Lehman, Bear Stearns and the Medici

Word in SIBOS 2009 often harks back to the events a year ago.Tenuous historical parallels are often seized upon without consideration. Since the collapse of Lehman Brothers last year, there has been untold references to the Great Depression, and now in politics, we see commentators looking back to Vietnam with increasing regularity. Such great socio-economic events, such as depressions and global conflicts, can be juxtaposed with one another because of their scale and grandeur. It takes longer to get down into the details, and attention spans are shorter. Luckily, this means we can all have a go at tenuous historical parallels.Through coincidence, I read two books on banking back to back; one for business and one for pleasure. William Cohens House of Cards, the account of the Bear Stearns collapse, and while on holiday in Florence, Tim Parks Medici Money; a history of the Medici bank in the 15th century. Both banks were started on their road to riches not by their founders, but a later maverick. For the Medici, Giovanni di Bicci de' Medici, an inventive accountant. At Bear Stearns, Cy Lewis, a hard drinking ex-footballer took up the reins and became the banks most powerful partner. Betting extravagantly on railway bonds during World War II, Lewis turned Bear Stearns into an international securities trading and brokerage firms.While the Medici family went onto becoming Popes, Cardinals, and feudal overlords of Florence, Bear Stearns failed even to become a principality of JP Morgan, but the common ground lies with the three dominating personalities that pulled each bank through their respective centuries. Cy Lewis, along with Ace Greenberg and Jimmy Cayne, made each quarter at Bear Stearns a profitable one, while becoming players in New York high society. Like a modern Rockefeller, Cohen describes how Lewis started as a former shoe salesmen in Philadelphia, making millions, moving from townhouse to townhouse, picking up mistresses and an alcohol addiction, only to expire unwrapping a gold Piget retirement watch. Greenberg, a bizarre character who wrote missives to fellow colleagues under the name of Haimchinkel Malintz Anaynikal regarding personal hygiene and business ethics, wrestled power away from Lewis, and expanded the firm internationally. The business floated in 1985, and Jim Cayne, more interested in bridge that business, gambled on mortgage-backed securities. The rest is history. Along with Giovanni, two other personalities dominated the Medici bank. Cosimo and Lorenzo spent their way through the profits that mainly stemmed from what is now called currency arbitrage. Moving money across Europe in the 15th century was dangerous business. Setting up a bank in Bruges, the Medici hid the start up capital in a bale of wool. To avoid robbery, the bank leant money to merchants needing to send goods across Europe, allowing them to repay at their destination . As the exchange rates were largely fixed across Europe, and the Florentine florin was worth less abroad, the bank accepted repayment in the London, for example, at the same exchange rate set in Florence. As the florin was worth 4p less in London than in Florence, the Medici bank pocketed the difference. They then repeated the trade back to Florence, creating an interest rate of up to 22% a year.In the end both profitable banks also suffered from the follies of building grandiose offices. Bear Stearns' former offices at 383 Madison Avenue are a grotesque monument to inflated egos. In Milan, a large palazzo was too much of a temptation for the local duke, seizing it from the hapless local Medici bank manager in a fit of jealously. Both banks failed because of distractions it seems. Lorenzo because interested in politics, and Cayne played too much bridge and ignored the crisis as it swirled around him. Tenuous links I know, but mild proof that banking has been the same throughout history.

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