With this post, we’re going to delve in to the history books. There’s been plenty of financial scandals in the past so it should come as no surprise to people when there are new ones unearthed as the banks, financial institutions and people in high places have a reputation for being somewhat shifty when it comes to personal gain.
The following financial scams, collapses and scandals range from modern day right the way back to the 1700s so there’s a lot to take in.
Here at Stanton Fisher, we know that there are a number of banks in the country that have benefitted from you, the general public and that’s why we’re trying to make things right by helping you claim back the money that you’re owed from being mis-sold PPI, which is one of the biggest financial scandals of recent times.
The Panic of 1792
This one goes back to 1791 when George Washington signed a charter which created the Bank of the United States, a precursor to the Federal Reserve.
During the initial public offering, investors aggressively bought shares in the bank which, as you probably guessed, caused them to soar in value.
William Duer, a speculator and signer of the Article of Confederation, attempted to corner the marker by buying all the available shares with borrowed money. Then came the punch, he attempted to start a rival bank by using the shares as collateral but he overextended himself which forced the liquidation of his holdings and sending share prices plummeting.
Subsequently, William Duer lost absolutely everything and found himself thrown in debtors’ prison where he eventually died seven years later. The actions of William Duer caused what is considered to be the first ever financial crash in the United States and it prompted securities dealers to enter into the Buttonwood Agreement which created the first exchange for buying and selling securities, or as we know it now, the stock market.
The Ponzi Scheme
Moving on a little bit from 1792, in 1918 Charles Ponzi came up with an idea to buy and sell international reply coupons, which due to high inflation, could be bought cheaply in his home country of Ital and sold for a profit in the US.
Ponzi formed an “investment company” with promises of 400% returns in order to expand his still legitimate scheme. The public dumped millions of dollars into his company but soon the coupons were forgotten about.
Initially, early investors were paid off with the money received from new investors until the authorities uncovered the fraud, shut it down and sent Ponzi to prison.
This was certainly not the first scheme of its kind however it’s the most popular one and by far the largest one of its time losing the investors a grand total of $200 million.
The Treaty of Versailles ended WWI in 1919 and it obligated Germany to pay reparations which it did by issuing bonds. By the time Hitler was in power in 1933, most of those bonds ended up on Wall Street and servicing them was crushing the German economy.
In order to be able to build his own war machine, Hitler was looking to free up funds so he sent his top banker Hjalmar Schacht to the White House to discuss refinancing the bonds. President Roosevelt listened intently then asked who owns the bonds to which Schacht replied saying “Mostly Republican bankers” to which Roosevelt replied saying that it serves them right.
Three weeks later Hitler renounced all foreign debt and the bonds, which totalled $600 billion in today’s US dollars, became worthless almost overnight. In 1953, West Germany agreed to service the debt obligation of these bonds and made the final interest payment in 2010, 92 years after they were issued.
Barings Bank Collapse
In 1995, Nick Leeson the head derivatives trader for Barings’ Singapore operation, began to conceal his losing trades in a secret account. He was able to do this because he was also in charge of auditing and reporting all trading activity.
As his losses piled up, Leeson took on riskier trades which were unknown to his superiors in London in order to try and make back the money that he’d lost. However, things went from bad to worse as he lost more than £845m which was more than twice Barings’ total available capital which led to the bank collapsing and, unsurprisingly, landed Leeson in jail.
Never before this incident in the mid-nineties, or since this incident has any one individual been able to destroy a major financial institution like Barings. They had been in business for 238 years and they even counted Queen Elizabeth as a client at the time of their fall from grace.
The Enron Bankruptcy
Enron was named “America’s Most Innovative Company” six years in a row by Fortune magazine and they were a major energy player with revenues of $101 billion in 2000. It turns out that most of that revenue was in fact “planned accounting fraud” which created “limited liability special purpose entities” which is where the company hid its liabilities.
It was a whistle blower that led to the downfall or Enron. They revealed Enron’s deception to the authorities and following this, the stock dropped from a high of $90 to just a few pennies.
Authorities struck a plea deal with Andrew Fastow CFO to testify against CEO Jeffrey Skilling and founder Ken Lay, both of whom were convicted of securities and wire fraud and got sent to prison.
The Enron bankruptcy was the largest in US history at the time, but more importantly, was the most shocking example of planned accounting fraud ever seen.
The UK Banking Collapse
This is one that all of the UK will remember if they were old enough to realise what was going on around them.
The crash started in 2007 with Northern Rock having borrowed huge amounts of money in order to fund mortgages for their customers and they needed to pay off this debt by reselling the mortgages in the international capital markets.
The thing that hurt Northern Rock was the fact that demand for securitised mortgages had fallen and they faced a liquidity crisis and needed a load from the Government sparking fears that they will soon go bankrupt which led to customers queuing to withdraw their savings and it was the first run on a British bank for 150 years.
Following this was two failed private takeover bids which led Alistair Darling to nationalise Northern Rock in what he claims is a temporary measure but only 4 years later did Northern Rock return to the private sector.
There were many more twists and turns in this scenario including the UK’s largest mortgage lenders, HBOS, being rescued by Lloyds TSB after a huge drop in their share price. For more information on the credit crunch, check out this timeline.
This all unfolded when Lloyds announced in May 2011 that they were setting aside £3.2bn in order to compensate customers who were mis-sold payment protection insurance. This is what kick-started and exposed the full extent of a scandal that dated back more than a decade.
The initial PPI mis-selling scandal bill was expected to be £4.5bn but as of March this year, it was said to have topped £24bn.
The charge sheet against those guilty of mis-selling PPI, which was the vast majority of lenders, banks, building societies and so on claimed that PPI was…
- Expensive – Premiums often added 20% to the cost of a loan and in the worst cases seen, over 50%.
- Ineffective – Structured to limit the chances of a pay out to someone who was genuinely ill.
- Mis-sold – They were generally mis-sold to customers without their knowledge, or they were sold as “essential”, or sold to people such as the self-employed who would never be able to claim.
- Inefficient – Anyone who did actually claim would face a lengthy delay or a complicated claims procedure.
For more information about the PPI mis-selling scandal, check out this post here.
In 2014, Tesco, the UK’s biggest supermarket chain had to delay their half-yearly financials after admitting first half profits were overestimated by £250m.
They suspended their head of UK business and called in independent accountants and lawyers to investigate what had been going on after the discovery of overstated first-half profits.
On August 29th, 2014, Tesco told investors to expect profits of around £1.1bn for the six months to August 23rd which would be down from £1.6bn the year previous, however the discovery of the overstatement of revenue paid to Tesco by its suppliers means that the supermarkets profits for the first-half were down almost half to around £850m.
For more information on the whole of the Tesco scandal, this article has everything you need to know.