A Day Full of Financial Scandals


On this day in economic and financial history...

The world's oldest continuously operating bank was founded in Siena, Italy on Feb. 27, 1472. Banca Monte dei Paschi di Siena, or MPS, was born when Leonardo da Vinci's career was just beginning to take off in nearby Florence. It remained a powerful bank in the Tuscan region until Italy's unification in the 19th century, which allowed MPS to expand throughout the Italian peninsula. During this time it became the first bank in Italy to offer mortgage loans.

MPS was a privately held bank until 1999, when it went public on the Italian Stock Exchange. It has been a rude introduction to modern securities markets for this ancient bank, which has lost 95% of its value since that day. In 2013, the world's oldest bank has become part of the world's latest political furor in the financial sector. Italian leaders, mired in a combative election season, arranged in 2012 a $5.3 billion bailout for MPS -- more than twice its market cap on the Italian exchange -- to paper over a bad deal it had made as the worldwide financial crisis took center stage in 2008.

The deal, which involved the purchase of a floundering regional bank from Banco Santander of Spain, also wound up involving American banking giant JPMorgan , which stepped in with a convertible-bond scheme that allowed MPS to go through with the purchase at a wildly inflated value of $11.9 billion. After surviving droughts, plagues, wars, famines, and revolutions, the world's oldest bank was finally brought low by the complexities of modern finance.

The original spectrum crunch
On Feb. 27, 1922, Commerce Secretary Herbert Hoover held a landmark conference in Washington, D.C. to decide what to do about the chaotic use of radio spectrum. In the year prior to this conference, the number of American households with a radio receiver had grown 12-fold from about 50,000 to more than 600,000.

Hoover, who had pledged to be "the personal representative of the American small boy," noted that radio communications between individuals would be "a perfectly hopeless notion." Instead, he said, radio should be used "for the spread of certain predetermined material of public interest from central stations." Hoover opposed the use of advertising in this new medium, but his most important work at the conference was to sort out the particulars of wireless spectrum allocation, then called "wave lengths" or "ether." This matter would be critical in the establishment of the tiny broadcasting industry, which was already operating on AM frequency bands with little regulatory oversight. Stricter regulation would prove essential in establishing the rights of station operators, which at this point had minimal competition, as only a few such stations existed in the country.

The country was just beginning to experience the explosive growth of the 1920s. At the time, the Dow Jones Industrial Average was a mere 30% higher and six months removed from its 1921 low. It would rise another 350% before peaking in 1929, by which point the top radio stocks had produced enormous gains. RCA, often simply called "Radio" in the financial press, grew 57,000% over the course of the Roaring '20s. It would join the Dow in 1928 and was removed in mid-1930, which was enough time for it to contribute greatly to both the index's parabolic rise and its devastating crash.

There were only five operating radio stations the year before this conference, and 30 by the end of the year. That number leapt to more than 550 in 1924. The Crash of 1929 slowed the rise of radio as stations closed during the Great Depression, but by the eve of America's entry to World War II, more than 760 stations were operating across the country.

Take two and call me in the morning
Chemist Felix Hoffman, working for Germany's Bayer , gained the first U.S. patent for aspirin (acetylsalicylic acid) on Feb. 27, 1900. Originally discovered in 1897 as a means to treat Hoffman's father's rheumatoid arthritis, aspirin was at first deprioritized in favor of another Hoffman chemical: diacetylmorphine, more popularly known as heroin. Luckily for achy patients everywhere, aspirin was pushed into the testing phase and was soon on its way to full production. Its name comes from a combination of "a-cetyl-spir-saure" (the German word for salicylic acid) and "-in," which made the drug name simple enough for the average patient to remember.

The drug proved popular enough that Bayer soon had to set up an American subsidiary to produce and sell aspirin without incurring import tariffs. This lasted until World War I, when a plot to constrain the supply of phenols necessary to produce the drug backfired and caused a major public-relations fiasco. When the U.S. declared war on Germany, it also wound up seizing Bayer's assets, which remained beyond the drugmaker's control until 1994.

Bayer eventually reclaimed these assets and has managed to grow this ancient (by modern standards) drug with no patent protection into a veritable blockbuster. More than a century after that first patent, Bayer's annual worldwide sales of aspirin amounted to more than $1.1 billion.

Trouble in the Capitol
The Credit Mobilier scandal drew to a close on Feb. 27, 1873, when the U.S. House of Representatives voted to censure two of its members, while the Senate voted to expel one of its own. The scandal had become a major campaign issue in 1872 after it was revealed that the Credit Mobilier company of America (a French counterpart also existed for a time) had passed out stock and cash bribes to secure favors during the construction of the Union Pacific Railroad .

This railroad, originally chartered in 1862 during the Civil War, was meant to connect the Mississippi with the West Coast at the enormous cost of nearly $250 million to the government -- more than 3.5% of the national GDP at the time of its establishment. The project was an enormous risk, extending nearly 2,000 miles through some of the most forbidding territory of the American West, much of which was controlled by Native Americans. Credit Mobilier was thus formed by executives of Union Pacific as the principal construction contractor for this venture in an effort to make Congress and the public believe that it was independent and competitively chosen. Credit Mobilier, far from independent, was a fraudulent enterprise that allowed its directors to use construction contracts to buy Union Pacific's stock and bonds at par value, only to resell these instruments on the open market at great profit. This scheme was hidden for years by paying off key members of Congress who would then support granting Union Pacific additional funding.

The Union Pacific eventually met the Central Pacific, built out of San Francisco, in 1869, and would eventually merge with it to form the modern Union Pacific. However, little business was initially forthcoming, and by the time the scandal concluded, it was apparent that the major players had largely escaped the punishment they deserved. The Chicago Daily Tribune, writing on the investigation, called it "A Lame and Impotent Conclusion," noting that Representative Oakes Ames had only been censured despite bribing dozens of his colleagues -- and these colleagues received only light reprimands. The Union Pacific, its reputation shattered, went bankrupt twice by the end of the century before emerging in 1897, just in time to ride another railroad bubble to great gains.

First to fail
The Farmers' Exchange Bank of Boston became the first financial institution to fail in the U.S. on Feb. 27, 1809. This bank, controlled by Andrew Dexter, had never really succeeded in the first place. Banks in the early days of the nation were allowed to print their own banknotes, which were legal tender within regional confines and assumed to be backed by precious metals. The Farmers' Exchange Bank functioned primarily as a source of easy liquidity for Dexter, who used the money the bank printed to buy land and build property in Boston. By early February of 1909, the bank had issued $650,000 worth of paper bills, which were later found to be backed by only $86.16 worth of gold and silver. When this fact was uncovered, the bank was kaput.

Thousands of American banks have failed since this first collapse. A quarter of American banks failed between 1839 and 1842. More than 9,000 failed during the Great Depression. More than 1,000 failed during the Savings and Loan Crisis, and roughly 500 more have failed since the start of the 21st century .

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