standard, implying that gold
adherence was a noisy signal. This is what led Bordo and Kydland (1995) to argue that confidence
could somehow transcend adherence to convertibility and lead to stabilizing speculation in case of
occasional suspensions. But then one may say, what is the point of gold adherence?84
The central difference between the two hypotheses is that nobody “owns” the gold standard so that
nobody has an incentive to making it an adequate signal of underlying policies. By contrast, the few
prestigious houses who could grant the privilege of borrowing with them derived value from ensuring
a high degree of transparency of the signals that were associated with such events. And because they
did not have the securities in portfolio until an issue occurred, there was no danger of their being held
up by a rogue borrower. Conversely, an issue could only occur if a certain number of actions, deemed
adequate by the underwriter, had been implemented by the borrower.85 The gold standard, as a self-
delivered badge of honour, could never, and as empirical research has shown, did never, come close to
that.
c) Constitutions vs. Policies
The last alternative hypothesis is due to North and Weingast (1988). They famously argued that
constitutional restraints and commitments are pre-conditions for the development of sovereign debt.
Their hypothesis is that the origin of sovereign debt can be found in domestic institutions. However,
this hypothesis falls short of explaining the expansion of foreign government lending to autocratic
governments. In the early 19th century successful borrowers included outright reactionary powers: the
Empire of Brazil, the Kingdom of Naples, Prussia, Russia. Thus the question: How come that
sovereign lending prosper without domestic commitments?86
One implication of the analysis in this paper is that financial “checks and balances” can be found
elsewhere than in domestic constitutions. It is true that under certain hypotheses it is possible, by
giving parliament some veto point over the executive, to ensure that the government is adequately
monitored.87 But other monitoring devices can be found and we argue that they were located in the
market place. As we explained, the global bond market found it possible and desirable to monitor
government performances, making good constitutions a sufficient but not necessary condition for
sovereign borrowing.
84 . Moreover, we know from theories of exchange rate crises that the collapse of a currency peg is a lagging, not
leading, signal of flawed policy decisions.
85 . Then of course, the issue could occur, and of course there was a risk of moral hazard afterwards. But then
again, the risk was limited by the extent of borrowing which the underwriter could set at levels that would make
the cost of foregoing future loans more costly than the benefits from a one-shot default.
86 . Note that this pattern had already begun in Amsterdam in the 18th century, which Riley (1980) describes in
detail and the same problem must be confronted when dealing with the 19th century. As we emphasized, the
successful new borrowers of
87 . See Stasavage (2002) for a criticism of that view.
This perspective leads to reverse causation. Specific constitutions are now consequences rather
than causes of foreign lending, and they do not necessarily turn out to put much control over the
executive. The experience of Prussia in 1818 does yield support to this hypothesis. Some historians
have mistakenly portrayed Nathan de Rothschild as the good Samaritan concerned with securing
constitutional guarantees from Prussia, further arguing that he would have wished to implement a
system that would assimilate the plan of the loan “to the established system of borrowing for the
public service in England”, meaning “the sanction of the Chamber to the national debt incurred by the
Government”. 88 It seems however that Nathan was prepared to settle for much less. The final contract
merely stated that “for the security of shareholders there would be a special mortgage on the royal
domains”. Projects to introduce a constitution in Prussia failed. The 1818 bond issue and subsequent
ones did not. The implication is that a constitution is not a necessary condition for sovereign debt, so
that if Nathan nonetheless went along, this must be because he knew he would have another way to
keep Prussia on a tight leash. And thus we may conclude that maintenance of Prussia’s absolutist rule
was facilitated by the ease with which authorities got access to money.89 This conclusion is consistent
with the that of earlier historians who suggested that the Prussian government’s decision to raise a loan
in London in 1818 was intended to avoid a number of political concessions (see Gille 1965 and Kehr
1970 for a discussion).
We thus ask the question: What was needed for sovereign borrowing to occur? For a “principal” to
monitor an “agent”, one must be sure that the agent acted in a coherent, rational way. This is trivial
from an individual point of view, but less so if the agent is an organization. This emphasizes the
relevance of a robust administrative and political infrastructure as a sufficient condition for the
borrowing entity to be (a) concerned about losing access to funding and (b) able to take action to
prevent this from happening. Granted this, the critical element to bear in mind is that the way
monitoring is achieved is by making sure that a certain number of actions are taken. In other words,
the principal exercises control over policies, which enhance debt sustainability.
This line of reasoning suggests that the only really important thing for sovereign debt was the
quality of the administrative apparatus and centralization of decision-making. From the vantage point
of administrative robustness, Brazil, the Kingdom of Naples, Prussia, Austria and Russia had
88 . Ferguson (1998: 132). This is part of a broader argument by this author suggesting that Rothschilds acted as
promoters of constitutional restraints (pp. 131-143). This may have led him to incorrectly attribute the
Portuguese contract, as we saw, to the House of Rothschilds (see supra). In Ferguson’s words, the contract
would have “once again demonstrated [Nathan’s] willingness to lend to a constitutional regime, as the
Portuguese King had accepted a Spanish-style constitution drafted by the Lisbon Cortes on his return from Brazil
in 1822” (p. 142). Note however that when the contract was signed, complete power lay in the hands ofJoão VI
and that in May 1823, one month after French forces had entered Spain, a military coup toppled the government.
However, João VI is said to have turned out to be influenced by British and French ideas of moderate
constitutional monarchy, unlike his Spanish counterpart. Strangely, Ferguson does not see either that Russia was
hardly a constitutional monarchy.
89 . The idea that constitutions could be endogenous to lending is nicely encapsulated in a quote from Frankfurt
burgomaster Smidt who argued in 1820 that: “Prussia would have had to give up its regime long ago if the house
[of Rothschild] had not helped it to survive” Quoted by Gille (1965 : 202).
something in common. Intuitively, there is no point lending to a government that is unable to enforce a
structural adjustment, no point lending to a government that does not control the borrowing of its
provinces, no point lending to the government of a country collapsing in civil war. If a state’s
administrative structure is deficient, then recommended policies will not be implemented and the
actions of the monitor will become pointless.90 Thus the point is that, since the model under study
rested on conditionality, adequate borrowers were not those with constitutions and commitments, but
those that could implement the required policy adjustments.91
We conclude that the development of sovereign lending in the 19th century was collateralized by
strong administrative infrastructures. Strong (and reactionary) governments were allowed to borrow at
the same time they were given incentives to repay and this was achieved through the very
centralization of the global money market. As a result, they remained strong (and reactionary).
Underwriters could exercise policy leverage but essentially over actions with a direct bearing on debt
sustainability. They had little capacity, but also little need, for changing the constitutional set up.
Whether borrowers were nice and democratic and favoured the rule of law, universal happiness and
ice creams on Sunday, or whether as was more often the case, they were arch-conservative who had no
remorse with implementing ruthless repression and even relished a bloodbath or two from time to
time, was altogether irrelevant, provided this had no incidence on debt sustainability. And for bankers,
all this was just business.92
Conclusions
This paper has dealt with the development of a market for sovereign debt. It revolves around a
simple idea. We argue that the entire system rested on a transfer of credibility from the underwriter to
the borrower. Investors could not learn about borrowers, but they could learn about underwriters.
Prestigious underwriters came to monopolize the market for sovereign debt, leaving little room for
other players. During occasional manias, such as in the mid 1820s, lower quality intermediaries tried
and did break in. However, they could only underwrite the securities of the weaker countries, which
the better houses did not care to sell. The outcome was written on the wall. When opportunity knocked
the flight to quality led to collapses of the securities issued by bad underwriters. Those investors who
had not already understood were reminded that the underwriting business was not a market but a
hierarchy.
90 . Gille develops a similar view when he argues that the bankers preferred “States with a robust administrative
infrastructure” (Gille: 1965, p. 107): “Les Etats qui possédaient une armature administrative relativement solide
avaient trouvé sans trops de difficulté l’assistance des banquiers pour leurs emissions de rentes”. This view that
is also supported by Brewer (1991) emphasis on administrative improvements as a basis of Britain’s financial
progresses in the 17th century.
91 . We do not think of our new hypothesis as necessarily exclusive to that of North and Weingast. The case of
Denmark, who could access the market without the agency of leading underwriters, may be seen as illustrating
the benefits associated with representative institutions. But the point is that this is not the entire story, and
moreover, judging from the actual historical record, this is a too optimistic one.
92 . Archer et al. (2007) make a similar point in a modern context. They argue that there is no ‘democratic
advantage’ in bond ratings. Economic performance and a good track record seem to be decisive factors.
Through this process emerged a form of market organization that also acted as a de facto rating
system. Within the leading houses, Rothschilds signalled “investment grade” securities. The Barings
on the other hand were outdone by the heavy artillery of Rothschilds’ huge stock of capital, and
retreated to a different ways. Marginally, in the 1820s, and then more heavily in the subsequent
periods, a topic for more thorough future research, they contributed to the issuing and pricing
securities that were risky but had a potential. Namely, by issuing, but not underwriting, the Barings
thought they had found a way to deal at arms’ length with attractive but risky borrowers. Barings
signalled “speculative grade” investments. The Buenos Aires and perhaps Mexican cases pioneered
subsequent operational patterns. They proved remarkably persistent. For instance, Flores (2004) shows
that the House of Baring did not underwrite any of the sovereign loans of Argentina issued during the
period before the eponymous crisis of 1890, just as we found for the 1820s.93
This central conclusion -- that hierarchy of underwriters was a proxy for hierarchy of issuers -- is
encapsulated in the opening quotes, which underlines that, back at the time, everybody understood
this. In 1823, Byron’s Don Juan described “Jew Rothschild, and his fellow Christian Baring” as the
“true Lords of Europe”. And for sure, since in the end all the mechanism rested on the fact that
everybody understood that everybody understood that. This situation coincides with what political
scientists call a “social fact”, i.e. an inter-subjective understanding. Our analysis has suggested that at
the heart of this social construct, was a pile of capital.
In passing, we may remark that such ideas initially came as a surprise to people who had been
trained in the 18th century belief, articulated by philosophers and political scientists, that one could
map constitutions, checks and balances, and all others institutional artifacts designed to rein in the
Leviathan, into reputational ladders (Massie 1750). As they learned, market structures provided a way
around. Promoters of a restoration of the Ancien Regime, and all kinds of reactionaries did not
overlook the promises of this system in the immediate aftermath of the Congress of Vienna: It implied
that one could circumvent the forces of progress and separate material advancement from political
advancement. And thus the traditional characterization of the Rothschilds as bankers of the Holy
Alliance.94 Obviously, our conclusions come as a challenge to modern advocates of the role of
constitutions and commitments in sustaining sovereign borrowing. Yet looking at the world around, it
is not clear that progressive regimes are always rewarded by financial markets. There again, the early
19th century experience may have a lot to tell.
93 . Cairncross 1953 has emphasized that such ways of doing business created fragility. Our discussion suggests
that this may not be an adequate statement, given that the safe bets segment was already occupied by the House
of Rothschild.
94 . Wikipedia defines the Holy Alliance in the following terms (http://en.wikipedia.org/wiki/Holy_Alliance):
“The Holy Alliance was a coalition of Russia, Austria and Prussia created in 1815 at the behest of Tsar
Alexander I of Russia, signed by the three powers in Vienna on September 26, 1815. Ostensibly it was to instill
the Christian values of charity and peace in European political life, but in practice Metternich made it a bastion
against revolution. The monarchs of the three countries involved used this to band together in order to prevent
revolutionary influence (especially from the French Revolution) from entering these nations. It was against
democracy, revolution, and secularism.”
A final implication of our work has to do with the management of defaulted debt. While obviously
much more work is needed to understand better how this happened, we saw the Barings beginning to
work as advisors for nascent bondholders associations and putting their weight and prestige in
attempts at bringing defaulters to the negotiation table. The suggestion here is that a deal supported by
the Barings commanded better terms and thus increased the incentives for debt renegotiations.
Interestingly, we found that this led to a form of cooperation between underwriters and bondholders
that is at odds with what is observed today. The difference, we speculate, comes from the importance
of brand value in a world of information asymmetries. Today, investors turn to rating agencies to price
securities, and this, logically if paradoxically, encourages intermediaries’ moral hazard, since rating
agencies are an ideal scapegoat if things turn badly.95
And thus we reach the conclusion that many of the views that have been developed regarding the
historical evolution of the sovereign bond market need a reappraisal. While theory has emphasized in
general terms that information asymmetries have critical consequences on the way market are
organized, very little work has been done to show that this has dramatic implications for the global
financial system. We conclude that the international financial architecture, be it that of then or that of
now, should be studied bottom up, starting from a careful analysis of the market mechanism rather
than jumping directly to conclusions on the incidence of certain rules and regimes, more or less
inadequately measured, on global financial stability. We think that much of what we look through the
lenses of “macro” analysis is just a direct consequence of under-explored “micro” structures. For one
thing, this study has cast doubt on the popular notion that, as pundits of global financial reform have
repeated following the Asian crisis, we should merely recommend that “more information” be made
available for the system to work better. After this foray of the early nineteenth century record, we feel
such a proposal is questionable as theoretical statement and naïve as policy recommendation. The true
and possibly universal question is who owns information, and for what purpose.
Paris and Madrid, June 2007
Sources:
Archives
Rothschild Archive, London
Baring Archives, London
Guildhall Library, London
Euronext, Paris
Printed sources
Wetenhall, The Course of Exchange,
The Times
Cours des effets commerçables à la Bourse de Paris
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Table 5. Underwriters and Default: Sovereign Bond Issues in London during the 1820s
Country Year Coupon Contractor Issuer Payment of
dividend and
coupon
Amount
£ m. Price of
issue Yield at
issue Status in
december 1829
Defaulting States
Buenos
Ayres 1824 6 Carlson, Catro and
Robertson Baring Brothers Baring Brothers 1 85 7.1 Arrears since
01-1828
Chile 1822 6 Hul
lett, Brothers and
C° Hullett, Brothers
and C° Hullett, Brothers
and C° 1 70 8.6 Arrears since
09-1826
Columbia 1822 6
Herring, Graham and
Powles Herring, Graham
and Powles Herring, Graham
and Powles 2 84 7.1 Arrears since
05-1826
Columbia 1824 6 B. A. Goldschmidt B. A. Goldschmidt B. A. Goldschmidt 4.75 88.5 6.8 Arrears since
01-1826
Greece 1824 5 Loughnan, Son, &
Obrien’s
Loughnan, Son, &
Obrien’s
Loughnan, Son, &
Obrien’s 0.8 59 8.5 Arrears since
01-1827
Greece 1825 5 J. & S. Ricardo J. & S.
Ricardo J. & S.
Ricardo 2 56.5 8.8 id.
Guatemala 1825 5
Barclay, Herring,
Richardson & C°,
and J. A. Powles &
C°
Barclay, Herring,
Richardson & C°,
and J. A. Powles
& C°
Barclay, Herring,
Richardson & C°,
and J. A. Powles
& C°
1.43 73 6.8 Arrears since
02-1828
Mexican 1824 5 B. A. Goldschmidt
B. A. Goldschmidt
B. A. Goldschmidt 3.2 58 8.6 Arrears since
10-1827
Mexican 1825 6
Barclay, Herring,
Richardson & C°,
and J. A. Powles &
C°
B. A. Goldschmidt
& C°
B. A. Goldschmidt
& C° 3.2 89.75 6.7 id.
Peru 1822 6 Thomas Kinder Thomas Kinder Fry & Chapman 0.45 88 6.8 Arrears since
04-1826
Peru 1824 6 Thomas Kinder Thomas Kinder Fry &Chapman 0.75 82 7.3 id.
Peru 1825 6 Thomas Kinder Thomas Kinder Fry & Chapman 0.62 78 7.7 id.
Portugal 1823 5 B. A. Goldschmidt B.A. Goldschmidt B.A. Goldschmidt 1.5 87 5.7 Arrears since
06-1828
Spain 1821-2 5 Haldimand and Sons Haldimand and
Sons Haldimand and
Sons 12.9 56 8.9 Arrears since
05-1824
Spain 1823 5 James Campbell James Campbell James Campbell 1.4 30 16.7 id.
Non defaulting States
Austria 1823 5 Rothschild Rothschild Rothschild 3.5 82 6.1 104
Brazil 1824 5 Bazett, Fletcher and
T. Wilson Bazett, Fletcher
and T. Wilson Thomas Wilson
and C° 1 75 6.7 73
Brazil 1825 5 Rothschild Rothschild Rothschild 2 85 5.9 73
Denmark 1821 -2 5 Haldimand and Sons Haldimand and
Sons Goldschmidt 3 77.5 6.5 Fully redeemed
Denmark 1825 3 Thomas Wilson and
C° Thomas Wilson
and C° Thomas Wilson
and C° 3.5 75 4.0 75.125
Naples 1824 5 Rothschild Rothschild Rothschild 2.5 92.5 5.4 98.5
Prussia 1822 5 Rothschild Rothschild Rothschild 3.5 84 6.0 104.125
Russia 1822 5 Rothschild Rothschild Rothschild 5 81 6.2 109.375
Notes on sources: See Appendix.
Table 7. Longevity of Merchant Banks in the ‘Emerging Countries’ Sovereign Debt Business:
Number of Loans Per Bank Per Period
Banks 1815-25 1826-40
Total
amounts
of loans
Number
of Loans Defaults Spread
of Issue
Total
amounts
of loans
Number
of Loans Defaults Spread
of Issue
Rothschild 21.5 6 0 2.62 9.14 3 0 2.84
Baring 1(a) 1 1 3.82 9 2 0 1.79
Thomas
Wilson 4.7 2 0 2.16 0.8 1 0 5.96
J.&.S
Ricardo 2 1 1 5.68 8.6 4 1 6.36
B. A.
Goldschmidt 12.45 4 3 3.37 BUST !
Barclay,
Herring,
Richardson 4.63 2 2 4.16 BUST !
Hullet
Brothers 1 1 1 4.75 OUT !
Herring,
Graham and
Powles 2 1 1 3.39 OUT !
Thomas
Kinder 1.2 1 1 3.14 OUT !
Haldimand &
Sons 12.9(b) 1 1 5.03 OUT !
James
Campbell 1.4 1 1 12.85 OUT !
Loughman,
Son &
O’Brians 0.8 1 1 5.32 OUT !
Thomas &
William King 0.313 1 0 3.11
Wright 0.45 1 0
I.L.
Goldsmid 2.9 3 0 3.54
Source: Authors’ database. Default windows (1815-1825) and (1826-1840).
Notes: (a) We have not included the two loans from Baring to Austria and Russia in the 1810s, for lack of
information on terms. Note that these loans are curiously excluded from standard lists. On the other hand, this
table lists as a “Baring loan” the Buenos Aires loan of 1824 although this one should more adequately be
associated with Robertson. (b) Details.