HELICOPTER ROTORS THRUM
THUNDER RUMBLES
Welcome to the world of money,
lt's the English-speaking world's favourite game...property.
The most basic financial impulse of all
We may think power resides
ln our time, we've witnessed the zenith of global finance.
bread, cash, dosh,
is to save for a rainy day.
with presidents and prime ministers in palaces and parliaments. Not so.
dough, loot, lucre, moolah,
Some people today say that companies -
Because, as we've been painfully reminded by the recent months of financial turmoil,
And today the stakes in the game are higher than ever.
ln 2006, the world's total economic output was worth around $47 trillion -
the readies, the wherewithal.
and particularly multinational corporations - rule the world.
ln today's world, real power lies in the hands of an elite group of unassuming men
the future is so unpredictable.
Call it what you like, money can break us or it can make us.
lt's pretty hard to believe that any kind of human organisation
The world really can be a dangerous place.
that's 47 followed by 1 2 zeroes.
in anonymous, open-plan offices...
The original property game we know today as Monopoly was actually
could tame the vast natural barriers of South America.
..the men who control the world's bond market.
Not many of us get through life without a little bad luck.
The total value of stock and bond markets
invented back in 1 903 to expose the unfairness of a social system
ln the past year, it's certainly broken
But one company believed it could.
more than a few of the biggest names on Wall Street
was roughly $1 1 9 trillion - more than twice the size.
Some of us get a lot.
where a small minority of landlords screwed the majority of tenants.
and in the City of London.
lt's all about being in the wrong place at the wrong time,
And the amount outstanding of the strange new financial life form
Bill Gross is the boss of PlMCO,
By constructing a 1.5 billion dollar gas pipeline from Bolivia
like New Orleans when Hurricane Katrina hit.
the world's biggest bond-trading operation,
And while former masters of the universe crash and burn,
30 years later, an unemployed plumber named Charles Darrow
known as derivatives was $47 3 trillion - ten times larger.
which manages a portfolio of bonds worth $7 00 billion.
right across the South American continent to the Atlantic coast of Brazil.
the rest of us are left worrying if our savings would be safer in a mattress
patented a new version of the game, with the board based on
The question is, how shouId we deaI with the risks and uncertainties of the future?
Gross is widely regarded as the king of the bond market.
the streets here in Atlantic City.
than in a bank.
By running gas along the longest pipeline in the world
By the summer of 2007, it seemed as if the Earth had turned into Planet Finance.
ShouId the onus be on the individuaI to insure against disaster?
Just call him Mr Bond.
4,000 miles from the tip of Patagonia to the Argentine capital Buenos Aires.
The great financiaI crisis that began in the summer of 2007
lt was Darrow who introduced the little houses and hotels.
ShouId we be abIe to reIy on the voIuntary charity of our feIIow human beings
As never before, the world was interconnected,
has most of us utterIy baffIed.
How on earth couId a IittIe IocaI difficuIty
but not just by cabIes, container ships and jet pIanes.
when caIamity strikes?
Bonds are the magical link between the world of high finance
What the game of Monopoly tells us, contrary to its inventor's intentions.
Or shouId we be abIe to count on the state -
with sub-prime mortgages in the United States
Such schemes exempIify the vauIting ambition of modern capitaIism,
and the worId of poIiticaI power.
By 24/7 deaIing rooms and internationaI investment banks.
is that it's smart to own property.
in other words, the compuIsory contributions of our feIIow taxpayers -
unIeash an economic tsunami big enough
Governments wiII aIways spend more than they raise in taxation -
And if it's smart to own property, it's even smarter
but they're onIy possibIe because of one invention -
to obIiterate some of WaII Street's most iIIustrious names,
to baiI us out when the fIood comes?
ln this series, we've seen how the markets for credit, bonds, stocks,
sometimes shed-Ioads more -
to Iend money to the peopIe who own property.
the joint stock company.
THUNDER RUMBLES
and they make up the difference by seIIing bonds that pay interest.
to force nationaIisations of banks on both sides of the AtIantic
insurance and real estate all evolved in Europe and North America.
That's because the phrase, ''Safe as houses''
But - and here's the magic - if you want to get rid of a bond,
has a rather speciaI meaning in the worId of finance. What it means
That's a long way of asking a simple question -
and to bring the entire worId economy to the very brink of recession,
lf the 1 6th century had seen a revolution in money and credit,
the government doesn't have to give you the cash back.
are you insured?
is there's nothing safer than to Iend money to peopIe who own reaI estate.
Well, now it's time to tell the story
and the 1 7th had witnessed the birth of the bond market,
if not downright depression?
You just take it to a bond market,
of how those financial innovations conquered the world.
ShouIdn't this series be caIIed The Descent Of Money?
Iike the one here at Tokyo Stock Exchange, and seII it.
then the next step in the story of the ascent of money
The British certainly think they are.
Why? WeII, because if they defauIt on the Ioan,
WeII, I want to expIain to you just how money rose
This is the story of financial globalisation.
was the rise of the joint stock limited liability company.
GULLS CRY
you can aIways repossess the property.
After the rise of banks,
Today, we pay a larger proportion of our income on insurance
Even if they run away, the house can't.
to pIay such a terrifyingIy dominant roIe in aII our Iives.
the birth of the bond market was the next big revolution in the history of finance.
than any other people in the world.
What's more, the English-speaking world's obsession with property
Globalisation is something we take for granted today.
But the ability of the company to transform our lives
lt's rather odd, because Britain is one of the safest countries on Earth.
lt created a whole new way for governments to borrow money.
What's more, l want to reveal financial history
And yet for all the advantages of an interconnected world,
has been the foundation for a unique economic and political experiment -
would depend on another innovation...
as the essential back story behind all history.
The bond market funded the wars
perfectIy exempIified by Hong Kong's astonishing humming container port,
The struggle to overcome risk has been a constant theme of the history of money,
the property-owning democracy.
that plagued northern ltaly 600 years ago.
The stock market.
Some say it's a model the whole world should adopt.
Banks financed the Renaissance while the bond market decided wars.
there's a downside to gIobaIisation, and that is its vuInerabiIity -
from the invention of life insurance by two hard-drinking Scots clergymen,
GUNSHOT ECHOES
lt dictated the outcome
The price that people are prepared to pay for a company's shares in the market
The growth of property ownership
its vuInerabiIity to financiaI shocks, because finance isn't an exact science,
of the Battle of Waterloo
to the rise and fall of the welfare state,
gave rise to a new era in the history of finance.
and created the world's greatest financial dynasty.
tells you how much money they think it'll make in the future.
and its vuInerabiIity to poIiticaI forces beyond the controI of the bankers.
to the explosive growth of hedge funds and their multi-billionaire owners.
On the back of property, literally trillions of dollars
Stock markets built empires...
lt ensured the defeat of the South in the American Civil War.
have been borrowed, some of it by so-called sub-prime borrowers -
..and monetary meltdowns made revolutions.
But as we have discovered in recent months of financial turmoil,
And in modern times, the bond market
The ascent of money has seldom been smooth.
At the core of our struggle with risk is an insoluble conflict -
has brought once wealthy nations, like Argentina, crashing to their knees.
stock markets can also be shock markets.
people who'd previously been content to rent rather than own their homes.
Time and again, it's been punctuated by big and painful crises.
we want to be financially secure, and so we yearn for a predictable world.
From Ancient Mesopotamia right down to present day London,
The future is aIways uncertain.
Today, governments and companies use bonds to borrow
So it's come as rather a shock to millions of people that real estate
But we human beings are prone to over-optimism.
the ascent of money has been an indispensable part of the ascent of man.
But the future always seems to come up with new and unpleasant ways
Just ten years ago, it seemed that these crises
on an unimaginably vast scale.
When prices here on the New York Stock Exchange surge upwards in synch,
is fundamentally no different from any other financial asset.
All told,
were more likely to blow up in emerging markets, like Asia.
But money's rise has never been a smooth, upward ride.
to take us by surprise.
there are bonds out there worth around $85 trillion.
it's as if investors are gripped by a kind of coIIective euphoria -
lts price can go down as well as up.
As we'II see, financiaI history has repeatedIy been interrupted
We want calculable risk.
Yet today, it's the West that's caught up in a full-blown credit crunch,
what the former chairman of the FederaI Reserve, AIan Greenspan,
The fortunes of most of us, whether we like it or not,
lt turns out that no amount of financial alchemy
We're stuck with random uncertainty.
by gut-wrenching crises of which today's is just the Iatest.
once famousIy caIIed ''irrationaI exuberance''.
are directly linked to the bond market.
can turn little suburban boxes into treasure chests with roofs.
while Asia seems scarcely to have noticed.
So stock markets reaIIy can be Iike soap bubbIes.
From the fluctuating prices of the homes we own
lndeed, a new phenomenon has come to define the world economy.
lf the bond market tanks, then down goes the value of our pensions -
We never quite know when they're gonna burst.
to the high-speed industrialisation of China,
Which raises the question, is property really as safe as houses?
American borrowers have come to rely on Chinese savers -
and that's a huge part of our wealth as individuals.
the power of finance is everywhere we look and it affects all of our lives.
The exuberance was especially irrational and the burst especially painful
ln the financial crisis that has gripped the world since the summer of 2007,
a symbiotic relationship between China and America that l call ''Chimerica''.
Or couId it be that we've Iet our Iove affair with reaI estate
for the company that proposed those vast projects in Latin America.
US government bonds have been seen as a safe haven for investors seeking shelter
SEAGULLS CRY
get compIeteIy out of proportion?
But can we be sure that Chimerica will save
But are you in on the secret? Do you know what causes a bank run
from the storm of falling property and share prices.
Enron became the biggest corporate fraud in modern American history.
this era of financial globalisation?
or a monetary meItdown or a stock market crash?
The chiIIing reaIity is that a hundred years ago,
So if Bill Gross were to lose faith in those bonds,
Can you teII the difference between a sub-prime Ioan and a prime Ioan?
But Enron was very far from the only corporate scam
another age of financiaI gIobaIisation ended not with a whimper, but with a bang.
it would hit the financial world like... well, a thunderball.
When Hurricane Katrina hit New Orleans in the last week of August 2005,
since shares were first bought and sold 400 years ago.
WeII, I think these financiaI technicaIities onIy reaIIy make sense
That's why this ''Mr Bond''
And there's no reason why that shouIdn't happen again in our time.
it caused death and destruction.
once you know where they came from.
And the shady practices it epitomised live on.
has become so much more powerful than the Mr Bond created by lan Fleming.
And that's why financiaI history is of more than mereIy academic interest.
lndeed, they've been a key cause of the financial crisis we're living through now.
Property ownership was once the preserve of an aristocratic elite.
Not knowing this stuff can seriousIy damage your weaIth.
And that's why both kinds of bond have a licence to kill.
Yet it's not a natural catastrophe that now threatens the survival of the city.
Cooked books? Stock prices rigged?
Been there. Done that.
The real lesson of the disaster is about money.
Estates were passed down from father to son, along with titles
For centuries.
TRADERS SHOUT
How the risk management system we call insurance
Nothing illustrates more clearly than the history of stock market bubbles
and political privileges.
Everyone else was a mere tenant, paying rent to their landlord.
simply failed when faced with a calamity on this scale.
how hard human beings find it to learn from history.
Even the right to vote in elections
lt used to be said that ''emerging markets''
The hurricane didn't hit New Orleans directly.
was originally a function of property ownership.
were places where they have emergencies.
HORN BLARES
The main force of the storm passed to the north-east of the city.
In one respect, not much has changed in Britain since those days.
lnvesting in faraway places can make you rich,
But just as the residents breathed a sigh of relief,
Crisis or no crisis, the amount of money sloshing around planet finance
STOCK MARKET HUBBUB
Of 60 miIIion acres of British Iand, around 40 miIIion
''War, '' declared the ancient Greek philosopher Heraclitus,
but when things go wrong, it's often been a fast track to financial ruin.
the real catastrophe began.
still boggles the mind.
''is the father of all things. ''
This IndustriaI CanaI Iinks Lake Pontchartrain to the Mississippi.
are owned by just 189,000 famiIies.
By one measure, the US stock of money is now $8, 7 00,000,000,000,
lt was certainly the father of the bond market.
The difference is that they no Ionger monopoIise the poIiticaI system.
After the hurricane, the huge storm surge
up 1 2% since last year.
raised the water IeveI in the canaI so high
That's why many of today's apparently unstoppable emerging markets
Indeed, thanks to reform of the House of Lords,
For much of the 1 4th and 1 5th centuries, the medieval city-states of Tuscany -
And some people are still pocketing a huge share of that cash.
that it broke the Ievee,
the hereditary peerage is being phased out of ParIiament.
pouring umpteen gaIIons of the Iake over here, into the Ninth Ward of New OrIeans.
are really re-emerging markets.
Hidden away among the many splendours of Venice
Florence, Pisa and Siena - were at war with each other.
Now, you can expIain the decIine of the aristocracy in many ways.
is a small clue to one of the most astonishing tales of adventure
But, as far as I'm concerned, the main driver was finance.
Last year, despite the onset of the biggest financial crisis
This was war waged as much by money as by men.
in all financial history.
Just to the east of the Ninth Ward is St Bernard,
since the Depression, his hedge fund paid George Soros a cool $2.4 billion.
a blue-collar community of homeowners
These days, of course, the uItimate re-emerging market is China.
all, on paper at least, covered by private insurance.
To taIk to some peopIe,
In Pieter van der Heyden's BattIe Of The Money-Bags And Strong-Boxes,
''To the honour and memory of John Law of Edinburgh,
there's simpIy no Iimit to the amount of money to be made here.
Until the 1 830s, fortune smiled on the British land-owning elite -
That's roughly 41,000 times more than the average American family earned.
And it's certainIy true that over the past 20 years,
''most distinguished controIIer of the treasury of the Kings of the French.''
piggy banks, treasure chests and barreIs fuII of coins
the 30 or so families with gross annual income from their lands
the mainIand has foIIowed the exampIe set here in Hong Kong, and boomed.
As they say on Wall Street, ''Way to gol''.
Iay into one another with Iances and swords in a chaotic free-for-aII.
above Ł60,000 a year -
Councillor Joey DiFatta refused advice to leave the city,
This is the finaI resting pIace of the man who invented the stock market bubbIe.
And yet this isn't the first time that foreign investors have piIed into China,
roughly Ł 1 50 million pounds today.
The Dutch verses inscribed at the bottom read,
staying put during the storm.
''It's aII for money and goods, this fighting and quarreIIing.''
An ambitious Scot, a convicted murderer,
aiming to make megabucks from the worId's most popuIous nation.
With such vast property assets backing them
Eventually, he was forced to retreat to the roof of the town hall
a compuIsive gambIer and a fIawed financiaI genius,
But what they might just as easiIy have said
And the Iast time,
and income from agriculture booming,
those foreign investors Iost aImost as many shirts
as the waters kept rising.
is that war is impossibIe if you don't have the money to pay for it.
it was hard to see how the aristocracy could fail to flourish.
he not onIy caused the first true boom and bust in asset prices,
Now, however, imagine a world with no money.
..And as you can see,
as the IocaI taiIors here can stitch together in a week.
BELL TOLLS
- this is the water Iine. - That's the water Iine.
he aIso indirectIy caused the French RevoIution.
Yet, by ignoring a fundamental truth about property,
(Joey DiFatta) Where it came up to.
And the way to do that -
The water came in this buiIding in, er...
The key problem with overseas investment, then as now,
There was a time when John Law owned a quarter of what is now the United States,
the ability to finance war through the bond market -
they ensured their own decline.
500 years ago, the most powerful society in South America,
- 1 4 feet of water in 15 minutes. - Wow.
is that it's hard for an investor in London or New York
GUNSHOT
the lnca Empire, had no real concept of money.
was, like so much else, an invention of the ltalian Renaissance.
CROWS CAW
only to lose it all in history's first great crash.
to see what a foreign government or company is up to
The lncas appreciated the aesthetic qualities of rare metals -
From the second fIoor of this buiIding,
Like many of us today, the great magnates saw the value
when they're an ocean or more apart.
From Edinburgh to Amsterdam to Paris, all the way here to New Orleans,
I couId see, coming down Judge Perez, a waII of water.
of their property as a cash cow and used it to borrow to the hilt...
Rather than require their own citizens to do the dirty work of fighting,
lf the foreign borrower decides to default on its debts,
gold was the sweat of the sun, silver the tears of the moon -
and finally to Venice, Law's story is a classic tale of boom and bust.
In that waII of water was debris - cars, vehicIes, pieces of roofs.
what's an investor to do?
each city hired military contractors - condottieri -
..often more than the property was worth.
The answer before 1 91 4 was brutally simple but effective.
labour was the unit of value in the lnca Empire,
And this waII of water, you know, you guestimate,
lt's also very much a story for our own times.
What they'd failed to understand is that property is only a security
who raised armies to annex land and loot treasure from the others.
just as it was later supposed to be in a communist society.
had to be maybe 15 to 20 feet taII.
to the person who lends you money.
- And moving fast. - Moving quickIy.
Hidden away here in the warehouse of the Louisiana State Museum
Among the condottieri of the 1 360s and 1 37 0s,
Get your government to send in the navy.
Just coming down this bouIevard street, and taking everything with it as it came.
As a borrower, you still have to earn the money to pay back the loan.
is the onIy known painting of John Law.
But in 1 532, the lncas ran into a man
one stood head and shoulders above the others.
By guaranteeing European political control,
And for the great landowners
whose hunger for money had led him across an ocean.
Here he is.
of Victorian Britain, that suddenly became a very difficult thing to do.
gunboat diplomacy provided reassurance for British investors
The whole of St Bernard Parish was inundated in just 1 5 minutes.
With that Iean and hungry Iook,
This is his portrait in Florence's Duomo - a thank-you from a grateful public.
he reaIIy is, for aII the worId, a Scotsman on the make.
even at the remotest extremities of the world economy.
Francisco Pizarro and his fellow Conquistadores had come from Spain
Nowhere was the pain more acute than here in the heart of rural Buckinghamshire.
Only five houses out of 26,000 weren't flooded.
to what they called Upper Peru inspired by the legend of El Dorado,
Unlikely though it may seem, this master mercenary was an Essex boy.
The Royal Navy provided the firepower
the realm of the gold-covered king.
The path that led Law ''from obscurity to celebrity, to notoriety'' is a path
that underwrote the first age of globalisation...
More than 2,000 peopIe were kiIIed in Hurricane Katrina
So skilfully did he wage war
After defeating the lnca army at the Battle of Cajamarca
and the subsequent fIooding.
that many of the great stock market players have followed since.
..and its pioneers,
that the ltalians called Sir John Hawkwood Giovanni Acuto -
Here in St Bernard Parish, 1 48 peopIe Iost their Iives,
like William Jardine... and James Matheson.
There's something undeniabIy magnificent about this huge,
their quest began in earnest.
John the Acute.
Law was born here in Edinburgh in 1 67 1,
mostIy because they became trapped in their houses
neocIassicaI paIace -
At Potosi, in what is now Bolivia,
Stowe House - arguabIy the greatest private residence
Jardine and Matheson were buccaneering Scots
This castle was one of many pieces of prime real estate
as the fIood waters rose.
the son of a successful goldsmith and heir to the estate of Lauriston.
the Spaniards struck it rich.
The painted signs on these abandoned houses
buiIt in EngIand in the 18th century.
who'd set up a trading company in the southern Chinese port of Canton in 1 832.
They discovered the Cerro Rico, literally the Rich Hill.
the Florentines gave him as a reward for his services.
say whether dead bodies were found after the fIood waters receded.
Just Iook at these extraordinary scagIioIa piIIars
ln 1 694, while living in London,
A IittIe bit Iike medievaI London in the time of pIague.
Law killed a man in a duel over a woman
or the stunning eIIipticaI pIaster ceiIing.
Towering nearly 1 6,000 feet above sea level,
Not to put too fine a point on it,
But Hawkwood was a mercenary
and was sentenced to death.
who was willing to fight for anyone who'd pay him -
it was a money mountain.
their most profitable line of business was drug dealing.
And yet there seems to be something missing.
Milan, Padua, Pisa or the Pope.
In their 250 years of Spanish ruIe, more than two biIIion ounces of siIver
Or rather many things.
Yet three years later,
Somehow, Law managed to escape from prison and fled to Amsterdam.
They shipped opium produced under British Government control in lndia
Because once in each of these aIcoves there was a Roman statue.
it's not flooding or plague that's killing New Orleans.
to China's population of addicts -
He couldn't have picked a better town to lie low in.
were extracted from mines Iike this one, 1 4,000 feet up in the Andes.
A harsh financial reality has emerged.
a trade that China's Emperor had banned.
People can't live here any more
These dazzIing frescoes in FIorence's PaIazzo Vecchio
What the Incas couIdn't grasp was why the Europeans had such an insatiabIe Iust
because they can't insure their homes.
On March 1 0th, 1 839, an imperial official named Lin Zexu
The exquisite Georgian firepIaces have been ripped out
By the 1 690s, Amsterdam was the world capital of financial innovation.
show the armies of Pisa and FIorence cIashing in 1364.
One man made it his mission
and repIaced by bog-standard ones Iike this.
for goId and siIver.
At that time, Hawkwood was fighting on the side of Pisa.
arrived in Canton under orders from the Emperor to stamp out the trade.
to show the limits of private insurance
To help finance their war against Spain,
They couIdn't understand that to Pizarro and the Conquistadores,
when it comes to a really big crisis.
But 15 years Iater, he'd switched sides.
the Dutch had introduced one of the world's first national lotteries.
Why?
siIver was much more than just shiny metaI.
He besieged the British opium warehouses,
How did this most stately of stately homes become a mere shell of its former self?
Why? Because FIorence was where the money was.
To protect their merchants from dodgy coinage,
It couId be made into money...
blocking any further imports.
20,000 chests of opium valued at Ł2 million
they'd created the world's first central bank.
..a store of vaIue, a unit of account, portabIe power.
The cost of these incessant wars plunged ltaly's city-states into crisis.
He's former navy pilot Richard F Scruggs,
The answer is that this house beIonged to the principaI victim
But the one that had the biggest impact on Law
were confiscated and literally thrown in the sea.
was the single greatest Dutch invention of them all -
one of those lawyers that only America seems to produce.
of the first modern property crash -
Expenditures, even in years of peace, were running
Faced with catastrophic losses, Jardine hurried to London
Richard PIantagenet TempIe-Nugent-Brydges-Chandos-GrenviIIe,
the company.
at double or more tax revenues.
Dickie Scruggs took $50 million off the asbestos industry,
to lobby the British Government to send a gunboat.
I must say, I find this pIace pretty harrowing.
To pay the likes of Sir John Hawkwood, Florence was drowning in deficits.
2nd Duke of Buckingham.
The story of the company had begun 1 00 years before Law's arrival
then $248 billion off tobacco companies
The Spaniards had a system of forced Iabour
Stowe was only part of the Duke's vast empire of real estate.
which meant that every abIe-bodied maIe in the native popuIation
WeII, Jardine got his wish granted.
as Dutch traders spread out all over the world,
for failing to warn smokers of the danger of lung cancer.
ln all, he owned around 67,000 acres in England, lreland and Jamaica.
On August 23rd, 1840, British gunships Ianded here on Hong Kong IsIand.
had to do a stint down these mines.
from Manhattan lsland to the Cape of Good Hope.
This wonderfuI document in the FIorentine State Archive
This kind of work has its rewards.
And you can see why one in eight of them didn't survive the ordeaI.
But it was Asia that became the primary target of Dutch commercial expansion.
The Qing Empire was about to feeI the fuII force
shows how the city's debt had expIoded
Scruggs's share in fees on the tobacco case was $1.4 billion.
These immense properties seemed more than adequate
from around 50,000 fIorins at the beginning of the 1 4th century
of history's most successfuI narco-state.
Why?
to back his extravagant lifestyle.
The East Indies were so aIIuring because of these -
to five miIIion by 1 427.
And he spent money as if it might go out of fashion
Scruggs's latest target has been America's insurance companies.
spices -
It was quite IiteraIIy a mountain of debt, hence the name - the Monte Commune.
As Jardine had predicted,
on mistresses, on illegitimate children,
pepper, cIoves, nutmeg, ginger.
the Royal Navy made short work of the Chinese defences.
on anything that he felt was compatible with his standing as a Duke of the Realm.
Today, 500 years later,
Europeans craved them to fIavour their food, but aIso to preserve it.
But from whom couId the FIorentines possibIy have borrowed such a vast sum?
His clients, hundreds of homeowners whose houses were destroyed by Katrina,
conditions for miners in the Cerro Rico haven't improved much.
TraditionaIIy, they'd come overIand by the Spice Road.
PEACOCK CRIES
argued that the companies were refusing to pay up on genuine claims -
With south-western China under British control,
The answer is right here - from themseIves.
But at least they get paid for the work they do.
But the Dutch pIan was to fetch them the Ionger, but quicker way, by sea.
By 1 845, the jig was up.
the opium trade was given free rein.
ln those days, it was a way of making money that verged on genocide.
a view the insurers disputed.
And that pungent aroma was the smeII of money to be made.
Drug addiction exploded.
There was a house there?
Grain prices had begun their long slide downwards,
lt was a revolutionary idea that would change the world of money for ever.
Large tracts of the country slid into rebellion and anarchy.
There was a house here, a house next to it,
and so had the income from agricultural land.
where you see the traiIer.
Rather than paying direct tax, citizens were now
Rural property prices plummeted.
Scruggs had a dog of his own in this fight.
But for Jardine Matheson, with their head office now established in Hong Kong,
The silver ore was ground up, refined with mercury
effectively obliged to lend money to their own government.
Suddenly, the aristocracy found that their borrowings
This painting shows the return of one of the first Dutch fleets from the East.
His own home on Pascagoula's Beach Boulevard, here on the Mississippi coast,
the glory days of Victorian globalisation had arrived.
and then shipped to Europe as bars and coins.
had outrun the value of their estates.
The inscription reads, ''Four ships sailed to go and get the spices towards Bantam
was so badly damaged by Katrina
The Duke was spending far more than his income
Empire, it seemed, had made the Spanish crown rich beyond the dreams of avarice.
that it had to be demolished.
and most of that was being absorbed by interest payments.
ln return for these forced loans, they received interest.
By1 900, the firm had diversified into more respectable lines of business.
''and also established trading posts.
- This is the... - The front door?
''And came back richly laden to the poles of Amsterdam.
This is the front door, right here.
But there was to be one final bout of conspicuous consumption.
lt had its own breweries, its own cotton mills,
''Departed 1 st May 1 598.
The edge of the sIab, if you wiII.
These debt instruments - simpIe Iines in a Iedger -
its own insurance company,
- You were sIabbed. - We were sIabbed.
''Returned 1 9th July 1 599. ''
In preparation for a visit by Queen Victoria and Prince AIbert,
and its own railways, like the one they built from Kowloon to Canton.
were the originaI government bonds.
If you couId fix the system...
And the wonderfuI thing about them was that if you needed your money in a hurry,
But I'm fortunate enough that I have the means to...
the Duke decided to spIash out and refurbish Stowe House from top to bottom.
And yet, aII the siIver in the mines of Potosi
you couId seII your bonds to other citizens.
- To Iose a house and buiId it. - Most peopIe here don't.
The Asian spice trade was so profitable
couIdn't haIt the inexorabIe economic and poIiticaI decIine of Spain's empire.
15 saIoons were stuffed fuII of the most expensive furniture
They were Iiquid assets.
that just one return trip could pay for the construction costs
If you had the power to change the system so that peopIe really were insured,
What this record teIIs us
Back in 1913, an investor in London had an extraordinary range
is how FIorence turned its citizens into its biggest investors.
Why was that, when Pizarro seemed to have struck it so incredibIy rich?
that money couId buy.
of a ship like this.
The fIoorboards were groaning under the weight of Genoa veIvet,
But so prolonged was the journey round the Cape of Good Hope to the East
how wouId you do that?
of foreign opportunities,
Is there a way of making insurance work again?
The answer is that the Spaniards had dug up so much siIver
and nothing iIIustrates that better than the Iedgers of N M RothschiId & Sons.
embroidered satin and goId brocade.
and so hazardous that merchants had to pool their resources and their risk.
There is, and it's discIosure of what...what you're buying.
to finance their wars of conquest,
This wartime expedient marked the birth of the modern bond market.
When the Queen saw the resuIts, she commented rather waspishIy,
Just a singIe page from 1913
that the metaI itseIf suffered an extraordinary decIine in vaIue.
The result was around six fledgling East lndia enterprises.
''I am sure I have no such spIendid apartments in either of my paIaces. ''
Iists no fewer than 20 different foreign securities,
Everyone was a winner.
Er, so that, you know...
More siIver coins didn't make Spain richer.
Bonds had saved the city-state from bankruptcy.
incIuding bonds issues by ChiIe, Egypt, Germany, Hungary, ItaIy,
Iike...Iike a drug.
SadIy, the cost of this mega-makeover proved to be the finaI straw
They simpIy made prices higher as an increased quantity of money
The citizens were happy earning their interest.
There's a bIack box warning on there.
And the bond market let them buy or sell as they saw fit.
chased the same amount of goods.
''This is what it does, this is what you shouId watch out for.''
not forgetting 1 1 different raiIway companies,
for the ducaI finances.
What the Spaniards didn't get
As opposed to this device, which is caIIed a modern insurance poIicy,
incIuding four from Argentina, two from Canada and, down here,
lt seemed as if the problem
was that money is onIy worth what other peopIe wiII give in exchange for it.
ln August 1 848, to the Duke's horror,
In 1602, at the instigation of the Dutch government,
of public debt had been solved, allowing the citizens of Florence
his son had the entire contents of Stowe House auctioned off.
the good oId KowIoon to Canton raiIway Iine.
these various companies came together
which no-one can interpret or understand.
to turn their minds to higher things.
to form the United Dutch East India Chartered Company,
Now, his ancestral stately home was thrown open
But there was just one problem with this brilliant idea.
or Vereenigde Oost-Indische Compagnie for short.
For the first time in history, the world economy was truly united
lt seemed as if the insurance companies had been well and truly ''Scrugged''.
for throngs of bargain-hunters to bid for the silver, the wine, the china.
And, whether money takes the form of silver coins,
And this is its originaI charter,
by a combination of low trade and high finance.
seashells, bars of gold or bank notes,
which speIIs out that the company was to enjoy a monopoIy on aII trade
One of America's biggest insurers settled hundreds of cases brought by Scruggs
that's been true from ancient times right down to the present day.
Today, Stowe is a private boarding school.
Yet this first era of financial globalisation
from the Cape of Good Hope aII the way east to the Straits of MageIIan.
There was a limit to how many more or less unproductive wars could be waged.
on behalf of clients whose claims had been turned down.
was to be brought to a violent halt by the world's first truly global conflict.
Even lumps of clay can work better than silver coins,
Pretty much haIf the worId.
THUNDER RUMBLES
The larger the debts of the ltalian cities became, the more bonds they had to issue,
if people have enough confidence in them.
The structure of the new entity was novel.
But in this bitter, high-stakes battle,
lt's a poignant symbol of the transience of landed wealth.
In Ancient Mesopotamia, nearIy 4,000 years ago,
the insurance companies had the last laugh.
The capital of the company was divided unequally
and the more bonds were issued, the less valuable they looked to investors.
peopIe used cIay tabIets Iike these ones
between all the major Dutch cities.
After winning the case, Scruggs was convicted and sentenced to five years
ln the modern world, it turned out,
On June 28th, 1 91 4, the heir to the Austrian throne,
to commit themseIves to particuIar financiaI transactions.
Citizens were invited to participate in the new venture by investing.
a regular job and a steady income mattered more than an inherited title -
for attempting to bribe a judge and influence the distribution of legal fees.
For exampIe, this one, found a IittIe south-west of Baghdad,
And that was exactly the sequence of events in Venice.
the Archduke Franz Ferdinand,
lt was the form of this investment that was the real novelty.
was assassinated in the Bosnian capital, Sarajevo.
no matter how many acres you owned.
specifies that a debtor wiII repay a Iender 330 measures of grain
By the early 1 6th century,
lnitially, financial markets shrugged off the news
the city had suffered a series of military reverses,
And the big insurance companies responded to the weight of post-Katrina claims
Divorced by his Iong-suffering and much-betrayed Scottish wife,
This rather wonderfuI painting is of the famiIy of one of the founders
as just another bout of Balkan bloodshed.
on the harvest day. But this one's even more fascinating,
and the value of Venetian bonds had taken a hammering.
by, in effect, declaring parts of the Gulf Coast a no-home-insurance zone.
whose entire wardrobe had been seized by Sheriffs Officers in London,
of the Dutch East India Company, Dirck Bas.
because what is says is that a debt of four measures of barIey
ln reality, the assassination
For 6,000 guiIders, he and 16 other so-caIIed ''participants'',
the Duke was finaIIy forced to reIinquish Stowe
had sparked off a chain reaction in the world's financial markets.
shouId be repaid to the bearer of the cIay tabIet
Today, as Councillor Joey DiFatta has found out,
and move into rented accommodation.
became the firm's managing directors, the bewindhebber.
and it's that idea of repayment to the bearer that reaIIy fascinates me.
At their nadir between 1509 and 1529,
As investors belatedly grasped the likelihood of a full-scale European war,
He eked out his days at his cIub, the CarIton,
insuring a house in this part of New Orleans is virtually impossible.
After 1606, however, anyone who put his money into the East India Company
Venetian Monte Nuovo bonds were trading at just 10% of their face vaIue.
writing a succession of highIy unreIiabIe memoirs
liquidity - the ability to borrow money or sell assets -
received an ''aktie'' - IiteraIIy an ''action'',
and incorrigibIy chasing actresses and other men's wives.
- They can't get a mortgage either? - (Joey DiFatta) That is correct.
lf the phrase sounds familiar, then it should.
was sucked out of the world economy as if the bottom had dropped out of a bath.
Now, if you buy a bond when war is raging, you're taking a risk -
or as we wouId say, ''a piece of the action'' -
They have to make a choice. Do I buiId a house here?
Just take a look at a Ł20 note.
The fall of the Duke of Buckingham was a kind of harbinger
a share in the company's future profits.
Or do I reIocate to an area where insurance may be a IittIe cheaper
the risk that the city won't pay you back or pay your interest. On the other hand,
And here it is, the worId's very first share certificate,
for a new democratic age in which every adult would be given the vote
The resulting disruption to international finance
and I can afford it?
Bank notes have next to no intrinsic worth.
remember that the interest is paid on the face vaIue of the bond,
issued by the worId's very first muItinationaI company.
That is hurting our community, it's taking our peopIe away,
They're simply promises to pay,
shattered globalisation.
whether they owned a stately home or paid rent for a humble flat.
the nucIeus of this parish, and puIIing them away.
so if you can buy it at just 10% of its face vaIue,
just like the clay tablets of ancient Babylon four millennia ago.
AImost exactIy four centuries ago.
As aristocratic fortunes from agriculture declined,
SHIP HORN
you're earning a handsome return of maybe 50%.
It's absoIuteIy fascinating to foIIow the outbreak of the First WorId War
On the back of the $1 0 bill it says, ''ln God We Trust''.
Three years after disaster struck,
so the franchise was widened.
And that is how the bond market works.
St Bernard Parish has only a third of its pre-Katrina population.
through the financiaI pages of the London Times.
Three years later, Bas and his fellow directors declared
Yet the advent of universaI suffrage didn't mean that property ownership
In a sense, you get return for the risk you're prepared to take.
It wasn't untiI JuIy 22nd, 191 4, that anybody appreciated
that any shareholders who wanted their cash back could not have it refunded,
But it's not really God you're trusting in.
had become universaI.
At the same time, it's the bond market
On the contrary, as recentIy as 1938,
By swapping your goods or your Iabour for a fistfuI of these things,
that sets interest rates for the economy as a whoIe.
but would have to sell their shares to another investor.
THUNDER RUMBLES
that the assassination of the Archduke Franz Ferdinand in Sarajevo,
Iess than a third of the UK housing stock was in the hands of owner-occupiers.
If the state has in effect to pay 50%, then so do aII the other borrowers.
Of course, life has always been dangerous.
you're trusting the US Treasury Secretary not to repeat Spain's mistake
three weeks before, might have some financiaI repercussions.
The real lesson of Katrina, or any big disaster,
Overnight, a market for the company's shares was born -
It was on the other side of the AtIantic
and produce so many of the damn things that by the time you come to spend them,
Just ten days Iater, on August 1st, 191 4,
that the first true property-owning democracy wouId emerge.
is that even when we think we're protected against risk,
the worId's first true stock market.
The bond market had been invented to help pay for ltaly's wars.
they're worth even Iess than the paper they're printed on.
the Times had to report the cIosure of the Stock Exchange,
sometimes it turns out we're not.
And it wouId emerge from the biggest financiaI crisis ever seen.
But now it was setting interest rates for everyone.
and cIosed it remained untiI January 4th, 1915.
This invention was to change the face of finance for ever,
Even making quite modest insurance claims
lts rise to power had begun.
can seem more trouble than it's worth.
Why were investors so seemingIy obIivious to Armageddon
because it created a mechanism whereby the price of shares was determined
lt leaves you wondering why we bother
Over the next two centuries, bonds would come to rule the world.
just days before the outbreak of worId war?
by the laws of supply and demand, sellers and buyers.
Today we're quite happy with paper money.
spending so much on insurance policies every year.
WeII, the answer is that a combination of financiaI innovation
Where did this strange habit come from?
And as the renegade Scotsman John Law couldn't help but notice,
and gIobaI integration had made the worId seem reassuringIy safe.
Even more amazingly, we're happy with money we can't even see.
Saving up for the proverbiaI rainy day is the first principIe of insurance,
the trading of these company stocks
was making the world's first shareholders very rich indeed.
Millions of dollars pass through this woman's hands every day...
An EngIishman's home is his castIe
This house was built by the financial dynasty
but the trick is knowing what to do with your savings
The lights in financial markets were flashing green, not red,
and Americans know that there's no pIace Iike home too,
that helped decide the Battle of Waterloo -
so that, unIike in New OrIeans after Katrina,
even if aII the homes are rather simiIar.
until the very eve of destruction.
..or rather, across her computer screen.
they're in the kitty when you reaIIy need them.
the dynasty that produced the man they called the Bonaparte of finance,
There may be a lesson here for our time, too.
But to do that, you need to be more than usuaIIy canny,
Today we take the universal right to own our own home for granted.
She's a foreign exchange dealer,
the emperor of the 1 9th-century bond market.
Financial globalisation mark one took a generation to engineer.
and that gives us a vaIuabIe cIue
whose business is literally buying and selling money.
as to where the history of modern insurance has its origins.
But before the 1 930s,
Each day around $3 trillion changes hands
''He is master of unbounded wealth,
Where eIse but in bonny, canny ScotIand?
no more than two-fifths of American households were owner-occupiers.
But it was blown apart in a matter of days.
By 1 61 0, the world's first joint stock company, the Dutch East lndia Company,
''he boasts that he is the arbiter of peace and war,
in transactions like these around the world.
And it would take more than a generation to repair the damage done
BELL TOLLS
''and that the credit of nations depends upon his nod.
was ready to conquer the world.
by the guns of August 1 91 4.
lf the old class system,
And it's all built on trust. lt has to be when you can't even touch the stuff.
lt had a new charter, new shareholders and a burgeoning trade in these shares.
''Ministers of state are in his pay. ''
based on elite property-ownership was distinctively British,
They say the Scots are a pessimistic people.
the revolution that created a new property-owning democracy
Maybe it's the weather - all those hundreds of rainy days.
That's what the Conquistadores got wrong.
But it had to fight to survive,
was born out of a great American financial crisis.
The First World War had put an end to the first age of globalisation.
Those words, spoken in 1 828 by the Radical Member of Parliament Thomas Duncombe,
literally.
They failed to see that money is about trust - even faith.
Maybe it's the endless years of sporting disappointment.
Until the late 1 960s, international finance slumbered.
were describing Nathan Rothschild, bond trader extraordinaire
Or maybe it was the Calvinism we picked up at the time of the Reformation.
Trust in the person paying you the money,
When the Depression struck in 1 929, the US economy nose-dived.
Having established a string of factories and warehouses across South Asia
trust in the centraI bank issuing the money,
and founder of the London branch of what became the biggest bank in the world.
Some even considered it dead.
trust in the commerciaI bank that honours the cheque.
from Java to lndia, the company had to struggle to keep the Spaniards
Certainly, it's two Church of Scotland ministers
The minority of people who did own their own homes
Money isn't metaI. It's trust inscribed.
ln 1 944, the soon-to-be-victorious Allies
The bond market made the Rothschilds stupendously rich -
who deserve the credit for inventing the first true insurance fund,
couldn't afford the mortgage payments.
and their English competitors at bay.
And it doesn't much matter what it's inscribed on - paper, siIver, cIay,
gathered to devise a new financial architecture for the world.
Tenants too struggled to pay the rent when all they had coming in was the dole.
With 40 warships and a private army of 1 0,000 soldiers,
so rich that they could afford to build 41 stately homes all over Europe.
back in 1 7 44,
or a screen - provided the recipient beIieves in it.
and fathering a multi-billion-pound industry.
the directors of the East lndia Company were the original corporate raiders.
Trade wouId be free,
but capitaI movements wouId be subject to tight reguIation.
Nowhere were the effects of the Depression more painful than in Detroit.
This is number 29 - Waddesdon Manor in Buckinghamshire,
When money did fIow across nationaI borders,
which has been restored in all its gilded glory
it wouId go from government to government.
There was one huge possibility created
The Kirkyard of Greyfriars is best known for the grave-robbers,
Soon the automobile industry here
by Jacob Rothschild, Nathan's great-great-great-grandson.
by the emergence of money as a system of mutual trust -
For the Dutch East India Company,
employed only half the number of workers it had in 1 929,
firepower and foreign trade went hand in hand.
the Resurrection Men, who came here in the late 1 8th century
a possibility that would revolutionise world history.
and at half the wages.
This new financial order was to have two guardian sisters,
WeII, he was short, fat,
But the key to the company's success wasn't just its cannons
to supply the Medical School at Edinburgh University
By 1 932, the dispossessed of Detroit had had enough.
established here in Washington DC -
obsessive, extremeIy cIever,
lt was the idea that you could rely on people to borrow money from you
with corpses for dissection.
Iike these ones aboard The Batavia, the pride of its fIeet.
the lnternational Monetary Fund
whoIIy focused.
Like aII big companies, it was abIe to combine economies of scaIe
But Greyfriars' lasting importance
and the lnternational Bank for Reconstruction and Development,
I can't imagine he wouId have been a very pIeasant person to have had deaIings with.
and pay it back at some future date.
comes from the work of the minister here, Robert Wallace,
with reduced transaction costs
later known as the World Bank.
On March 7th, 5,000 workers laid off by the Ford Motor Company
That's why the root of ''credit'' is ''credo'', the Latin for ''I beIieve''.
and what economists caII ''network externaIities'' -
and his friend, Alexander Webster.
the abiIity to pooI information between muItipIe empIoyees and agents.
marched to the factory to demand unemployment relief.
By the 1 97 0s, however, vast sums of money were being accumulated
It's somehow appropriate that it was Scottish ministers
Between around 1 81 0 and 1 836, the five sons of Mayer Amschel Rothschild
The Batavia was part man-of-war, part muItinationaI corporation.
Without the invention of credit,
who invented modern insurance.
What followed would force Americans to completely rethink
by the oil exporters of the Middle East.
the entire economic history of our world would have been impossible.
After aII, we tend to think of them as the embodiment of prudence and thrift,
rose from the obscurity of the Frankfurt ghetto to attain a position
With Western bankers desperate to reinvest the money as loans,
their attitude to property ownership.
weighed down with an anticipation of impending divine retribution
The big networked company was simply more efficient.
of unequalled power in international finance.
the guardian sisters relaxed their grip.
That was why, by the 1 620s,
for every tiny transgression.
Financial globalisation was reborn.
But, in fact, Robert WaIIace was a hard drinker,
it had established a virtual monopoly on spice exports from Asia to Europe.
lt was the third son, Nathan,
As the unarmed crowd reached Gate 4
Because we take it for granted,
who orchestrated this family triumph from London.
of the company's River Rouge plant in Dearborn,
as weII as a mathematicaI prodigy,
we tend to underestimate the extent to which our entire civiIisation is based on
The region where the bankers chose to lend the petrodollars
The world's first multinational was making its shareholders enormously wealthy.
scuffles broke out.
who Iiked nothing better than knocking back magnums of cIaret
Evelyn de Rothschild is Nathan's great-great-grandson.
Suddenly, the factory gates opened
seemed to promise the best returns.
the borrowing and Iending of money. No, it doesn't IiteraIIy make the worId go round.
with his bibuIous buddies.
He recently retired as chairman of Rothschild's -
and a phalanx of police and security men rushed out
Not for the first time in financial history,
I'm Iooking here at the originaI sharehoIders' register
the bank that Nathan built.
Wallace and Webster were unhappy
and fired into the crowd.
But it does makes vast quantities of peopIe, goods and services
it also posed the biggest risks.
He was very ambitious
of the Dutch East India Company,
GUNSHOTS
at the way the widows and children of their fellow clergymen
and he moved to London.
and IiteraIIy every name in here was a winner.
go around the worId from BabyIon to BoIivia.
I think he was determined. I don't think he suffered fooIs IightIy.
ln seven years, Latin America quadrupled its borrowings from foreigners
were treated when the Grim Reaper struck.
If you'd put 1 ,000 guiIders into the company at its very inception,
Maybe that's a famiIy trait.
to more than $31 5 billion.
by 1 736, your investment wouId have been worth 7,000.
They often found themselves homeless and penniless.
The puzzle is that the early moneylenders got so little thanks for their services.
Five workers were killed.
This is one of the few surviving Ietters from Nathan RothschiId to his brothers
Then, in 1 982,
Days later, 60,000 people sang The lnternationale at their funeral.
On the contrary, they were widely reviled as pariahs.
Mexico declared that it would no longer be able to service its debt.
Over its entire Iifetime, the company paid an average annuaI dividend of 16.5%.
The plan Wallace and Webster came up with was ingenious -
written, as aIways, in Judendeutsch -
that was German transIiterated into Hebrew characters -
the first true insurance fund in history.
Soon, the entire continent teetered on the verge of bankruptcy.
Why was that?
and it gives you an idea of what an extraordinary work ethic the man had
VirtuaIIy aII its profits were paid back to the sharehoIders.
and how he tried to impose it on his poor, Iong-suffering brothers.
The Communist Party newspaper accused Edsel Ford,
These are some of the voIuminous caIcuIations that Robert WaIIace did,
But the days had gone when investors could confidently expect their governments
Dirck Bas's original shareholding of 6,000 guilders
Just Iisten to this.
son of the firm's founder, Henry, of allowing a massacre.
''Dear AmscheI, I am writing you my opinion because it's my damned duty to do so.
now housed at the NationaI Archives Of ScotIand.
to send a gunboat to get their money back when foreign borrowers misbehaved.
Welcome to Northern ltaly in the year 1 200AD.
had been transformed into a 500,000 guilder fortune.
You can see how he ran the numbers over and over again,
making very carefuI assumptions about the maximum number
''I read your Ietters, not once, but often 100 times,
Could anything be done
Now responsibility for such debt crises fell on the lMF and the World Bank.
of widows and orphans that wouId have to be provided for.
to defuse what was beginning to seem like a revolutionary situation,
A land divided into multiple feuding city states.
''because you can weII imagine that after dinner I don't read books,
The key point was that, from now on, ministers wouIdn't just pay money in
pitting the seriously propertied Fords against their property-less ex-employees?
To John Law, lying low in Amsterdam having escaped the gallows in London,
''I don't pIay cards, I don't go to the theatre.
that wouId be paid out when one of their number died.
They didn't have gunboats.
A land where trust was in rather short supply.
''My onIy pIeasure is my business.''
Rather, they wouId pay premiums that wouId be used to create a fund,
the workings of the Dutch East lndia Company came as a revelation.
ln a remarkable gesture of conciliation,
But in return for new loans,
they could insist that Latin American governments
Among the many remnants of the defunct Roman Empire was a numerical system
Edsel Ford turned to a Mexican artist named Diego Rivera.
and the fund wouId then be invested for profitabIe purposes.
adopt painful ''structural adjustment programmes'' -
Law was living off his winnings at the gambling table.
PHONES RING
He invited him to paint a mural that would show Detroit's economy
The widows and orphans, henceforth, wouId be paid out of the returns on that money,
But he was fascinated by the relationships between the company,
singularly ill-suited to complex mathematical calculation,
lt was this phenomenal drive, allied with innate financial genius,
impose fiscal discipline.
as a site of cooperation, not class conflict.
with its splendid offices in the Hoogstraat, the nearby stock exchange,
Ieaving the premiums to accumuIate.
let alone the needs of commerce.
To American economists, these programmes all made perfect sense.
that propelled Nathan from obscurity to mastery of the London bond market.
where dealers busily traded the company shares, and the Bank of Amsterdam.
Nowhere was this more of a handicap than in Pisa,
But not everyone agreed.
Diego Rivera was a IifeIong Communist.
All that was required for the scheme to work
where merchants struggled to do business
Once again, however,
with seven different forms of coinage in circulation.
was an accurate projection of how many widows and orphans
His ideaI was of a society in which there wouId be no private property,
the opportunity for a financial breakthrough came from war.
To the increasingly vocal critics of global finance,
Yet this Dutch financial system struck Law as not quite complete.
Even the simplest transaction could be a headache, requiring the use of an abacus.
there would likely be in the future.
in which the means of production wouId be commonIy owned.
A calculation which Wallace and Webster made with extraordinary precision.
the two guardian sisters of the post-war order
By comparison, economic life in the Eastern world -
In his eyes, Ford's River Rouge pIant was the very opposite,
To Law's financiaIIy supercharged mind, the Dutch were missing a trick, or two.
were being transformed into economic hit men.
in the Muslim caliphate or the Sung Chinese Empire - was far more advanced.
a capitaIist society in which the workers worked
For one thing, it seemed compIeteIy nuts
They were holding a financial gun to the heads of Third World governments...
On the morning of June 1 8th, 1 81 5, 67,000 British, Dutch and German troops
and the property owners, who reaped the rewards of their efforts,
The creation of the Scottish Ministers' Widows' Fund
to restrict the number of East India Company shares
To discover modern finance, backward Europe needed to import it.
was a milestone in financial history,
when the markets were so cIearIy enamoured of them.
mereIy watched.
..propping up dictators and furthering the interests of Yankee imperialism.
under the Duke of Wellington's command looked out across the fields of Waterloo,
for it provided a model not just for Scottish clergymen,
Law was also puzzled by the conservatism of the Bank of Amsterdam.
Enter a young mathematician called Leonardo of Pisa or Fibonacci.
but for everyone who aspired to provide for life's eventualities.
lt had created an internal system which allowed merchants to settle their accounts
not far from Brussels, towards an almost equal number of French troops
When the murals were unveiled in 1 933, the city's dignitaries were appalled.
And woe betide those who resisted the hit men.
commanded by the French Emperor, Napoleon Bonaparte.
The son of a Pisan customs official based in what is now Algeria,
by direct cashless transfers,
but it hadn't issued any real banknotes to the public.
By 1815, the principIe of insurance was sufficientIy widespread
Fibonacci is best remembered today
Conspiracy theories flourished in the anti-globalisation movement.
They saw them as Communist propaganda, ''a travesty on the spirit of Detroit''.
The BattIe of WaterIoo was the cuImination of more than two decades
for his sequence of numbers that mimic the properties of nature.
The idea was aIready taking shape of a breathtaking modification
to be adopted for the widows of men who Iost their Iives
According to one popular theory, two Latin American leaders -
of intermittent confIict between Britain and France.
of the institutions that Law had first encountered here in Amsterdam.
fighting against NapoIeon.
The power of art is a wonderful thing.
Jaime Roldos of Ecuador and Omar Torrijos of Panama -
But the famous sequence was onIy one of many Eastern mathematicaI ideas
But it was more than just a battIe between two armies.
At the BattIe of WaterIoo, your chances of getting kiIIed were up to one in four,
But it was clearly going to take something rather more powerful than art
OnIy combine the properties of a monopoIy trading company and a pubIic bank
It was aIso a contest between rivaI financiaI systems.
were actually assassinated for resisting the demands of American imperialism.
but at Ieast if you'd taken out insurance,
that Fibonacci introduced to Europe with his path-breaking book the Liber Abaci -
to heal a society so deeply split by the Depression.
One, the French, based on pIunder. The other, the British, based on debt.
you had the consoIation of knowing your wife and chiIdren
and the sky reaIIy wouId be the Iimit.
And yet there's something about this story of a WorId Bank-IMF pIot
The Book of Calculation.
wouIdn't be thrown out onto the street.
Law was preparing to unIeash a whoIe new system of finance
Other countries turned to the extremes of totaIitarianism.
Even more important was his demonstration of the superiority of Arabic numerals
Gives a whoIe new meaning to the phrase ''take cover''.
To pay for the war,
But in the United States the answer was the New DeaI.
the British government had sold an unprecedented amount of bonds.
on an unsuspecting nation.
against Third WorId Ieaders that doesn't quite add up.
over Roman numerals.
And that incIuded a New DeaI on housing.
After aII, it's not as if the United States had Ient that much money
And crucially, nearly all Fibonacci's examples related to business.
According to a long-standing legend,
In radicaIIy increasing the number of Americans
to Ecuador and Panama.
the Rothschild family made their first millions
who couId hope to own their own homes,
In the 1970s, they accounted for just 0.4% of totaI US grants and Ioans.
ln 1 7 1 6, John Law arrived in Paris.
by speculating on how the outcome of the Battle of Waterloo
the RooseveIt administration pioneered the idea of a property-owning democracy.
The Scottish ministers' fund grew into the world-famous Scottish Widows.
He had identified France as the ideal laboratory
would affect the price of these bonds.
Nor were they particuIarIy big customers for the United States.
Since Roman times,
Europeans had been struggling to do simple arithmetic with these...
It proved to be the perfect antidote to Red revoIution.
Even novelists, not renowned for their financial prudence,
Again, Iess than 0.4% of totaI US exports.
for what would be the biggest experiment in the history of the stock market.
lt was this legend of Jewish profiteering
could join.
Now, those just don't strike me as figures worth kiIIing for.
that, a century later, the Nazis did their best to embroider.
Walter Scott took out a policy in 1 826,
But why did the French give him his chance?
to reassure his creditors they'd be paid in the event of his death.
ln effect, the government would rig the housing market
The Hindu or Arabic numerals made all kinds of calculation easier.
To say the least,
ln 1 940 Josef Goebbels approved the release of this film, Die Rothschilds.
the idea of lMF-sponsored assassinations is a stretch.
to incentivise Americans to become property owners.
By the mid-1 9th century, being insured was as much a badge of respectability
The answer is that France's fiscal problems were exceptionally desperate.
HE SPEAKS GERMAN
Nevertheless, this new phase in the story of globalisation
as going to church on Sunday.
Customers at local mortgage lenders, known as savings and loans,
The country was saddled with enormous public debts
Nathan is seen bribing a French general to ensure the Duke of Wellington's victory,
did see the emergence of a new and more plausible kind of economic hit man,
BELL TOLLS
ln particular, Fibonacci showed how the new methods of calculation
the equivalent of British building societies,
as a result of the wars of Louis XlV.
and then deliberately misreporting the outcome of the battle in London.
would have their deposits guaranteed by the Government
armed with a financially lethal weapon - the hedge fund.
When the Sun King died in 1 7 1 5,
could be applied to commercial bookkeeping, to currency conversions
even if a bank went bust.
This triggers panic selling of British bonds,
the Duke of Orleans, who was acting as Regent for the under-age king Louis XV,
What no-one anticipated back in 1 7 44
which Nathan then snaps up at bargain-basement prices.
and, crucially, to the computation of interest.
Crucially, a new Federal Housing Administration was set up
faced a country on the brink of its third bankruptcy in less than a century.
The men who ran the hedge funds were far more intimidating
was that the careful calculations of two Scottish ministers
Just imagine trying to work out percentages in Roman numerals.
precisely because they didn't even need to threaten violence to get their way.
to offer larger, longer and lower-interest loans.
would grow into today's huge insurance industry.
Fibonacci's Liber Abaci made it child's play.
lt was the perfect opportunity for Law,
After the 1 930s, most mortgages in the United States were fixed
What happened here in 1 81 5 was altogether different.
And their distinctive contribution to globalisation was to speed it up.
the maverick self-taught economist who'd developed his theories
for 20 or 30 years.
As Robert WaIIace understood 250 years ago,
Whereas the World Bank lends money to countries for periods of years,
Far from making money from WeIIington's defeat of NapoIeon,
This was to be the appIication of mathematics to making money.
somewhere between the casino and the stock market.
A new Federal National Mortgage Association, nicknamed Fannie Mae,
size matters in insurance,
the RothschiIds were very nearIy ruined by it.
hedge funds are more likely to put their money in for just weeks,
because the more peopIe are paying into a fund
was set up to create a nationwide market for home loans.
Their fortune was made not by WaterIoo, but despite it.
Law's ambition was to revive economic confidence in France
or even days.
the easier it becomes, by the Iaw of averages,
(TV REPORTER) This coupIe is going through a modeI house now.
by estabIishing a bank on the Dutch modeI,
to predict how much wiII have to be paid out each year.
The grandmaster of the new economic hit men
The most fertile soil for such financial seeds
This is how it really happened.
but with the difference that this bank wouId issue paper money
AIthough no individuaI's date of death can be known in advance,
The husband, apparentIy, isn't very keen about it aII,
proved to be the ltalian city states.
was George Soros.
Selling bonds to the public had raised plenty of cash for the British government.
Iike this 100 Iivres note.
but his wife is entranced by such convenient features
actuaries can caIcuIate the IikeIy Iife expectancy of a Iarge group of individuaIs
Fibonacci's home town of Pisa was one.
as the sturdy buiIt-in ironing board.
A Hungarian Jew by birth, but educated in London and based in New York,
As money was invested in the bank,
But it was above all Venice -
But neither bonds nor bank notes were any use to Wellington.
the government's huge debt wouId be consoIidated.
with quite astonishing precision.
By reducing the monthly cost of a mortgage,
more exposed than any of the others to Oriental influences -
But at the same time, and this was the reaIIy important part of Law's system,
To provision his troops and pay Britain's allies against France
these reforms made home-ownership possible
Soros brought to global finance a brand-new theory of economic behaviour
that became the great money-lending laboratory...
for many more Americans than ever before.
he needed a currency that was universally acceptable.
paper money wouId revive French trade, and with it French economic power.
that underlined the fallibility of human nature
ln other words, insurance is all about
(TV REPORTER) They both wouId Iike to have this pIace for their very own.
Nathan Rothschild was given the job of taking the money raised on the bond market
and the instability of financial markets.
trying to cope with the risks of the future.
Too bad they can't afford it.
..and the home of literature's most notorious moneylender -
Your actions wiII have unintended consequences,
The Royal Government gained doubly.
Ah! But maybe they can.
lf, that is, you're insured in the first place.
and delivering it to Wellington - as gold.
Consolidation simply meant that its onerous debts
For according to this sign, they can buy this house
Shylock, in William Shakespeare's The Merchant of Venice.
so the outcome wiII not correspond to your expectations.
with monthIy payments that are Iess than they now spend for rent!
were magically transformed into shares in Law's bank.
No matter how many private funds like Scottish Widows were set up,
The success of this operation would determine the fate of the warring empires
At the same time, the monarch gained the ability
And that is the way human affairs generaIIy work.
May you stead me? WiII you pIeasure me?
there were always going to be people beyond the reach of insurance,
and of all Europe.
to print as much money as he liked.
ShaII I know your answer?
who were either too poor or too feckless to save for that rainy day.
lt's not too much to say that the modern United States,
As Law wrote - ''l maintain that an absolute prince who knows how to govern
This Ietter marks a turning point in the history of both the RothschiId famiIy,
CruciaIIy, ShyIock's onIy prepared to Iend the money if Bassanio's friend,
According to Soros's Theory of Reflexivity,
with its seductively samey suburbs, was born out of these New Deal reforms.
The Iot of the poor was once a pretty harsh one -
financial markets can't possibly be perfectly efficient,
''can extend his credit further and find needed funds at a lower interest rate
and the British government. It's dated the 1 1th of January 181 4,
the merchant Antonio, is providing the security.
either dependence on private charity,
much less rational,
and it's an order from the ChanceIIor of the Exchequer
or the harsh regime of the workhouse,
''than a prince who is limited in his authority.
From the 1930s then, the US Government effectiveIy underwrote
for the simpIe reason
Three thousand ducats for three months and Antonio bound.
that prices are just the refIection of the ignorance and the biases,
to the Commissary-in-Chief teIIing him to appoint Nathan RothschiId -
Iike this typicaIIy austere one here in the heart of Edinburgh.
''ln credit, supreme power must reside in only one person. ''
the mortgage market, bringing borrowers and Ienders together.
Yet by the 1880s,
mostIy compIeteIy irrationaI, of miIIions of investors.
Mr RothschiId - as a British government agent.
peopIe began to feeI that Iife's Iosers somehow deserved better.
Your answer to that.
And that was the reason for the big expIosion in property ownership
In Soros's eyes, markets are bound to go through cycIes of boom and bust,
Antonio is a good man.
Nathan's job was to gather together as much goId and siIver as he couId find
The seed was pIanted of an entireIy new approach to risk,
and mortgage debt in the decades after WorId War II.
By ''good'', ShyIock doesn't mean virtuous,
as sureIy as the human temperament
on the European continent and make sure it got to the Duke of WeIIington and his army
That absoIute power was in the hands of the Duke of OrIeans
is prone to bouts of euphoria and despondency.
a seed that wouId uItimateIy sprout into the modern weIfare state.
There was just one catch -
he means ''good'' for the money he's about to Iend Bassanio.
who Iived here in the PaIais RoyaI,
not everyone in American society had an invitation to the property-owning party.
who had just fought their way out of Spain into the South of France.
The state system of insurance was designed to expIoit the uItimate economy of scaIe,
just a short step from Law's apartment in the PIace Vendome.
In other words, creditworthy.
It was an operation that reIied heaviIy
It was to him that Law now unfoIded his scheme.
Have you heard any imputation to the contrary?
Soros's Quantum Fund had made millions from short selling,
on the RothschiIds' unique pan-European credit network
by covering IiteraIIy every citizen from the cradIe to the grave.
Oh, no, no, no, no. My reason in saying that he's a good man
The prize was nothing Iess than the revivaI of French power
and on Nathan's abiIity to mobiIise goId the way WeIIington couId mobiIise troops.
a type of dealing which borrows stocks or currencies
through financiaI engineering.
is to have you understand me that he is sufficient.
When these houses were built in Detroit back in 1 941,
and sells them for future delivery
But that was onIy haIf of Law's ingenious pIan.
on the calculation that they'll go down in value.
whether you got the money or not for a mortgage
Shifting such vast amounts of gold in the middle of a war was hugely risky.
Yet while we tend to think of the welfare state as a British invention,
(ShyIock) Three thousand ducats. I think I may take his bond.
As Law wrote,
depended on which side of this divide you lived.
His biggest coups came from being right about losers, not winners.
in fact, the world's first welfare superpower
Yet, from the Rothschilds'point of view,
''The bank is not the only, nor the grandest of my ideas.
It was a reaI estate deveIoper who buiIt this six-foot high waII
was Japan.
the hefty commissions they were able to charge more than justified the risks.
And the greatest of these was among the most momentous speculative hits
''l will produce a work which will surprise Europe
With any loan, things can go wrong.
right through the middIe of Detroit's 8 MiIe district.
''by changes more powerful than were produced by the discovery of the lndies. ''
in all financial history.
He had to buiId it in order to quaIify for Ioans
Ships can sink. And that is precisely why anyone who lends money to a merchant -
The Rothschilds soon became indispensable to the British war effort.
from the FederaI Housing Administration.
On September 1 6th, 1 992, with the British pound in big trouble,
The Ioans were to be given for construction on that side of the waII,
ln the words of the British Commissary-in-Chief...
if only for the duration of an ocean voyage - needs to be compensated.
The second part of Law's idea
''Rothschild of this place has executed the various services
which was a predominantIy white neighbourhood.
was that a huge monopoIy trading company shouId be estabIished,
l watched as Soros put out a contract on the Bank of England.
We usually call the compensation ''interest'' -
On this side, on the bIack side, there was to be no federaI credit,
''entrusted to him in this line admirably well, and though a Jew,
Disaster just kept striking Japan in the first half of the 20th century.
the amount paid to the lender over and above the sum lent or ''principal''.
the Compagnie d'Occident, the Company of the West.
because African Americans were regarded as fundamentaIIy uncreditworthy.
''we place a good deal of confidence in him. ''
I became convinced that specuIators Iike Soros were bound to win
As he put it, the whoIe nation wouId become a body of traders
ln 1 923, a huge earthquake devastated Tokyo.
if it came to a straight showdown with the British Government.
and Law himseIf, named here as the company's chief director,
Overseas trade of the sort that Venice depended on
The Rothschilds were so effective as war financiers
lt was part of a system that divided the whole city -
It was a matter of simpIe arithmetic -
couldn't operate without such transactions.
because they had a ready-made banking network within the family -
As in New Orleans,
a triIIion doIIars of currency traded every day on foreign exchange markets
in theory by credit-rating,
wouId be at its head.
And they remain the foundation of international trade to this day.
private insurance policies turned out to be worth little more
in practice by colour.
Nathan in London, Amschel in Frankfurt,
Segregation, in other words, wasn't accidental,
than the paper they were printed on.
against the meagre hard currency reserves of the UK Treasury.
James in Paris, Carl in Amsterdam and Salomon roving wherever Nathan saw fit.
A new idea began to emerge in Japan - that the state should take care of risk.
but a direct consequence of federal policy.
The focus for this wildly ambitious scheme would be in America,
At that time, the British pound was tightly linked to the German mark
where the French laid claim to a vast tract of land
But why does Shylock turn out to be such a villain,
This map by the FederaI Home Loan Board
through the ERM - the European Exchange Rate Mechanism.
either side of the Mississippi - Louisiana.
shows the predominantIy bIack areas of Detroit, the Iower east side
But this was to be state protection allied with imperial ambition.
demanding literally ''a pound of flesh'' - in effect Antonio's death -
lf the price of gold was higher in, say, Paris than in London,
The Regent gave Law's company, what was to become the Mississippi Company,
and so-caIIed coIonies Iike the one we're in now in Birwood-Griggs,
As German interest rates rose
James in Paris would sell - and Nathan in London would buy.
if he can't fulfil his obligations? Why is Shakespeare's moneylender so heartless -
in the wake of that country's hugely expensive reunification,
The Japanese set up a welfare state.
marked with a Ietter D and coIoured red.
a monopoly on trade with the new colony.
Britain's rates had to rise too,
Frenchmen, regardless of rank, were encouraged to buy shares in the company.
You can see why the practice
And they did it to promote warfare.
the original of that bloodsucking financier
hurting home-owners and businesses.
of giving whoIe neighbourhoods a negative credit rating
Soros calculated that the British Chancellor, Norman Lamont,
who recurs time and again in Western literature?
I think their edge over famiIies Iike the Barings, with whom they were competing,
Law's name headed the list of directors.
came to be known as ''red-Iining''.
would be forced to withdraw from the ERM and devalue the pound.
The resuIt was that when peopIe from round here needed mortgages,
was that they had their brothers in very important financiaI centres in countries.
lt was the mid-20th-century state's insatiable appetite
they had to pay significantIy higher interest rates
for able-bodied young soldiers and workers,
Now whether that was pre-meditated,
lt was the biggest bet of Soros's life.
than the foIks in the white part of town.
In modern parIance, what these documents teII us
One clue is that Shylock is one of the many Jewish moneylenders in history.
not some kind of bleeding-heart altruism,
whether they thought that through as they got out of the ghetto,
So sure was he that the pound would drop that he bet $1 0 billion -
is that Law was attempting a refIation. And why not?
that inspired the rise of welfare.
Half a century later, the two categories of borrowers
it's hard to beIieve that they went as far as that.
Jews who stayed in Venice for more than two weeks
France in 1 7 16 was in a depression
But that's what happened and once they saw that it was an advantage,
would come to be known euphemistically as prime and sub-prime.
more than the entire capital of his fund.
were supposed to wear a yellow ''O'' on their backs or a yellow hat.
and Law's banknotes heIped stimuIate a recovery.
State healthcare would ensure a fitter populace
they worked on that advantage.
The risk-reward was disproportionate.
At the same time, what he was doing
and a steady supply of able-bodied recruits to the Emperor's armed forces,
But in the 1 960s, this divide was the hidden financial dimension
And they were confined to a special area which became known as the Ghetto Nuovo.
was effectiveIy transforming a burdensome and badIy managed pubIic debt
ln March 1 81 5, Napoleon returned to Paris from exile in Elba
And therefore it seemed Iike a good specuIation,
of the Civil Rights struggle.
determined to revive his imperial ambitions.
and deliver him an empire.
into shares in what was a privatised tax-gathering and trade company.
Blacks were to be excluded from the new property-owning society.
This is the entrance to the Jewish ghetto in Venice where Jews were obIiged to Iive
or investment, if you Iike, shorting the pound.
WeII, what was not to Iike about that?
ENGINE REVS
The Rothschilds immediately ramped up their gold operation,
There would be a heavy price to pay for this exclusion.
and indeed confined at night. Jews were toIerated in Venice, but for a reason.
buying up all the bullion and coins they could lay their hands on.
l was equally convinced that sterling would have to be be devalued,
ln a fever of mass speculation,
the Mississippi Company's share price soared,
Nathan's reason for buying this huge stock of gold was simple.
On July 23rd 1 967, property in Detroit literally went up in flames.
The wartime slogan ''All people are soldiers''
though all l had to bet was my credibility.
from the original price of 500 livres to 5,000 on September 4th.
The key was that Jews could provide a service that Christian merchants
That evening, I headed to the opera to see Verdi's The Force Of Destiny.
was adapted to become ''All people should have insurance''.
He assumed that, as with all Napoleon's wars,
were forbidden to do - they could charge interest on their loans.
this would be a long one.
(TV) Four days of rioting, Iooting and arson rocked the city of Detroit
It proved exceedingIy appropriate.
By December 1 7 1 9, it had reached 1 0,000.
His gold would be more and more sought after and it would rise in value.
Fibonacci might have figured out the mathematics of lending,
in the worst outbreak of urban raciaI vioIence this year.
The only problem was that Japan had gone to war
but it took Shylock to do the deal.
And this is where it aII happened.
lt proved to be a near-fatal miscalculation.
Anger at economic discrimination spilled over into five days of rioting
This was where Law's share issuing office was Iocated, the Rue Quincampoix.
with the world's economic colossus -
At the intervaI, they announced that ChanceIIor Norman Lamont
the United States.
This is where the Venetian Jews used to do business.
Wellington famously called the Battle of Waterloo,
that left 43 people dead.
You can imagine the scenes of frenzy here
had appeared in there, in the Treasury courtyard,
This buiIding here was the oId Banco Rosso
Significantly, most of the violence was directed not against people,
''The nearest-run thing you ever saw in your life. ''
as haIf of Paris descended on this narrow aIIeyway
to say that Britain was withdrawing from the ERM.
and it was outside here that they used to sit behind their tabIes - their tavoIe -
Japan's warfare state proved to be a massive mistake.
aII desperate for a piece of the action.
How we aII cheered.
but against property.
CROWS CAW
Today has been an extremeIy difficuIt and turbuIent day.
The higher the share price went, the more they wanted to buy.
Nearly 3,000 buildings were looted or burned.
Quite apart from the nearly three million lives lost
on their benches - their banchi, the root of the ItaIian word for banks.
After a day of brutal charges, counter charges and heroic defence,
It was a cIassic stock market feedback Ioop.
in Japan's doomed bid for empire,
Massive specuIative fIows have continued to disrupt
by 1 945, the value of Japan's entire capital stock
Now, there was good reason why merchants came here to the Jewish ghetto
the late arrival of the Prussian Army finally proved decisive.
the functioning of the Exchange Rate Mechanism.
The real lesson for policy makers was that excluding ethnic minorities
lt was in these heady times that the word ''millionaire'' was first coined.
to borrow money. For Christians, what the Jews were doing,
seemed to have been reduced to zero
For Wellington, it was a glorious victory.
by American bombers.
Soros made a billion dollars that day,
Iending money at interest, was a sin.
from the property-owning democracy was a fast track to trouble.
Yes, millionaires, like entrepreneurs, were invented in France.
Cities built largely out of wood were incinerated.
But not for the Rothschilds.
and that was only 40% of his fund's annual profits.
To make people feel like stakeholders in the social status quo,
Nearly a third of the urban population lost their homes.
No doubt it was gratifying to Nathan RothschiId
And by January 1 720, John Law was the richest of them all.
(NiaII) Do you feeI... or did you feeI a sense of triumph
The medieval Church's laws against usury - charging interest on loans -
you had to make them property owners.
to be the first to hear the news of NapoIeon's defeat.
when your prophecy came true and the bet paid off hugeIy?
Thanks to the swiftness of the RothschiId couriers,
were a major obstacle to the development of finance in Europe.
Louis XlV had said ''L'etat, c'est moi'' - ''l am the state. ''
lndeed, widening home ownership might even turn the malcontents
he heard it fuIIy 48 hours before Major Henry Percy
Of course. It was Iike when you're betting and you win,
After all, what God-fearing Christian merchant
deIivered WeIIington's officiaI despatch to the British Cabinet.
into conservatives.
naturaIIy, you have that satisfaction and aIso the profit.
wished to risk the torments of Hell?
Now the renegade Scotsman, John Law, was able to say,
But, no matter how early he heard it,
This was a lesson that Margaret Thatcher was quick to learn.
This astonishing vision of eternaI damnation
Practically the only city to survive intact
''L'economie, c'est moi'' -
the news of Waterloo was anything but good from Nathan's point of view.
was Kyoto, the former imperial capital.
was painted by Giorgio Vasari and Federico Zuccari
Here in Britain, the idea of the property-owning democracy
COWS MOO
''l am the economy. ''
He had bargained for something much more protracted.
on the inside of the great dome of FIorence's CathedraI, the Duomo.
became a keystone of 1 980s Conservatism.
1 945 may have seen the end of the Japanese warfare state,
Now he and his brothers were sitting on top of a piIe of cash that nobody wanted,
And beIow there's another fresco by Domenico di MicheIino
By selling off council housing at bargain-basement prices,
Soros owed his success to a kind of gut instinct
Ensconced in his paIatiaI suite, here in the PIace Vendome,
but it wasn't the end of the Japanese experiment with state-sponsored welfare.
to pay for a war that was over.
about the way the ''electronic herd'' would move.
that's the Ritz HoteI over there,
Thatcher ensured that more and more British couples had a home of their own.
of FIorence's greatest poet, Dante AIighieri,
But even his instincts are sometimes wrong.
With the coming of peace,
Law had achieved a greater concentration of financiaI power in his hands
the great armies that had fought Napoleon could be disbanded.
So what if instinct couId somehow be repIaced by mathematics?
hoIding his masterwork, the Divine Comedy.
In Japan, as in most competent countries, the Iesson was cIear -
than any individuaI in aII French history.
According to Dante, there was a speciaI part of the seventh circIe of HeII
That meant no more gold for soldiers' wages and it meant the price of gold,
That also meant that more people than ever had mortgages.
the worId was just too dangerous a pIace
What if you couId write an aIgebraic formuIa
As ControIIer-GeneraI of French Finances, he was IiteraIIy in charge of
for private insurance markets to cope with.
that was excIusiveIy set aside for usurers.
that guaranteed doubIe-digit returns?
which had soared during the war, would fall.
With the best wiII in the worId,
the coIIection of aII France's indirect taxes,
WeII, on the other side of the financiaI gaIaxy,
Up untiI the 1980s, government incentives to borrow money and buy a house
peopIe couIdn't be expected to insure themseIves against the US Air Force.
the entire French nationaI debt,
such a formuIa had just been devised.
made pretty good sense for the average British famiIy.
the 26 mints that produced the country's goId and siIver coinage,
The answer, practicaIIy everywhere, was the same -
Interest rates were reIativeIy Iow in the '60s and '70s,
for government to step in.
the Company of the Indies - better known as the Mississippi Company -
Nathan was faced with heavy and growing losses.
In effect, to nationaIise risk.
There the moneylenders were eternally tortured with scorching earth
and the infIation rate tended to creep up,
As the new era of globalisation increased trade and growth,
CAR HORNS HONK
which had a monopoIy on the import of tobacco,
so that the reaI vaIue of mortgage debt tended to faII.
There was only one possible way out.
aII of France's trade with Africa and Asia,
and freezing snow, their necks weighed down with bulging purses.
Perhaps the most familiar sub-system of welfare from the cradle to the grave,
it also increased the world economy's vulnerability to financial shocks
But there was a sting in the taiI.
oh, and the Louisiana coIony,
Nathan could use the Rothschild gold to make a massive and hugely risky bet...
The very same governments that professed their faith
which covered around a quarter of what is today the United States.
also born in the ruins of war,
in the property-owning democracy were aIso committed to fighting infIation,
that could spread rapidly to the four corners of the Earth.
Jews, too, weren't supposed to Iend at interest.
was devised by the British economist, William Beverage.
on the bond market.
But there was a convenient get-out cIause
and that meant raising interest rates.
But what if we inhabited another completely different kind of planet?
in the OId Testament book of Deuteronomy, chapter 23,
ln his own right, Law also owned the Mazarin Palace,
When the Japanese came up with their own comprehensive weIfare system
The British and American policy of encouraging people
you weren't supposed to Iend to your brother at interest, but to a stranger?
A planet without all the complicating frictions caused by subjective,
to take out mortgages and then cranking up interest rates led in the late '80s
more than a third of the buildings around the Place Vendome,
in October 1947,
On July 20, 1 81 5, the evening edition of the London Courier
their advisory committee in sociaI security recommended
sometimes irrational human beings.
WeII, that was a different matter. In other words, a Jew couIdn't Iend to a Jew,
more than 1 2 country estates,
reported that Nathan had made ''great purchases of stock'',
to one of the most spectacular booms and busts in the property market's history.
what amounted to ''Bebariji no Nihon-ban'',
One where the inhabitants instantly absorbed all new information
but he couId Iend to a Christian.
''Beverage for the Japanese''.
several plantations in Louisiana,
meaning British government bonds.
lt was to the '80s what the sub-prime meltdown has been in our own time -
and used it to maximise profits,
And yet, they went even further than Beverage had intended,
Nathan's gamble was that the British victory at Waterloo
and a hundred million livres of shares in the Mississippi Company.
where amid the turbulence of everyday life
The price the Jews paid for performing this service was social exclusion.
as this copy of their report,
would send the price of British bonds soaring upwards.
the first, but not the last time that America's mortgage market
all was calm and predictable.
here in the Iibrary of the Japanese NationaI ParIiament, makes cIear.
Not bad going for a man who, when he'd first come here 12 years before,
Hence the ghetto.
has gone stark raving mad.
It caIIed on the government to provide against every cause of poverty.
ln such a perfectly observed, efficiently interconnected world,
And hence the centuries-long association between Jews and finance,
had been identified as a joueur - a professionaI gambIer and a possibIe spy.
Nathan bought, and as the price of bonds began to rise, he kept on buying.
Sickness and injury, disabiIity, death,
an unpredicted catastrophic stock market crash would be about as common
one of the few forms of economic activity from which Jews were not once excluded.
By January 1 720, Law's triumph seemed complete.
chiIdbirth, Iarge famiIies, oId age and unempIoyment.
as an adult shorter than one-and-a-half feet in our own world.
Despite his brothers' desperate entreaties to sell, Nathan held his nerve
A Scots murderer was, in effect, Prime Minister of France.
Whatever the reason, the needy wouId be guaranteed the minimum standard of Iiving
lt would happen only once in four million years of trading.
ln the end, of course, Shylock is thwarted.
To many of us, it's come as a shock
for another year.
by nationaI assistance.
that a crash in the American property market
For although the court recognises his right to a pound of flesh,
This was the planet imagined
MONKS PERFORM INCANTATIONS
could trigger a major financial crisis.
Law's problem was that he had no clear idea where to stop.
by some of the most brilliant financial economists of modern times.
Eventually, in July 1 81 7,
the law also prohibits him from shedding Antonio's blood.
with bond prices up by 40%, he sold his holding.
The Japanese wouId no Ionger have to reIy on the benevoIence of a feudaI Iord
ln fact, as so often in the ascent of money, it's happened before.
On the contrary, he had a strong personal interest in printing more money,
And, because he's a Jew, the law also requires the loss of his goods and life
And this is what their planet looked like.
His profits were worth approximately Ł600 million today.
which his own bank controlled, to drive up the price of his own company's shares.
or the Iuck of the gods -
for so much as plotting the death of a Christian.
the weIfare state wouId cover them
He only escapes by submitting to baptism.
against aII the vagaries and vicissitudes of the modern worId.
ln 1 993, two mathematical geniuses came to Greenwich, Connecticut,
The Rothschilds had shown
ln March 1 984, American government regulators received a copy
FortunateIy for Law, both his bank and his company
lt turns out to be a risky business to be a moneylender.
that bonds were more than just a way for governments to fund their wars.
of a video showing mile after mile of half-built houses and condominiums
were now operating out of the very same buiIding,
with a big idea.
lf they couldn't afford education,
They could be bought and sold in a way that generated serious money.
Stanford University's Myron Scholes
the Mazarin PaIace, which he himseIf happened to own.
the state would pay.
The Merchant of Venice raises profound questions
along lnterstate 30, just outside Dallas in Texas.
had invented a revolutionary new theory of pricing things called ''options''.
lf they couldn't find work,
So aII he had to do in order to drive up the company's share price
And with money, came power.
about both economics and anti-Semitism.
the state would pay.
Why don't debtors aIways defauIt on their debts -
was to take a waIk down the corridor from the office where the shares were issued,
He and Harvard's Robert Merton were the original ''quants'' -
lf they were too ill to work, the state would pay.
Mayer Amschel Rothschild had repeatedly admonished his five sons,
especiaIIy when the creditors beIong to unpopuIar ethnic minorities?
You can still see the empty slabs today.
to the office where the money was printed.
When they retired, the state would pay.
a new breed of speculators using quantitative mathematics
Why don't the ShyIocks aIways Iose out?
You couId say that Law had become the uItimate insider trader.
''lf you can't make yourself loved, make yourself feared. ''
And when they finally died, the state would pay their dependents.
to make money.
The investigation triggered by these un-buiIt homes wouId expose
As they bestrode the mid-1 9th century financial world
From this nondescript office they plotted a global financial revolution.
one of the biggest financiaI scandaIs of aII time -
as masters of the bond market,
At root, Law's system was what we nowadays call a Ponzi scheme,
the Rothschilds were already more feared than loved.
To get a better idea of how primitive moneyIending works,
a scam that wouId make a mockery of the idea
Merton and SchoIes's idea was based on the simpIe option contract.
after the legendary ltalian-American conman, Charles Ponzi.
So what happened after the war in Japan
you don't need to traveI back in time.
of property as a safe form of investment.
But now, they had become hated too.
was merely the extension of the warfare welfare state.
There are pIenty of modern-day ShyIocks remarkabIy cIose to home.
Take the case of a stock that's worth $100 today.
This isn't a story about reaI estate -
To pay out the generous returns it's promised to the first lot of suckers,
more Iike surreal estate.
The slogan now became ''All people should have pensions''.
Now, suppose I think that stock's going to be worth 200 in a year's time.
And they don't need to be Jewish to suffer a simiIar fate to ShyIock.
a Ponzi scheme needs to take in more money from the next lot of suckers.
The fact that the Rothschilds were Jewish
WouIdn't it be nice to have the option to buy it at today's price in a year's time?
Savings and loan associations - America's building societies -
ln John Law's scheme, the acquisitions of other companies
The Japanese welfare state seemed to be a miracle of effectiveness.
gave a new impetus to deep-rooted anti-Semitic prejudice.
were not only central to Roosevelt's New Deal on housing.
If I'm right, I make a tidy profit of $100.
and the generous dividends Law paid
ln public health and education, Japan led the world.
(RothschiId) Just a few months ago a colleague of mine in my office,
were financed not from company profits,
By the 1 97 0s, they were the foundation of America's property-owning democracy.
But if I'm wrong, weII, who cares? It was onIy an option.
who coIIects posters, found these...
but simply by selling new shares.
The onIy cost to me is the price of the option itseIf.
By the late 1 97 0s,
the Japanese could boast that their country had become
WeII, this particuIar, rather extraordinary exampIe of anti-Semitism
Then, in the 1970s, the savings and Ioan industry was hit
The big question is, what shouId that price be?
This is ShettIeston in the East End of GIasgow.
the welfare superpower.
$5? $1 0?
first by doubIe-digit infIation and then by higher interest rates.
in a stark form, about the RothschiIds, who were as it were epitomised,
It's actuaIIy where my grandmother used to Iive.
The answer was to be found in a magic formula.
Like aII Ponzi schemes, however, the effect of Law's system
And I think with its distinctive steeI shuttering,
to them and others at times,
Run Iike this, the weIfare state seemed to make so much sense.
lt was a lethal double punch for institutions that were forbidden by law
''Quants'' sometimes refer to this formula as a ''black box''.
it's one of the grimmest pIaces in the whoIe of Western Europe.
the most extreme forms of undesirabIe capitaIism as practised by Jews.
was to generate an unsustainabIe bubbIe.
Japan had achieved security for aII,
Well, let's look inside the box.
In fact, average maIe Iife expectancy here is just 64,
to raise the rates they paid to savers,
Law had refIated the French economy
the eIimination of risk,
and which were receiving interest payments from local mortgage borrowers
whiIe at the same time growing so rapidIy that by 1968
with a combination of paper money and pubIic confidence.
The challenge Merton and Scholes faced was how to price an option
which is sIightIy worse than BangIadesh.
lt was, above all, the Rothschilds' seeming ability to permit or prohibit wars
That means that the average ShettIestonian doesn't actuaIIy Iive Iong enough
Now, unfortunateIy, his bubbIe was about to go pop.
it had the second-Iargest economy in the worId.
that had been fixed decades before.
to buy a particular stock on a particular date in the future,
to coIIect his state pension.
that aroused the most indignation.
You might think nobody wouId be mad enough
The response in Washington was to remove nearly all these restrictions.
taking into account the unpredictable movement of the price of the stock
One US economist even predicted that Japan's per-capita income
to try and provide financiaI services here. But someone does.
would overtake America's by the year 2000.
in the intervening period.
You might have thought that the RothschiIds actuaIIy needed war.
When deregulation was enacted in 1 982,
Work that option price out accurately, rather than just relying on guesswork,
After aII, some of Nathan's biggest deaIs had been produced by war.
President Reagan was cock-a-hoop.
By the beginning of 1 720,
WeIfare was working where warfare had faiIed -
AII in aII, I think we hit the jackpot.
If it hadn't been for war, 19th-century states wouIdn't have needed to issue bonds
That someone is a loan shark.
and you truly deserve the title ''rocket scientist''.
France was in the grip of a mania - the Mississippi Bubble.
to make Japan top nation.
You give him your benefit card as security and he gives you a loan.
Well, some people certainly did.
With wonderful mathematical wizardry,
for the RothschiIds to buy and seII.
The key turned out to be not a foreign empire,
On the day your benefit arrives, he gives you back the card
But the troubIe with war, and even more so with revoIution,
but a domestic safety net.
But the man responsible, the renegade Scots murderer and gambler, John Law,
the quants reduced the price of the option to this formula.
And yet, there was a catch,
and you go to the post office to get your money,
was that increased the risk that a debtor state might faiI to meet its commitments.
Liberated from the old constraints, the people running savings and loans
a fataI fIaw in the design of the post-war weIfare state.
repaying him the interest. lt's a modern version of Shylock's business model.
who'd risen to become master of the entire French economy,
FeeIing a IittIe bit baffIed? Finding the aIgebra rather tricky to foIIow?
suddenly saw a chance to make some serious money
Just what was it that caused those predictions of Japan's uItimate triumph
And that hit the price of existing bonds.
was about to discover an inviolable law of finance...
Usury is alive and well and living in Scotland.
from the once boring business of mortgage lending.
By the mid-19th century, the RothschiIds were no Ionger mere traders,
WeII, that was just fine by the quants.
to faiI to come true?
In order to make money from this kind of thing,
Trees don't grow to the sky.
they were fund managers,
By raising savings rates, they could attract much more money from depositors.
they needed markets to be fuII of peopIe who had no idea how to price options.
carefuIIy tending to a vast portfoIio of their own government bonds.
These are some pages from the Ioan book of a GIasgow Ioan shark.
The welfare state looked to be working smoothly enough in 1 97 0s Japan.
And it's kind of interesting to see how the business modeI works.
Then they could use these deposits
Now, they stood to Iose much more than to gain from confIict.
ln its first two years, Merton and Scholes's company,
But elsewhere, there were signs that all was not well.
as the basis for as many loans as they liked.
You Iend out maybe Ł10 to someone
According to Law's PR campaign,
Long Term Capital Management, made megabucks by selling options
and you expect to be paid back Ł12.50 at the end of the week.
the huge profits he was projecting would come from the French colony of Louisiana,
The Rothschilds had helped decide the outcome of the Napoleonic Wars
ln Britain and throughout the western world,
Crucially, though, one thing didn't change.
Now that's 25% a week, but if you work that out at an annuaI rate
by putting their financial weight behind Britain.
that were never exercised because the buyers had guessed wrong
which he painted as a veritable Garden of Eden,
the welfare state, it seemed, had removed the incentives
Now they would help decide the outcome of the American Civil War -
Savers' deposits were still insured by the government.
and Long Term had got it right.
inhabited by friendly noble savages
it comes to 1 1 miIIion per cent.
without which a capitalist economy simply cannot function -
by choosing to sit on the sidelines.
They also made a killing by buying up all kinds of different securities
willing to exchange a cornucopia of exotic goods.
lt was an invitation to a gigantic free lunch for financial cowboys.
the carrot of serious money for those who strive,
GUNSHOTS
These would flow to France through a new city
that the rocket scientists thought were mispriced.
Once again, it was the masters of the bond market who would be the arbiters of war.
the stick of hardship for those who are idle.
at the mouth of the Mississippi, New Orleans,
So why do people scraping by on just Ł5.90 a day
Greenwich's luxury car dealers had never had it so good.
This is the Wise Circle Grill just outside Dallas,
named to flatter the always susceptible French Regent, the Duke of Orleans.
pay such horrendous interest on loans?
filled every lunchtime with local citizens of unblemished integrity.
Admittedly, to generate these huge returns, Long Term had to borrow.
The result was stagflation -
These, surely, are loans you'd be mad not to default on.
All the colony lacked was settlers.
low growth and high inflation.
This additional ''leverage'',
Twenty years ago, the clientele was rather different.
or gearing, allowed them to bet more than just their own money.
But here in Glasgow, defaulting on your loan is highly inadvisable.
What was to be done?
Grasping that Frenchmen were more interested in stock market speculation
50 years after the Battle of Waterloo, and on the other side of the world,
The city of DaIIas had more than its fair share of frauduIent savings and Ioans,
By August 1 997, the fund's capital was just under $7 billion,
One man and his pupils thought they knew the answer.
You won't literally lose a pound of flesh,
than the hard graft of colonisation,
another great war would be decided by the power of the bond market.
Law launched a recruitment drive in the Franco-German borderlands.
and this was where the DaIIas property cowboys came to hang out.
but grievous bodily harm isn't an unknown consequence
Thanks in large measure to their influence,
but the assets funded by borrowing amounted to 1 26 billion.
one of the great economic trends of the past 25 years
of letting down the loan shark.
The Wise CircIe GriII was the pIace to have brunch
But this time, it would be the vanquished who made the big bet and lost.
has been for the welfare state to be dismantled -
Quite simply, individual loan sharks have to be rapacious and ruthless
Several thousand bold Germans signed up and set sail to the promised land.
You might have thought that a coupIe of academics Iike Merton and SchoIes
when they weren't whooping it up on their Southfork-styIe ranches.
reintroducing people with a sharp shock
wouId have been scared siIIy by this enormous piIe of debt.
to the unpredictable monster they thought they had escaped from...
because the costs to them of even a single defaulter are so high.
It was aII very, very 1980s.
But not a bit of it. According to their magicaI mathematicaI formuIa,
Risk.
They ended up here.
To one group of DaIIas deveIopers, the Empire Savings and Loan Association
there wasn't the sIightest risk in being so highIy geared.
And that explains why, from Renaissance ltaly to modern Scotland,
The traditional view is that the key turning point in the American Civil War
offered the perfect opportunity to make money out of thin air...
Apart from anything eIse, Long Term was pursuing muItipIe,
This was the unfortunate immigrants' first gIimpse of Louisiana,
the moneylender is so often a hated figure.
came in June 1 863, two years into the conflict.
supposedIy uncorreIated trading strategies, around a hundred in aII,
or rather, out of fIat, Texan Iand.
an insect-infested swamp.
He's providing a service, but at a socially unacceptable price.
Within a year, 80% of them had died of starvation
That was the month when Union forces captured Jackson,
with over 7,600 different positions.
ln 1 97 6, a diminutive professor called Milton Friedman,
The surreal saga of Empire Savings and Loans began
or tropicaI diseases Iike yeIIow fever.
the Mississippi state capital,
One of these might go wrong, or possibIy even two.
SadIy for Law, the Mississippi Company's principaI asset,
and forced a Confederate army to retreat westward to Vicksburg,
working here at the University of Chicago,
when chairman Spencer Blain teamed up
So how did Ienders Iearn to overcome this fundamentaI probIem?
But sureIy aII the bets they'd pIaced couIdn't possibIy go wrong simuItaneousIy.
won the Nobel Prize in Economics.
with a flamboyant high-school dropout turned property developer
its monopoIy on trade with Louisiana, Iooked Iike being more or Iess worthIess.
their backs to the Mississippi River.
If they were too generous, they didn't make any money,
MiIton Friedman won his pIace in the economic haII of fame
named Danny Faulkner, whose speciality was extravagant generosity...
Surrounded, with Union gunboats bombarding their positions from behind,
but if they were too hard-nosed, borrowers wouId eventuaIIy defauIt.
Long Term was trading in markets all over the world.
by restating this simpIe equation.
with other people's money.
But the firm's biggest business
The answer was to get bigger and more powerfuI. It was time to invent banks.
MV = PQ,
the Southerners held out for a month before laying down their arms.
As the inscription on this Dutch cartoon put it,
COINS CASCADE
was selling options on American and European stock markets...
The money in question came in the form of deposit accounts
where M is the money suppIy,
''This is the wondrous Mississippi land made famous by her share dealings,
V is the veIocity at which it circuIates,
on which Empire paid alluringly high interest rates.
After Vicksburg, the Mississippi was firmly in the hands of the North.
P is the price IeveI
''which through deceit and devious conduct has squandered countless treasures.
..options that would be cashed in
and Q is the quantity of expenditures.
This is FauIkner Point, one of the very first deveIopments
if there were big future stock price movements, up or down.
The South was literally split in two.
ln 1 5th century ltaly, the key financial service of providing credit
Friedman's observation was simpIe -
if the money suppIy went up, then so did the price IeveI.
''However men regard the shares, it is wind and smoke and nothing more. ''
that Danny FauIkner ever buiIt, and it spawned a veritabIe empire
At the time, the high prices these options were fetching
moved out of the ghetto to become the legitimate preserve of banks.
Hence, the Quantity Theory of Money.
Yet this military setback wasn't the decisive factor
implied that the markets would become particularly volatile.
of FauIkner Crest, FauIkner Creek, FauIkner Crescent,
But you needed much more than a piece of chaIk and a bIackboard
This transition was symbolised by the rise of one family - the Medici.
To Law, economic success was all about confidence.
in the South's ultimate defeat. The real turning point came earlier.
to answer the second cruciaI question of MiIton Friedman's career -
FauIkner Fountains, FauIkner Oaks.
But Long Term thought this was wrong.
Danny FauIkner's favourite trick was ''the fIip''.
And it was financial.
But this was a confidence trick.
what had gone wrong with the weIfare state?
He'd buy some parceI of Iand for peanuts, and then seII it on to naive investors
With their ascent, credit came of age.
According to their calculations, market volatility would actually decline,
THUNDER RUMBLES
ln Chile, he found the perfect laboratory to test his theories.
200 miles downstream from Vicksburg,
Moneylending ceased to be disreputable.
where the Mississippi joins the Gulf of Mexico, lies the port of New Orleans.
ln Paris, the first rumours began to circulate
who got the money Ient to them by -
and that meant the chances of investors exercising their options would be low too.
lt became glorious - and the foundation of a new kind of power.
you've guessed it - Empire Savings and Loans.
that all was not well with Law's system.
So Long Term piled the options high and sold them cheap.
ln September 1 97 3, tanks had rolled through Santiago
The share price of the Mississippi Company began to slide.
Danny FauIkner may have cIaimed that he was iIIiterate,
The dazzling legacy of the Medici family's power
This is Fort Pike,
to overthrow the government
of Chile's Marxist president, Salvador Allende,
still surrounds you in Florence today.
buiIt after 1812 to protect New OrIeans from a future British attack.
Sounds risky?
but he certainIy wasn't innumerate.
They estimated their risk of going bust at one in ten to the power of 24.
whose attempt to turn the country into a communist state
ln a desperate bid to avert meltdown, Law called on the Duke of Orleans
In the space of 400 years, two Medici became Queens of France,
But 50 years Iater, it wasn't abIe to protect the South from a Northern attack
Many investors never even got a chance to view their properties close up.
had ended in total economic chaos
to cut the official share price from 9,000 livres to 5,000.
three became Pope.
ln other words, virtually zero.
and a call by the Chilean Parliament for a military coup.
Faulkner would simply fly them over in his helicopter without landing.
when Captain David Farragut seized New OrIeans on ApriI 28th, 1862.
AppropriateIy, it was MachiaveIIi, the supreme theorist of power,
lt was as if they really were on another planet,
This was when the limits of royal absolutism,
who wrote their history.
It was a cruciaI moment in the CiviI War
By 1 984, property development in Texas was out of control,
the foundation of Law's system, suddenly became apparent.
as New OrIeans was the principaI outIet for the South's most important export...
far from the mundane ups and downs of terrestrial markets.
Perhaps no other family left such an imprint on an age
paid for by government-guaranteed deposits
ln October 1 997,
as the Medici left on the Renaissance.
that were effectively going straight into the pockets of the developers.
Within weeks, the share price was in freefall.
as if to prove that Long Term really was the ultimate Brains Trust,
Up there on the baIcony of the Carrera HoteI,
You might even say that they paid for the Renaissance,
..cotton.
Angry crowds gathered outside Law's bank.
opponents of the AIIende regime ceIebrated with champagne
Without control over the cotton trade the South's cause was doomed -
Merton and Scholes were awarded the Nobel Prize in economics.
their patronage running the gamut of genius from Michelangelo to Galileo.
On paper at least, the assets of Empire had grown
as air force jets fIew overhead to bomb the Moneda PaIace.
Stones were thrown, windows broken.
APPLAUSE
because cotton had become the essential ingredient
from $1 2 million to $257 million in just over two years.
WHISTLING, EXPLOSION
By December, the shares had lost more than 90% of their value.
in an ambitious scheme to bring the bond market into the war.
The troubIe was that the demand for condos by Interstate 30
And this, in the Uffizi GaIIery, is the Medici's private art coIIection,
It seemed as if inteIIect had triumphed over intuition,
Like the ltalian city states 500 years before,
couId never possibIy have kept up with the vast suppIy
as if rocket science had taken over from risk-taking.
one of the most spectacuIar ever assembIed.
Here in the paIace, AIIende prepared to make a desperate Iast stand,
that was being generated by FauIkner, BIain and their cronies.
Equipped with their magicaI bIack box,
the Confederate Treasury had initially raised money for the war
This French map from 1 730 gives an absoIuteIy wonderfuI visuaI representation
armed with an AK-47 presented to him by his Cuban roIe modeI, FideI Castro.
the partners in LTCM seemed poised to make money
When the reguIators finaIIy bIew the whistIe in 1984,
by selling bonds to its own citizens.
far beyond the wiIdest imaginings of even George Soros.
of the worId's first stock market bubbIe.
that reaIity couId no Ionger be escaped,
But there was a finite amount of capital available in the South.
What the millions of tourists who flock here generally forget to ask
Here at the top is the goddess Fortuna,
and hundreds of the buiIdings that they erected
And then, in the summer of 1998,
pouring down goodies from her horn of pIenty.
ended up being buIIdozed or burnt to the ground.
when every seIf-respecting hedge fund manager
To survive, the Confederacy looked to Europe
is how the Medici paid for all this.
Here are the happy investors receiving their shares
Today, 24 years on,
shouId have been pIaying with his yacht,
in the hope that the world's greatest financial dynasty might help them
it's stiII a Texan wasteIand.
something happened that threatened to bIow the Iid right off
in the Mississippi Company from fIying cherubs.
The simpIe answer is that they were foreign exchange deaIers,
Looking out the paIace window and seeing the tanks IiteraIIy roIIing in,
the NobeI Prize-winners' bIack box.
But down beIow, there are some other cherubs chopping up the shares
beat the North as they had helped Wellington beat Napoleon.
ln 1 991, Faulkner and Blain were both convicted and jailed for fraud.
members of the Arte de Cambio - the money changers' guiId - who made it big.
ReaIity started to misbehave.
beside a shattered printing press.
AIIende reaIised that it was aII over for his dream of a Marxist ChiIe.
And there are two more cherubs bIowing bubbIes.
One investigator called Empire ''one of the most reckless
They were known as banchieri or tavoIieri because, Iike the Jews of Venice,
lnitially, the Confederacy had grounds for optimism.
To the right, there are four very unhappy Iooking men,
Cornered here in what was Ieft of the presidentiaI quarters,
ln evolution, big extinctions tend to be caused by outside shocks,
''and fraudulent land investment schemes in American history. ''
they IiteraIIy did their business sitting on benches behind tabIes.
one of whom is preparing to commit suicide by faIIing on his sword.
he took the decision to shoot himseIf.
ln New York, the Rothschilds' agent was sympathetic,
like an asteroid hitting the Earth.
ln all, nearly 500 savings and loans collapsed.
Indeed, the originaI Medici bank - or bench -
having opposed the North's leader, Abraham Lincoln
On Monday August 1 7th, 1 998,
As if pricked by a sword, the Mississippi Bubble had now burst.
was Iocated right here in the Via deII'Arte deIIa Lana - WooI GuiId Street.
According to one official estimate,
in the presidential election of 1 860.
nearly half had seen ''criminal conduct by insiders''.
a giant asteroid smashed into Planet Finance.
MILITARY BAND PLAYS
lt was at this moment that Law, vilified by the French people, fled the country.
And - surprise, surprise - it struck on the other side of the world
35 years later, you can still see the bullet holes
But still the Rothschilds hesitated.
in some of the buildings around the square.
The full cost of the crisis was $1 53 billion,
Lending to the British government to help defeat Napoleon had been one thing.
in an especially flaky emerging market.
Prior to the 1 390s, the Medici were Florence's answer to the Sopranos -
He never saw his wife and daughter again.
What happened here in September 1973
making it one of the most expensive financial crises in American history.
But buying bonds from a bunch of breakaway Southern slave states
a small-time clan notable more for low violence than for high finance.
He spent the rest of his life in Venice,
Weakened by political upheaval, declining oil revenues
in many ways epitomised a worIdwide crisis of the weIfare state,
And the federal government which had deregulated
dividing his time between writing long, self-justifying letters
seemed a risk too far.
and posed a stark choice between aIternative economic systems.
and a botched privatisation, the ailing Russian financial system collapsed.
the savings and loans in the first place
The Rothschilds decided to stay out.
and gambling.
ln a 1 7-year period, no fewer than five Medici were sentenced to death
had to pick up the bill, which is another way of saying that taxpayers forked out.
With output coIIapsing and infIation rampant,
He died in 1 729.
A desperate Russian government was driven to default on its debts,
ChiIe's system of universaI benefits was effectiveIy bankrupt.
by the criminal courts for capital crimes.
fuelling the fires of volatility throughout the world's financial system.
Yet despite this setback,
It was the first cIear sign that there might be a downside
For AIIende, the onIy soIution
the Confederate government had an ingenious trick up their sleeves.
was fuII-bIown, Soviet-styIe takeover of the entire economy.
Then came Giovanni di Bicci de' Medici.
to the idea of the property-owning democracy.
Stock markets plunged.
ln France, however, his devastating legacy lived on.
The generaIs and their supporters knew they didn't want that,
The trick, like the sleeves themselves, was made of cotton.
lt was his aim to make the Medici totally legitimate.
Remember all those low-cost options Long Term had sold
Yet the savings and loans crisis was a mere tremor
Law's bubbIe and bust fataIIy set back France's financiaI deveIopment,
but what did they actuaIIy want,
based on their prediction of low stock market volatility?
Part of the secret of his success was an ingenious bit of creative accounting
compared with the property earthquake
given that the status quo was unsustainabIe?
The South's idea was to use cotton as collateral to back its bonds.
that would strike the US market 20 years later.
The ones they thought no-one would ever exercise?
Enter MiIton Friedman.
putting Frenchmen off paper money and stock markets for more than a generation.
that got the Medici off the hook of the anti-usury laws.
Well, now they did.
lnvestors would be comforted to know that if the interest payments dried up
The French monarchy's fiscaI crisis went unresoIved
The quants had predicted that Long Term was highly unlikely
ln March 1 97 5,
Savings and loans was an all-American crisis.
and for the rest of the reign of Louis XV and Louis XVI,
Friedman flew from Chicago to Chile to answer that question.
to lose more than $35 million in a single day.
they could still demand their cotton instead.
But the sub-prime quake
These Iedgers of the Medici bank make it cIear
the crown Iived from hand to mouth.
would shake the entire world of finance to its very foundations.
SOLDIER SHOUTS ORDERS
how important commerciaI biIIs for financing foreign trade were to the bank.
On Friday August 21 st, it lost $550 million -
The South's agents went to work
Eventually, France was driven by royal bankruptcy to revolution.
selling the bonds in the financial centres of Europe.
True, the Church prohibited the coIIection of interest on Ioans.
1 5% of its entire capital.
ln addition to giving lectures and seminars,
Now that, according to the Long Term risk models, was next to impossible.
But there was nothing to prevent a shrewd trader
When this wall was built
When the Confederacy tried to market conventional bonds
Friedman came here, to the Moneda Palace,
from making money on transactions Iike these, which invoIved muItipIe currencies.
to divide white homeowners from black renters in the 1 940s,
for a meeting with the new Chilean president, General Augusto Pinochet.
in European financial centres like Amsterdam's,
The traders in Greenwich stared
black families found it virtually impossible to get mortgages.
slack-jawed and glassy-eyed at their screens.
investors wouldn't touch them with a bargepole.
The Mississippi Bubble of 1 7 1 9 was the first stock market bubble in history.
There was no interest, and therefore no sin,
But when an obscure French firm named EmiIe ErIanger and Company
lt couldn't be happening.
Sixty years later, that had all changed.
simply a commission deducted for the conversion of one currency into another.
Friedman spent three-quarters of an hour with Pinochet,
But it was.
But it's been by no means the largest.
offered cotton-backed bonds, it was a compIeteIy different story.
urging him to reduce the government deficit that he'd identified
When we think of stock market bubbles, we think of this.
''We want everybody in America to own their own home, ''
The key to the success of the ErIanger bonds
as the main cause of Chile's sky-high inflation -
By the end of the month, Long Term was down 45%.
President George WBush declared in October 2002, challenging lenders
was that they couId be converted into cotton
lf money was advanced to a particular trader for any length of time,
then running at an annual rate of 900%.
at the pre-war price of six pence a pound.
The nightmare that haunts the world of finance,
to create 5.5 million new minority homeowners
the commission was that bit larger.
which has returned to haunt us in the last few months,
The only chance of survival was to find a financial white knight to rescue them.
A month after Friedman's visit,
These cotton bonds formed the basis of the South's new financial strategy.
by the end of the decade.
the Chilean junta announced that inflation would be stopped at any cost.
is that there could ever be a bust to match the Great Wall Street Crash,
Positively encouraged by the federal government to relax lending standards,
ln the same way, depositors who put their money in the Medici bank
lf they could restrict the supply of cotton, its value,
And the most powerfuI knight in town was none other than George Soros.
which began on October 24th 1 929, Black Thursday.
The regime cut government spending by 27%.
were given 'discrezione' to compensate them for risking their money.
mortgage companies swarmed into areas like this one,
and the value of the bonds, would increase.
It was the uItimate humiIiation -
the quants from PIanet Finance begging for a baiI-out
Over the next three years, the US stock market declined a staggering 86%,
At the same time, the Confederates set out to use cotton
offering all kinds of alluring deals.
This was credit, in other words,
but with the interest payments discreetly concealed.
from the prophet of irrationaI, unquantifiabIe refIexivity.
to blackmail the most powerful country in the world -
''This problem of inflation is not of recent origin.
reaching its nadir in June 1 932.
Britain.
Now, for the first time, moneylending had evolved into banking.
(NiaII) That must have been a very tense meeting.
Because so many of the new borrowers had patchy credit histories,
''lt arises from trends towards socialism that started 40 years ago,
Do you remember the atmosphere in the room, or am I...?
(Tour guide) The routes to the United States of America
these loans came to be known as ''sub-prime''.
I remember he came for breakfast and it wasn't at aII tense, because...
''and reached their logical and terrible climax in the Allende regime. ''
provided Liverpool with growing volumes of trade
What was worse, this asset price deflation
and new docks opened on the Mersey in quick succession during the 1 800s.
The reaI story of the success of the Medici bank
was accompanied by the worst depression in all history.
Of course, he was tense
can be found here in the Libro Segreto - the Secret Book -
but I wasn't because I wasn't putting in the money.
(Narrator) ln 1 860, the Port of Liverpool was the principal gateway
That made you a perfect candidate for a NlNJ A loan.
of Giovanni di Bicci de' Medici. The key was not so much size as diversification.
There was to be no white knight for Long Term.
for imports of cotton to the British textile industry,
For tendering this advice, Friedman found himself denounced
ln the United States, output collapsed by nearly a third.
then the mainstay of the Victorian industriaI economy.
The problem was that behind low introductory payments,
for acting as a consultant to a military dictator
I feIt that it was too dangerous and that I didn't have enough capitaI
EarIier ItaIian banks had been monoIithic
Unemployment reached a quarter of the civilian labour force.
these new mortgage loans were very different from the old,
More than 80% of the cotton came from the Southern United States.
responsible for the executions of more than 2,000 real and suspected communists,
and very vuInerabIe to defauIt by a singIe bad borrower.
and, in fact, it reaIIy required the coordinated actions
30-year fixed-rate repayment loans of the past.
Now that gave the Confederate Ieadership hope
But the Medici bank was made up of muItipIe interIocking partnerships,
Since the 1980s,
and the torture of nearly 30,000 more.
that they had the Ieverage to bring in Britain on their side in the CiviI War.
of aII the banks to baiI out LTCM.
Why did the 1 929 crash happen?
the housing game has radicaIIy changed throughout the EngIish-speaking worId.
each in some measure independent of the rest.
To ratchet up the pressure, they decided to impose an embargo
It was this decentraIisation that was the key to their astonishing profits.
Why, indeed, does any crash happen?
Mortgages are for shorter and shorter durations
on aII shipments of cotton to LiverpooI.
And that's precisely what happened.
and more and more borrowers are opting for interest-onIy mortgages.
This remains one of the most hotly debated questions in financial history.
Fearful that Long Term's failure could trigger a general financial meltdown,
Under Giovanni's guidance,
That makes househoIds far more sensitive than they were to interest-rate hikes.
the Medici banking network extended from Florence, to Venice, to Rome.
For a while, the South's strategy worked brilliantly.
the New York Federal Reserve hastily brokered a multi-billion-dollar bail-out
Cotton prices soared. So did the value of the Confederates' cotton-backed bonds.
Chicago's roIe in ChiIe's new regime
So how come the lenders didn't worry that these sub-prime borrowers
There are all kinds of technical explanations for stock market crashes.
The scale and diversity of the Medici's operations
consisted of more than just a visit by MiIton Friedman, however.
by 1 4 Wall Street banks.
were almost certain to default if interest rates rose?
What on earth had happened?
And the cotton embargo devastated the British economy.
Since the 1950s, there'd been a steady stream of bright, young economists
was the key to reducing the risks of moneylending,
But at root, it's all about herd psychology.
Why was Soros so right and the giant brains at Long Term so wrong?
The answer to that question
and therefore also the costs to borrowers.
Mills were forced to lay off workers.
going from this pIace, the CathoIic University in Santiago,
and the key to the sub-prime crisis was another ''S'' word...
That's the essential difference between loan sharks and banks -
Eventually, in late 1 862, production all but ceased.
to study in Chicago,
ln a bull market, that's when share prices are rising,
and they'd come back convinced of the need to baIance the budget,
between Shylock and the Medici.
For one thing, this wasn't a coolly logical Planet Finance.
even the smartest investors can succumb
tighten the money suppIy, and IiberaIise trade.
to what the former chairman of the American Federal Reserve,
These were the Chicago Boys, Friedman's foot soIdiers.
lt was still dear old Planet Earth, inhabited by emotional human beings
And here's the proof that it worked.
Alan Greenspan, famously called ''irrational exuberance''.
This cotton miII in StyaI, south of Manchester, empIoyed around 400 workers,
Instead of putting their own money at risk,
And yet the most radicaI of their ideas
Page after page of Giovanni's assets, decIared for tax purposes
with a stampede mentality.
sub-prime Ienders immediateIy soId the Ioans on
went beyond what Friedman had recommended to Pinochet.
But when the herd changes direction,
but that was just a fraction of the 500,000 peopIe
There was, however, another reason why Long Term failed.
to banks here, in and around WaII Street.
sometimes in reaction to nothing more than a change in the wind,
It amounted to a fuII-scaIe roIIing back of the weIfare state.
and cuIminating in the grand totaI of 91 ,089 fIorins. In those days
And the banks then securitized the Ioans,
empIoyed by King Cotton across Lancashire.
their mood can also change from euphoria to gloom.
Their risk models were working with just five years' worth of data.
The conservative economic revoIution didn't begin in Thatcher's Britain,
which means they bundIed them together and then sIiced and diced them
ObviousIy, with no cotton there was nothing for peopIe to do.
that was serious money.
The herd stampedes.
By the end of 1862,
so that at Ieast the top tier
or Reagan's America.
lf they'd gone back even 1 1 years,
couId be cIassified as tripIe-A-rated, ''investment grade'' securities.
It began right here in ChiIe.
haIf the entire workforce of Lancashire had been Iaid off.
they'd have captured the 1 987 stock market crash.
One cow gets scared,
A quarter of the popuIation was on poor reIief.
When Giovanni died in 1 429,
and that fear just transIates to the whoIe herd and they aII take off.
And the banks then soId these securities to investors 1 ,000 miIes away from Detroit
And if they'd gone back 80 years,
his last words were an exhortation to his heirs
The mastermind behind this wholesale dismantling of the welfare state
They caIIed it the ''Cotton Famine'', but this reaIIy was a man-made famine.
And the rest of them don't know why they're scared.
they'd have captured the last great Russian default
who were happy to pay
to maintain his standards of financial acumen.
They just feeI that fear and they run.
for just a few extra hundredths of a percentage point in interest.
was a young economist called Jose Pinera.
after the 1 91 7 revolution.
His funeral was attended by 26 men of the name Medici,
Fear overwheIms aII rationaI thinking.
To put it bIuntIy, the NobeI Prize-winners
Britain was in the doldrums.
ChiIe's economy was destroyed. We have had 50 years of protectionism,
had known pIenty of mathematics, but not enough history.
And the South's cotton bonds were riding high.
all paying homage to the man who had made the business of banking respectable -
UntiI it's over.
The key to securitization was the distance
They'd perfectIy grasped the beautifuI theory of PIanet Finance,
Yet the South's ability to manipulate the bond market
ln market jargon, the buyers have turned into sellers, the bulls into bears.
state intervention - Iike sociaIism, if you want -
and profitable - as it had never been before.
between the mortgage borrowers in, say, Detroit,
but not the messy reaIity of PIanet Earth.
depended on one over-riding condition -
and the people who ended up receiving their interest payments.
and that was exacerbated during the AIIende government.
And that, quite simpIy, is why Long Term CapitaI Management
that investors could be sure of taking physical possession of the cotton
Despite the zooIogicaI imagery,
By the time small towns in Norway bought these securities,
For his son Cosimo, the accumulation of wealth combined seamlessly
turned out to be Short Term CapitaI Mismanagement.
We had created a sort of weIfare state,
which underpinned the bonds if the South failed to make its interest payments.
the point is that markets are mirrors of the human psyche.
they had no idea what was really behind their investment.
and that, of course, was going bankrupt in ChiIe.
The big question is whether such a crisis couId repIay itseIf today, ten years on,
with the accumulation of power.
Like homo sapiens, they are prone to mood swings,
Within 20 years of his father's death,
from greed to fear.
They can suffer from depression.
Cosimo de' Medici was the Florentine State.
FinanciaI aIchemy?
Between 1979 and 1981 ,
onIy this time invoIving so many hedge funds,
And that's why the fall of New Orleans on April 28, 1 862,
WeII, it was a business modeI that worked beautifuIIy
And sometimes they can experience compIete breakdowns.
Pinera and his coIIeagues erected a radicaIIy new pension system for ChiIe,
and on such a Iarge scaIe, that it simpIy couIdn't be baiIed out?
as Iong as interest rates stayed Iow, peopIe kept their jobs,
That happens rather more often
As the Pope himself put it - ''Political questions are settled at his house.
WeII, the answer to that question
was the real turning point in the American Civil War.
than some financiaI theories wouId Iead you to expect,
giving every worker the chance to opt out of the oId pay-as-you-go state system.
Iies not on another pIanet, but on the other side of this one.
and reaI-estate prices continued to rise.
but not so often that we're ever quite ready for the next breakdown.
Now that the South's main port was in Union hands,
''The man he chooses holds office.
Instead of a payroII tax,
''He it is who decides peace and war and controls the laws.
each worker now couId put 10% of his wages aside
any investor who wanted to lay his hands on Southern cotton
Unfortunately, none of these things happened in Detroit.
had to run the Union's formidable naval blockade.
into an individuaI personaI retirement account,
''He is King in everything but name. ''
lf movements in financial markets
to be managed by private competing companies.
ln 2006 alone,
were statistically distributed like human heights,
sub-prime lenders injected more than a billion dollars
This BotticeIIi is mainIy famous for the beauty of its young subject.
There was aIso a smaII premium for disabiIity and Iife insurance.
there would hardly be any crashes.
Most months would be clustered around the average,
The idea was to give each worker a sense
But it's actuaIIy intended as a tribute to a dead banker, Cosimo de' Medici.
into those areas of the city where home values were already falling
To some, financial history is just so much water under the bridge -
that the money being put aside was his own property,
with only a tiny number witnessing extreme ups or downs.
and unemployment and mortgage rates were already rising.
That's him there on the medaIIion,
ancient history, like the history of lmperial China.
his own capitaI.
and you can just make out the inscription Pater Patriae -
GUITAR PLAYING, MAN SINGING
Let's face it, not many of us are below four feet in height or above eight feet.
Some young traders don't even remember the 1997 / 98 Asian crisis.
The Confederates had overplayed their hand.
the father of his country.
They had turned off the cotton tap, but then lost the ability to turn it back on.
Where Detroit led, other cities soon followed.
In fact, if they came into the markets after 2000,
Pinera gambled. He gave workers a choice -
By 1 863, the mills of Lancashire had found new sources of cotton
they had seven bumper years.
This is the cIassic beII-shaped curve,
ln 1 50 years, the Medici had transformed themselves from backstreet moneylenders
Stock markets worIdwide boomed.
stick with the old system of pay as you go,
where things are distributed according to their frequency -
So too did bond markets. So did commodity markets.
in China, Egypt, and lndia
or opt for the new personal retirement accounts.
and investors were rapidly losing faith in the South's cotton-backed bonds.
the most commonIy occurring cIustered here around the middIe
to the most powerful financial force in Europe.
So did derivatives markets. In fact, every kind of asset market boomed.
and the reIativeIy rare dwarves and giants out here at the extremes.
lt paid off.
MEN READ OUT ADDRESSES
And so too did the markets for those products that are in demand
The consequences for the Confederate economy were disastrous.
Convinced by Pinera's argument,
That's why it's quite a steep curve,
80% made the switch to a private pension plan.
But it's this painting, BotticeIIi's Adorazione dei Magi,
when the bonuses are big, Iike vintage Bordeaux and Iuxury yachts.
because most human heights are quite cIose to the average.
It's Thursday at noon and I'm witnessing a twice-daiIy rituaI
With its domestic bond market exhausted and onIy two paItry foreign Ioans,
But if you do the same thing for financiaI markets,
which more than any other captures the transfiguration of finance
for daiIy moves in the stock market,
here on the steps of the Memphis Courthouse.
the Confederacy reaIIy had no aIternative but to print paper doIIars,
But was it worth it? Was it worth the huge moraI compromise
you end up with something that Iooks more Iike this,
the Medici had achieved.
About 30 homes are about to be auctioned off here, and the reason is
like these ones here in the Louisiana State Museum, to pay for the war.
that the Chicago Boys and the Harvard man made
On cIose inspection, the three wise men are Cosimo de' Medici,
with reIativeIy fewer smaII movements
that the mortgage Ienders have forecIosed on the homeowners
But these boom years were also mystery years.
and reIativeIy more big movements down or up.
when they got into bed with a torturing, murderous dictatorship?
ln all, 1. 7 billion dollars' worth.
washing the feet of Christ, and his sons Piero and Giovanni.
for faiIing to keep up with their interest payments.
For markets soared at a time of rising short-term interest rates,
And these are what the statisticians mean when they taIk about Iong or fat taiIs.
The answer to that question very much depends on whether you think their reform
2926 South Radford Avenue...
Now, it's true that the North aIso printed paper money,
The young man on the Ieft is Lorenzo.
Memphis is reaIIy becoming ForecIosure City these days.
glaring trade imbalances and escalating political risk.
but by the end of the war its ''greenbacks'' were stiII worth around 50 pre-war cents,
has heIped pave a peacefuI way back to a sustainabIe democracy in ChiIe.
The painting had been commissioned by the head of the Bankers' GuiId
In the past five years, something Iike one in four househoIds
lf stock market movements were distributed like human heights,
The key to this seeming paradox lay here in China.
as a tribute to the famiIy.
whereas a Southern ''greyback'' was down to just one cent.
And I think they did.
Perhaps it shouId reaIIy have been caIIed The Adoration of the Medici.
has received a notice threatening them with forecIosure.
a drop of 1 0% would happen only once every 500 years.
What's more, with more and more of this cash chasing fewer and fewer goods,
Having once been damned, bankers were now cIose to divinity.
Since the sub-prime mortgage market began to turn sour
And stock market crashes of 20% in a year would be unheard of,
infIation in the South simpIy expIoded.
ln 1 980, Pinochet conceded a new constitution
in the early summer of 2007, shockwaves have been spreading
By January 1865, the price of some goods was up by a factor of 90.
rather like people just six inches tall.
Chongqing, on the banks of the mighty River Yangtze,
Nothing could better illustrate the extraordinary ascent of money.
that prescribed a ten-year transition back to democracy.
Whereas in fact, there have been seven such crashes in the past century.
through all the world's financial markets,
wiping out hedge funds, obliterating venerable investment banks
is deep in the heart of the Middle Kingdom,
For what the Medici had achieved
Ten years later, he stepped down as president.
The South had bet everything on manipulating the bond market
over a thousand miles from the coastal enterprise zones most Westerners visit.
was nothing less than the birth of modern banking.
and costing the survivors hundreds of billions of dollars.
Democracy was restored,
and had lost.
As it turned out, those who feared that the brief panic of October 1 987
Others had tried before,
lt would not be the last time in history that an attempt to do so
and by that time, the economic miracle was under way
but the Medici were the first bankers to hit the poIiticaI big time.
that helped to ensure its survival.
Remember that pillar of the 1 930s New Deal mortgage market,
would end in ruinous inflation.
Yet this is the fastest-growing city on the planet.
would turn into the next great crash were proved wrong.
And they did it by Iearning one cruciaI Iesson -
Fannie Mae?
The market had one really bad month, then rallied.
With its younger brother, Freddie Mac, it grew to own or guarantee
in finance, smaII is seIdom beautifuI.
For the pension reform not only created a new class of property owners,
Today the global market for bonds is still bigger
By making their bank bigger and more diversified,
But that bubble provided a golden opportunity for corporate crookery.
around half of all American home loans.
each with his own retirement nest egg,
I've traveIIed aII over the worId making this series,
ln September 2008, Fannie and Freddie
than the all the world's stock markets put together.
the Medici had found a way of spreading their risks.
it also gave the Chilean economy a massive shot in the arm.
and I must say, I have never seen anything Iike this.
What John Law's Mississippi Company had been to the bubbIe
were effectively nationalised
lt's still a market that can make or break governments.
And by focusing on currency trading rather than just Iending,
WeIcome to Chongqing, the fastest growing city in the worId.
to avoid a complete collapse of the mortgage market.
that Iaunched the 18th century,
they'd reduced their exposure to defauIts by borrowers.
so another company wouId be to the bubbIe that ended the 20th.
Established Wall Street names like Bear Stearns, Lehman Brothers
It's construction heaven. If you Iook over through the fog,
These brokers at the Banco de ChiIe
For Cosimo and his famiIy, it was a truIy beautifuI business modeI.
are investing ChiIean workers' pension contributions into the stock market.
Does it surprise you that its key player
It was a company that promised its investors
you can just about make out one of the 30 bridges they're currentIy buiIding,
and Merrill Lynch have vanished.
began his money-making career in the casinos of Las Vegas?
weaIth beyond the dreams of avarice.
And they've been doing a pretty good job of it.
Unlike savings and loans, this crisis extends right around the world.
and down there, one of the ten Iight raiIways.
It was a company that cIaimed to have reinvented the entire financiaI system.
Average returns on the personaI retirement accounts has been over 10%,
Yet not even the Medici were invulnerable.
I was a bIackjack pIayer.
And it was a company that used its impeccabIe poIiticaI connections
The four Norwegian municipalities of Rana, Hemnes, Hattfjelldal and Narvik,
One of the first professionaI bIackjack pIayers, not to brag,
The bank suffered heavy losses
refIecting the fact that in the 20 years after 1987,
AII around me, there used to be prime farmIand, untiI six months ago,
to ride aII the way to the top of the buII market.
as a result of over-generous loans to blue-blooded debtors
but in the Iate '60s, I went to Vegas
the ChiIean stock market has gone up by a factor of 18.
which had invested their citizens' taxes in sub-prime backed securities,
Named by Fortune Magazine as ''America's Most lnnovative Company''
when they started constructing IiteraIIy miIIions of square metres
who felt no compunction about defaulting on their obligations
and appIied a card-counting system to try and beat Vegas.
of new office space.
are now sitting on an investment worth roughly 1 5% of what they paid for it -
and telling the bankers to get lost.
for six consecutive years, that company was...
The aim is to turn Chongqing into the financiaI capitaI of western China.
a loss of $1 00 million.
Enron.
There is a downside to the system, to be sure.
Now this master of understatement is the King of the Bond Market,
WeII, if they keep this up, it'II soon be the financiaI capitaI of the worId.
Bad debts - money owed by borrowers who go bust -
Seven years after its collapse,
Thanks to growth like this, there are now 345,000 dollar millionaires in China
most of us have consigned Enron to the dustbin of financial history.
controller of the biggest bond fund in the world.
In the EngIish-speaking worId,
are the perennial problem that any bank confronts.
we tend to think of property as a one-way bet.
Since not everyone in the economy has a regular full-time job,
So what has this got to do with you and me?
Yet it pioneered many of the dubious business practices
The simpIest way of getting rich is to pIay the property market.
Yet for a time, it seemed as if modern bankers had solved this age-old problem.
not everyone ends up participating in the system.
Well, when Gross buys or sells bonds,
and over 1 00 billionaires.
it doesn't just affect financial markets and government policy,
In fact, you'd be a mug to invest your money in anything eIse.
that continue to plague us today.
Not only has China left the colonial era far behind,
Which leaves a substantial chunk of the population
They really thought they were smarter than the Medici.
it affects the value of our pension funds
with no pension coverage at all.
But the remarkable thing about this supposed ''truth''
the fastest-growing economy in the world has also managed
and the interest rates we pay on our mortgages.
is how often reality gives it the lie.
to avoid the kind of crisis
There's only one thing that Mr Bond is afraid of
ln the three years up to August 2000,
that has periodically blown up in the other emerging markets.
I'm standing in front of the Communist Party headquarters
For like stock markets, property can soar in value
shares of the Houston energy company had gone through the roof.
and it's not Goldfinger.
Memphis, Tennessee is a long way from Florence.
here in La Victoria, a suburb of Santiago,
One reason for China's crisis-free ascent has been the fact
Once a small-time gas company in Nebraska,
only to crash in the most spectacular way.
Rather, it's inflation.
which was once one of the hotbeds of opposition to the Pinochet regime.
And the world economy has come a long way since the Renaissance.
that most Chinese investment hasn't been financed by foreigners,
Enron was now the fifth largest company in the United States,
The lethal danger that inflation poses
Because most peopIe here are either unempIoyed
is that it undermines the value of being paid a fixed rate of interest on a bond.
ln Britain, between 1 989 and 1 995,
but out of China's own savings.
with stated revenues of 1 1 1 billion dollars.
A crucial part in that transformation
or work in the informaI sector,
There has been foreign investment,
they don't, or can't, pay into the pension system
has been played by the spread of modern banking from its ltalian birthplace
but most of it has been direct investment
the average house price fell by 1 8%.
If infIation goes up to 10%
Enron was the darling of Wall Street.
which means they don't get anything out of it.
in the form of things Iike factories
to a country where money has increasingly taken the form of easy credit.
which you can't easiIy Iiquidate and send home in a crisis.
This is the kind of neighbourhood where Che Guevara is stiII the IocaI hero,
and the vaIue of a fixed-rate interest is onIy five,
But that was nothing compared with what happened here in Japan.
Indeed, so enormous have China's savings become in recent years
not Jose Pinera.
Yet a little historical knowledge might have made Enron's investors think twice.
then that means that the bond hoIder is faIIing behind infIation by 5%.
The United States has been built on borrowed money.
that they have enabIed gIobaIisation to do the most aImighty U-turn.
The poor of Chile may not have a private pension plan,
PreviousIy, it was the rich EngIish-speakers who Ient money
lndeed, the story of Enron was like a re-run of the Mississippi Bubble
But whereas the Medici tended to lend only to the relatively well off,
That's why, at the first whiff of higher inflation, bond prices fall,
and may have to make do with a meagre government handout in their old age...
to the poor Asian periphery.
The view's good.
until the present credit crunch at least, American banks seemed willing to give
But now it's the Chinese who are Iending money to rich Americans.
and in some cases, keep falling.
280 years before.
Very Austin Powers decor. I'm Ioving that.
..but even they've benefited from Chile's rapidly growing economy.
WeIcome to the strange new hybrid country of China and America.
just about anyone a loan.
John Law's plan had been to revolutionise French government finance.
Oh, that's the boiIer.
Memphis is famous for blue suede shoes, barbecued ribs and bankruptcies.
I caII it ''Chimerica''.
To see just how bad things can get when the inflationary genie escapes
(Jose Pinera) Growth makes a difference in the Iife of every citizen.
OK, weII, Iet's cut to the chase.
Ken Lay, the chairman of Enron,
How much is this pIace going to cost if I put the money down now?
from the bottle you just have to look at the example of Argentina.
planned to revolutionise the global energy business.
The poverty rate in ChiIe has gone down from about 50%
You can tell people here are a little... How shall l say it? ..a little sub-prime.
SPEAKS JAPANESE
to 13%.
So that wouId be cIose to $2 miIIion.
So this has been reaIIy a huge success
OK, that's Iike a miIIion...
You onIy need to Iook at the shopping maII for the seriousIy poor.
and the pension reform has been a criticaI eIement in this.
This extraordinary place is the South Western Stock Exchange.
a miIIion pounds buys me this bijou apartment in Tokyo.
For years, the industry had been dominated by huge utility companies,
Many Argentines date the steady decline of their economic fortunes
lt's where hundreds of Chongqing's residents come to have lunch,
And the ubiquitous no-friIIs eatery.
The improvement in ChiIe's economic performance
to a day in February, 1 946,
which both produced the energy, pumped the gas and generated the electricity,
But this is a smart neighbourhood, right?
since the Chicago Boys' reforms is reaIIy very hard to argue with.
Then there's a tax advisor who can teII you how to cIaim your Iow-income credits.
play ping pong and invest -
when the newly elected President, General Juan Domingo Peron
That may sound like a lot, but in recent Japanese history, it's a real bargain.
and sold it on to consumers.
In the 15 years before MiIton Friedman's visit,
or is it gamble? - their savings on the stock market.
came here to the Central Bank in Buenos Aires.
the growth rate here was a measIy 0. 1 7% a year.
This is what defines the Chinese economy today.
Lay's big idea was to create a kind of energy bank,
A shop where you can borrow money on the equity you own in your car.
lncreasingly, it's what defines the world economy.
In the subsequent 15 years,
which would act as the intermediary between suppliers and consumers.
He was astonished at what he saw.
Between 1 985 and 1 990,
it increased by a factor of nearIy 20.
Chinese investors trying to work out what to do with their abundant savings.
And a pIace where they'II give you an advance on next week's pay cheque...
The poverty rate here's down to 15%,
''There is so much gold, '' he marvelled,
property prices in Japan rose by a factor of roughly three.
His dream was to make Enron the greatest energy company in the world.
compared to 40% in the rest of Latin America.
''you can hardly walk through the corridors. ''
After years of instability,
Banks fell over themselves to ride this wave.
And when you Iook down at Santiago's shiny new financiaI district,
Chinese households save an unusually high proportion
..not to mention a pawn shop the size of a department store.
Caught up in the heady spirit of the times
The very name Argentina suggests wealth and plenty -
you can see why the ChiIean pension reform
of their rapidly rising incomes,
was senior Enron executive, Sherron Watkins.
in marked contrast to Americans, who these days save none at all.
it means ''The Land Of Silver''.
has been imitated right across the region and, indeed, around the worId.
The river flowing past the capital is the Rio de la Plata, ''The Silver River''.
It was very eIectric.
But it wasn't a wave. lt was a bubble.
And finaIIy, when you've no possessions Ieft to pawn or to seII,
You feIt Iike you couId... If you came up with a good idea,
there's just one option Ieft.
Enron wouId give you the money and you couId go for it at a very young age.
For Britain's Margaret Thatcher, the general from Chile
And in 1 990 it burst.
And that's to head on down to ZLB PIasma
So plentiful are Chinese savings that for the first time in centuries,
and the professor from Chicago were heroes,
Like John Law, Ken Lay had friends in high places.
where you can seII your own bIood for $25 doIIars a pop.
Once upon a time, there used to be two Harrods in the world.
Prices here in Tokyo fell...
who demonstrated that only by rolling back the welfare state
the direction of capital flow is not from West to East,
He contributed generously to George HWBush's presidential campaign.
TaIk about being ''bIed dry''. It's amazing reaIIy -
One in London, in Knightsbridge, and the other here, in the Avenida Florida,
..by 7 5%, wiping out all the previous gains.
could governments revive economic growth.
but from East to West.
an entire economic sector based on peopIe who are broke.
in the heart of Buenos Aires.
As President, Bush duly pushed through legislation
And it is a mighty flow.
Founded in 1912,
Yet one country where this recipe has not been tried
this other Harrods is a reminder that Argentina used to be a rich country.
This costs Ł1 miIIion now.
that deregulated the energy industry.
How much did it cost back in 1990, at the peak of the property bubbIe?
is the country that's come to need it most.
Riding a global wave of energy privatisation,
At one time, its per capita income was 18% Iess than that of the United States.
ln 2007, the United States needed to borrow around $800 billion
ln some ways, it rather reminds me of the East End of Glasgow.
Enron snapped up assets all over the world.
- So roughIy three times the vaIue. - Three times?
Japan.
Yet there's a world of difference between this world
Investors who fIocked to buy Argentine bonds
ln Latin America alone, the company had interests in Colombia, Ecuador,
So cIose to...possibIy $6 miIIion.
from the rest of the world.
That's more than $4 billion every working day.
and the world where loan sharks extract their pounds of flesh
hoped that Argentina wouId become the United States of South America.
So successful was the Japanese welfare superpower
Ł3 miIIion. Wow!
Peru and Bolivia, where they laid a huge pipeline across the continent to Brazil.
We think we've had a property crash in the West, but this is a reaI property crash.
China, by contrast, ran a current account surplus
from petty defaulters.
that by the 1 97 0s, life expectancy was the longest in the world.
Well, Argentina's history since then
equivalent to more than a quarter of the US deficit.
Here in sub-prime America, defaulting on your debts is easy.
And thanks to the intervention of Ken Lay's personaI friend, George W Bush,
is a classic illustration that all the resources and talent in the world
And a remarkably large proportion of that surplus
Well, pretty easy.
can be set at nought by chronic financial mismanagement.
has ended up being lent to the United States.
Enron was abIe to acquire a controIIing stake
The problem was
So no, property isn't a uniqueIy safe investment.
that Japan's welfare state was too successful.
in the Iargest naturaI gas pipeIine network in the worId,
ln effect, the People's Republic of China
House prices can go down as weII as up.
here in Argentina.
MUTED CONVERSATION
This is Richie. He's in the repo business -
And as assets go, houses are pretty iIIiquid,
has become banker to the United States of America.
Today, the programmes run here at Japan's Ministry of WeIfare
There have been many financial crises in Argentine history.
which means you can't unIoad them in a hurry if you get into a financiaI jam.
snatching cars from under their owners' noses
Above all, however, Enron traded.
reIy on an ever-smaIIer number of active workers
when they haven't made their payments.
Not only in energy, but in virtually all the ancient elements
But the crisis that hit the country in 1 989
And that, pretty much, is the downside
lt may seem a little bizarre.
He grabbed that boIt action, he went ''chh'' and I watched the rifIe sheII
to support an ever-rising popuIation of retirees.
of the idea of a property-owning democracy.
of earth, water, fire and air.
was unparalleled.
The average American has an income of around $44,000 a year,
The question now is whether we EngIish-speakers
lt even traded in internet bandwidth.
Back in 1960, there were something Iike 1 1 active workers
go in the barreI and he Iunged it towards me and hit me right here
whereas the average Chinese, despite this country's 100-pIus biIIionaires
have any business trying to export our modeI to the rest of the worId.
for every one retired person.
Enron led a Wall Street surge unnervingly reminiscent of the Mississippi Bubble.
But by 2025,
and aII the ostentatious signs of new money here in centraI Chongqing,
that number couId sink as Iow as two.
and aImost knocked me down.
In other words, there'II be one oId-age pensioner
is on around $2,000.
He said, ''Either you drop the truck or I'm dropping you.''
Despite his half-hearted warnings against ''irrational exuberance'',
So why wouId the Iatter want to Iend money to the former
for every two bureaucrats working here at the Ministry.
The real flaw in the property-owning democracy, as recent events have proved,
At the beginning of February,
And I said, ''Yes, sir,'' and I dropped the truck.
the country was suffering one of the hottest summers on record.
In just 30 years, the cost of sociaI security benefits
this bull market was propelled upward
who's roughIy 22 times richer?
You know, you make it sound so attractive, maybe I... I shouId switch jobs!
WeII, here's how it works.
by the chairman of the US Federal Reserve, Alan Greenspan.
is that the housing market, like any asset market, is prone to booms and busts.
ln Buenos Aires, the electricity system just couldn't cope.
has risen in reIation to Japan's nationaI income
Five-hour power cuts were commonplace.
I teII you what, it's interesting.
by a factor of four.
But maybe there's another way of looking at property -
As in John Law's time, a stock market bubble could only happen
Until recently, from China's point of view,
Today, virtually all Japan's health insurance societies
But these, as it turned out, were the least of Argentina's problems.
as a means of unlocking new wealth
if money was abundant.
ln the bankruptcy capital of America, repossessing cars is a routine matter.
the best way of employing its vast population
are in deficit.
by providing collateral for aspiring entrepreneurs.
And the pension funds are nearly out of money too.
And by raising interest rates only once between February 1 995 and June 1 990,
was through exporting manufactures to the insatiably spendthrift US consumer.
As is almost always the case,
Japan's once so-super welfare state
Could property ownership be the answer to the problems
there were several well-trodden steps to monetary hell.
Greenspan made sure that it was.
To ensure that those exports were irresistibly cheap,
is threatening to bankrupt the nation.
of the world's poorest countries?
BUZZ OF AUCTION ROOM
In step one, the government spends more, much more,
The rewards for investors were immense,
China had to stop its currency strengthening against the dollar
and aIso for the managers here at the company's Houston headquarters,
You've heard of sub-prime borrowers. Well, welcome to a sub-prime country...
than it can raise in taxation.
by buying literally billions of dollars on world markets.
UsuaIIy, but not aIways, it's because of a war.
who were generousIy incentivised with share options.
lnsurance. lt seemed such a brilliant idea
In Argentina's case, there were two.
..Argentina, where economic underachievement
In the space of just three years after 1997,
$16,000...
One, a civiI war between GeneraIs and the Left in the 1970s,
in the calculations of those Scottish ministers,
And, until recently, this seemed to be to America's benefit too.
the Enron stock price rose by a factor of very nearIy five,
and even more brilliant in Japan's all-encompassing welfare state.
It's got the Ieather, the top...
has been a way of life for a century.
the other a foreign war against Britain over the FaIkIand IsIands in 1982.
Each week, United Auto Recoveries sells 500 repossessed cars.
from beIow 20 doIIars a share to above 90.
But as we've seen, the best-laid schemes can be thrown into disarray
Here in America, the best way to keep the good times roIIing
By 1989, the financiaI system was about ready to bIow.
It was the Mississippi Company aII over again.
These slums on the outskirts of Buenos Aires seem a million miles
The cars are auctioned off to the trade, ending up in the same car lots,
in recent years has been to import cheap Chinese goods by the container-Ioad
by an unexpected turn of events.
So is there any better way of managing risk in an uncertain world?
from the elegant boulevards of the Argentine capital's centre.
to be sold to much the same people
By February, inflation had already reached 1 0% - per month.
and seII them in out-of-town superstores, Iike this one.
and, when they can't keep up with their monthly payments,
Even a city used to extravagant oil-fired living had seen nothing like it.
But are people here really as poor as they look?
repo'd and recycled once again.
For companies Iike WaI-Mart, outsourcing to China
Disasters Iike 9/1 1 and Katrina
Banks were ordered to close as the government tried to lower interest rates
has been a way of reaping vast profits from cheap Chinese Iabour.
expose the Iimits of both traditionaI insurance
TechnicaIIy the Memphis repo men are simpIy doing what debt coIIectors do
One man didn't believe so.
and the weIfare state.
and stop the currency's exchange rate from collapsing.
In 2006 aIone,
But insurance and weIfare aren't the onIy ways
This is where Ken Lay and his Enron executives used to live,
Peruvian economist Hernando de Soto saw the shabby residences like these
WaI-Mart out-sourced no Iess than $9 biIIion-worth of goods from China.
the worId over.
to buy yourseIf protection against future shocks.
The difference, apart from the sheer mind-boggIing scaIe of the thing,
lt didn't work.
in River Oaks, Houston's most exclusive neighbourhood.
These days, the smart way of doing it is by being hedged.
ln just a month,
in developing countries all over the world as representing
But at the same time,
is the reIative ease with which the bad debts are wound up
the austral fell 1 40% against the dollar.
by seIIing biIIions of doIIars of bonds to the PeopIe's Bank of China,
ln the final year of its existence, Enron paid its top 1 40 executives
literally trillions of dollars of unrealised wealth.
Now, everybody's heard of hedge funds,
and the coIIateraI is soId off. For the debtors,
the United States has been abIe to enjoy much Iower interest rates
but what exactIy does ''hedging'' mean and where did it come from?
there's virtuaIIy no sociaI stigma and nobody seems to be getting hurt.
At the same time, the World Bank froze lending to Argentina,
an average of 5.3 million dollars each.
than wouId otherwise have been the case.
Luxury car sales went through the roof.
saying that the government had failed to tackle the root cause of inflation -
The big mystery is why the worId's most successfuI capitaIist economy
It's what they caII at business schooI a win-win situation.
The probIem is that the peopIe who Iive here,
and in countIess shanty towns around the worId,
To most of us, hedge funds are a mystery.
a bloated public-sector deficit.
is based on a foundation of more or Iess painIess economic faiIure.
don't have secure IegaI titIe to their homes.
(Sherron Watkins) You got muItipIes of your annuaI base pay.
With no cheap Ioans forthcoming from the WorId Bank,
But the one thing we do know
This is the wonderful dual country of ''Chimerica'',
is that they can make you stupendously rich.
That's bad, because without a IegaI titIe to property,
the government tried to finance its deficit by seIIing bonds to the pubIic.
You were reaIIy Iess thought of if you got a percentage,
accounting for 33% of the world's economic output
One hugely successful hedge fund manager paid $60 million for this Cezanne.
you can't use it as coIIateraI to borrow money.
even if it was 75% of your annuaI base pay.
But investors were hardIy IikeIy to buy bonds with the prospect
and more than half of all global growth in the past eight years.
Oh, you were getting a percentage. You wanted muItipIes.
And if you can't borrow money,
Here in Tennessee, when the house has been stripped bare
then you can't possibIy raise the capitaI you need to start a business.
You wanted two times your annuaI base pay,
that their reaI vaIue wouId be wiped out by infIation in just a matter of days.
And he owns this Degas too.
and the repo man has taken your car,
three times, four times your annuaI base pay, as a bonus.
Not to mention a Jasper Johns he paid $80 million for.
you end up in the hands of one of Memphis's bankruptcy lawyers,
Nobody was buying.
Chimerica seemed like a marriage made in heaven.
The government was running out of options.
Part of the trouble is that in poor countries, it's a bureaucratic nightmare
He's also given hundreds of millions of dollars to charity.
along with around 1 3,000 other people
And Lay, the pillar of society,
who filed for bankruptcy here in the past year.
The East Chimericans did the saving. The West Chimericans did the spending.
espoused the highest moral standards for his company.
ln April, furious customers overturned shopping trolleys
to establish secure legal title to property.
Of course that's one thing that's making you... Bumping your payments up so high.
(Ken Lay) Enron is a company that deaIs with everyone with absoIute integrity.
after one supermarket announced over the loudspeaker
lt can take months - sometimes years - longer than in the English-speaking world.
But there was a catch.
that prices were being raised by 30% immediately.
Every week, bankrupts gather here with their lawyers
We pIay by aII of the ruIes, we stand by our word,
For Hernando de Soto,
Ken Griffin is the founder of the Citadel lnvestment Group,
The more China was willing to lend to the United States,
breathing financiaI Iife into aII this dead capitaI
to hammer out deals with their creditors. There's even a fast track lane.
we mean what we say, we say what we mean.
Shops emptied of goods as owners weren't making enough money to buy new stock.
the more Americans were willing to borrow.
one of the world's biggest hedge funds.
is the key to providing the poor with a more prosperous future.
The only problem was that, like John Law's system,
Chimerica, in other words,
Last year, he navigated his way through the credit crunch so successfully
was the underlying cause of the flood of new bank loans,
the Enron system was an elaborate fraud.
he was able to pay himself more than a billion dollars.
In this case it's a mortgage and it's a car, or two cars.
bond issues and derivative contracts that swept Planet Finance after 2000.
PHONE RINGS
The shanty town of Quilmes, on the southern outskirts of Buenos Aires,
To most of us, risk is scary,
I can't see anything eIse in there that they're...they're having to pay off.
provides a natural experiment to test De Soto's theory.
but all of Griffin's vast wealth has come because he's found a way of managing risk,
That, in turn, was the underlying reason why the US mortgage market
- ActuaIIy there are three cars. - Three cars?
ln this tape, an Enron trader
with a mixture of mathematical precision and brilliant intuition.
On one side of the town, there are some of the most squalid slums l've ever seen.
is discussing with the El Paso Electric Company
was so awash with cash in 2006
The third car is... the neighbourhood titIe Ioans,
that sub-prime mortgages were being sold to people with no income,
how to hold California's consumers to ransom
has a... has a Iien on the car, they are hoIding the titIe.
(Ken Griffin) Nothing is constant. Nothing is the way it's aIways been.
But just a few miles away, it's a very different story.
by closing power stations to restrict the supply of electricity.
no job and no assets - Ninjas.
Government bond prices plunged
(NiaII) So putting this reaIIy simpIy,
So what I find is that peopIe who are reaIIy good at this
as fears rose that the Central Bank's reserves were running out.
what were they supposed to be paying and what are they now paying?
It was in the earIy 1980s that a group of squatters here
have great intuition, great instinct.
With no foreign Ioans and no-one wiIIing to buy bonds,
It wasn't as if the sub-prime mortgage crisis of 2007 was hard to predict.
Iobbied the government for secure IegaI titIe to their homes.
WeII, that payment was reduced from 241 . 1 1 ...
Their gut actuaIIy teIIs them something.
there was onIy one thing Ieft for an increasingIy desperate government to do -
The mathematics are important
OK.
because they demonstrate you understand the probIem.
They were successfuI, and those wiIIing to pay a nominaI rent were granted Ieases
- down to 107. - OK.
Months before it bIew up, I was in Tennessee and in Michigan,
get the CentraI Bank IiteraIIy to print more money.
Quite an improvement.
But uItimateIy, the decision about whether or not to take a given risk
Cutting their monthIy obIigations by more than haIf.
which, after 20 years, converted into fuII ownership.
seeing for myseIf how many poorer househoIds
But they couIdn't even get that right.
The results were not only the higher prices Enron wanted,
I think is reaIIy a human judgement caII in every sense of the word.
were heading for mortgage defauIt and forecIosure.
You can teII they're owner-occupied by the fact that there's a fence,
but also, despite there being plenty of power available,
What was much harder to predict
the waIIs are painted, there's even a rather excitabIe guard dog.
was how a smaII tremor in America's very own home-grown emerging market
On Friday April 28th, Argentina literally ran out of money.
repeated blackouts for consumers.
From 1 996 to 2006 there were between one and two million bankruptcy cases a year
After aII, owners tend to Iook after properties better than tenants.
wouId cause a financiaI earthquake aII around the worId.
''lt's a physical problem, ''
The origins of hedging, appropriateIy enough, are agricuIturaI.
And some of the owners here
the Central Bank Vice-President told a news conference.
are even reaIising the vaIue of their properties by putting them up for saIe.
Enron's money was stolen in more ways than one.
in the United States, nearly all of them involving individuals
For a farmer, nothing is more important than the future price of his crop
Not many people foresaw that defaults on sub-prime mortgages
The company's stated assets were vastly inflated.
who elected to go bust rather than meet their obligations.
What he meant was that Argentina's mint had run out of paper to print new notes,
after it's been harvested and brought to market.
But its key financial innovation was to remove its debts from the balance sheet
Yet there seems to be a flaw in the theory, for owning their own homes
would send such a shockwave around the world
But that can be higher, or much Iower, than he expects.
and the printers had gone on strike.
that a British bank would suffer the first run since 1 866
ln medieval ltaly - or in the Glasgow of my youth, for that matter -
hasn't made it significantly easier for people here to borrow money.
A futures contract aIIows him to protect himseIf
and hide them in so-called ''special purpose entities'',
and end up being nationalised,
bankruptcy was seen as a disaster. But not here.
by committing a merchant to buy the crop when it's brought to market
or that one of the greatest names in American investment banking,
Just 4% of them have managed to secure a mortgage.
dubious names like Chewco and Raptor.
at a price agreed when the seeds are being pIanted.
Lehman Brothers, would go bust.
In fact, this abiIity to waIk away unscathed from unsustainabIe debt
The reaIity is that owning property doesn't give you security -
Each quarter, the company's executives had to use more smoke and more mirrors
''l don't know how we'll do it,
The farmer gets a floor below which the price can't sink.
And not many people saw
''but the money has got to be there on Monday, '' he declared.
and start again has been a defining characteristic of American capitaIism.
it just gives your creditors security.
that as other banks started to write down hundreds of billions of losses,
The merchant gets a ceiling above which it can't rise.
to make actual losses look like bumper profits.
ReaI security comes from having an income,
inter-bank lending would simply seize up,
There were no debtors' prisons here in the earIy 1800s,
By signing a futures contract,
lt couldn't last.
as the Duke of Buckingham discovered in the 1840s,
Yet the faster the printing presses rolled, the less the money was worth.
both the farmer and the merchant have hedged their bets.
When you cook the books and then you try to hide it,
driving the US Treasury to propose a $7 00 billion bail-out
at a time when EngIish debtors couId Ianguish in jaiI for years. Since 1898,
as Detroit homeowners are discovering today,
(Ken Griffin) Both parties are better off,
you're toast.
The government was forced to print higher and higher denominations of notes.
and as I suspect the peopIe of QuiImes wouId probabIy agree.
for the financial system as a whole.
When they sensed the game would soon be up,
and because of that, the worId as a whoIe is much better off.
every American has been entitIed to fiIe for Chapter 7 - Iiquidation,
For that reason, it probabIy isn't necessary
Lay and his cronies started to unload
ln May, the price of coffee went up by 50% in a week.
It encourages capitaI formation,
for every entrepreneur in the deveIoping worId to take out a mortgage on his home
hundreds of millions of dollars worth of shares,
or Chapter 13 - voIuntary personaI reorganisation.
it encourages investment,
while at the same time reassuring the public
it encourages peopIe to do what is needed to be done
CertainIy, by June 2008.
For rich and poor aIike,
Farmers stopped bringing cattle to market as the price for one cow
or, for that matter, on her home.
that the share price would continue to soar.
an American recession seemed more or Iess inevitabIe.
bankruptcy has become as much of an inaIienabIe right
In fact, property ownership may not be the key to weaIth-generation at aII.
to make the worId a better pIace.
was now the same as for three pairs of shoes.
But the end of the worId?
as ''Iife, Iiberty and the pursuit of happiness''.
Like John Law's desperate attempts
Looking around the streets of Hong Kong,
to stem the freefall of Mississippi Company shares,
With the development of a standardised futures contract,
I don't see much sign of a recession here.
all Ken Lay's reassurances were in vain.
agreed rules, and an effective clearing house,
Can it be that the Chinese haIf of Chimerica
The theory is that American law exists to encourage entrepreneurship -
the first true futures market was born.
has successfuIIy decoupIed itseIf from the American haIf?
On November 1 5th 2001, Alan Greenspan, head of the US Federal Reserve,
to facilitate the creation of new businesses.
By June 1989, infIation in Argentina had reached a monthIy rate of 100%,
This is Betty Flores.
And that means giving people a break when things don't work out the first time,
And its birthplace was here in the Windy City.
The idea that China can somehow walk away unscathed from the American crisis
received the Enron Prize for Distinguished Public Service,
She runs a small coffee shop in El Alto,
Chicago.
or even the second time.
an annuaI rate of roughIy 12,000%.
a poor suburb of the Bolivian capital, La Paz.
is certainly seductive.
The born risk-takers don't get wiped out as they learn through trial and error
adding his name to a roll of honour
To put that into concrete terms,
Betty is one of an increasingly large number of women around the world
After the city's futures exchange was established in 1 87 4,
that included Mikhail Gorbachev and Nelson Mandela.
Despite declining exports to the recession-hit West,
if you wanted to go out for dinner in Buenos Aires on a Saturday night,
how to make that first million,
and a stock market crash, booming domestic demand
Greenspan deserved it, because without his monetary policies in the late '90s,
hedging commodities became standard practice.
who have borrowed money with no security at all.
because today's bankrupt might be tomorrow's billionaire.
in May you'd pay 10,000 austraIes.
seems set to keep China's economy growing at at least 8% a year.
By June, you'd have to pay 20,000 for the same meaI.
She's the personification
the Enron bubble, and the dotcom bubble that coincided with it,
The next step was for a conditional kind of future to evolve.
of an extraordinary new financial movement known as microfinance.
lt's a theory that seems to work.
And by the foIIowing month, it wouId take 60,000.
But remember, we've been here before.
would surely have been impossible.
Many of America's greatest successes failed in their early endeavours,
The option.
A hundred years ago,
Did you borrow the money to set up this coffee stand?
You've heard of a fistfuI of doIIars.
in the first age of globalisation,
Some of this really is the financial equivalent of rocket science,
Just two weeks after the award ceremony, Enron filed for bankruptcy.
including the author Mark Twain,
WeII, you needed a drawer fuII of austraIes just to buy a square meaI.
many investors thought there was similarly symbiotic relationship
COMPANION TRANSLATES
but the underlying principle is simple.
The company owed billions.
the comedian Buster Keaton,
between the world's financial centre, Britain,
Because they're derived from underIying assets,
SHE REPLIES IN SPANISH
and Europe's most dynamic industrial economy.
But just how many billions?
Yes, to make the...the stand. She borrowed money to make the stand.
aII futures contracts are known as ''derivatives''.
and none other than the great industrialist Henry Ford himself.
That economy was Germany's,
ln June, popular frustration erupted
When Enron decIared bankruptcy, December 2001 ,
But an even smarter kind of derivative is an ''option''.
and the breakdown of that relationship ended in war.
in two days of intense rioting and looting by hungry mobs.
they met with their creditors to say,
Has she paid it aII back?
The buyer of a caII option
All of these men eventually flourished
has the right, say, to buy a barreI of oiI for $120
''Erm, guys, I know on our baIance sheet,
- She's paid it off a Iong time ago. - Oh, I see.
At least 1 4 people died.
not least because they were given a chance to try, fail and start over.
''we have reported 13 biIIion doIIars of Iong-term debt.
As before 1 91 4,
in a year's time.
For their part, the banks simply assume
ln a country where a steak and a bottle of wine
there's a fine line that separates symbiosis from rivalry and conflict.
Now, if the price of oiI rises to $150 a barreI,
Stories Iike Betty's point to one of the great reveIations
''Our true Iong-term debt picture is 38 biIIion doIIars.
that a proportion of the loans they make will go bad.
were on practically every table every day,
of the microfinance movement in a country Iike BoIivia.
then the option is in the money
After all, most people going bankrupt owe relatively trivial sums.
thousands were eating in soup kitchens or going hungry.
''There's 25 biIIion doIIars in off-baIance-sheet debt''.
According to one estimate, China's gross domestic product
and the smart guy makes a profit of $30.
It turns out that women are actuaIIy a better credit risk than men,
CLOCK CHIMES
But if that doesn't happen, if the price of oiI stays the same,
could exceed that of the United States as early as 2027.
A Chapter 1 3 doesn't wipe their debts out, it just reschedules them.
(NiaII Ferguson) Did those numbers come as a shock to you?
with or without a home as security for the Ioan.
lt's obvious enough who loses from hyperinflation.
You knew there were probIems, but not on that scaIe.
or actuaIIy decIines,
By that time some critics of free trade argue
It aII rather fIies in the face of the conventionaI image
Yes, I mean, I think we were aII fIabbergasted.
he's under no obIigation to carry through the deaI.
Very rapidly rising prices are bound to wipe out
AII he does is to write off the cost of the option itseIf.
of the spendthrift femaIe.
that virtually nothing may remain of American manufacturing industry.
anybody who's dependent on an income that's fixed in cash terms.
The day before 4,500 employees at Enron's HQ were given their marching orders,
WeII, it's by buying and seIIing compIex smart derivatives Iike options
Groups Iike academics and civiI servants on infIexibIe monthIy saIaries,
These women are hardly what you would call good financial risks.
So it's a mistake to think, as Shakespeare's Antonio did,
And the worse things get in the United States,
that Ken Griffin has become a biIIionaire.
the louder such complaints will grow.
of moneylenders as mere leeches,
They probably have just a few dollars between them.
a final round of bonus cheques were issued to grateful executives.
oId-age pensioners and, particuIarIy,
TRADERS SHOUTING
sucking the life's blood out of unfortunate debtors.
bondhoIders Iiving off the interest on their investments.
Yet with no security, they are being lent money. Here in Bolivia,
ln theory, derivatives offer a new way to hedge against an uncertain future.
On a day Iike today, when the Hong Kong stock market is down sharpIy,
Buenos Aires is absoIuteIy fuII of antique shops Iike this one,
ln May 2006, Ken Lay was convicted on all six counts of securities and wire fraud.
lenders have come to realise
it's tempting to ask whether anything couId trigger
A much smarter way than boring old insurance.
Credit and debt are the building blocks of economic development.
Iaden down with jeweIIery and watches and cutIery,
that creditworthiness may in fact be a female trait.
a comparabIe breakdown in gIobaIisation Iike the one that happened in 191 4?
And much more profitable.
His sidekick, Jeffrey Skilling, was sentenced to 24 years in prison.
aII soId off by middIe-cIass famiIies who just ran out of cash.
But it takes banks to elevate that relationship
The obvious answer is some kind of confIict
beyond the tie between a loan shark and his hapless victim.
Carmen Velasco set up Pro Mujer
ln the past decade, derivatives have seemed to take over the world of finance.
between the United States and China, whether over trade, Taiwan, Tibet,
ln the 1 920s, the great economist John Maynard Keynes had predicted
to provide finance to poor but enterprising women.
Lay died before sentencing, while on holiday in Aspen, Colorado.
the euthanasia of the bondholder,
By the end of 2007, the notional value of all derivatives contracts
or some other unforeseeabIe bone of contention.
Because the loans are unsecured by property,
anticipating that inflation would eat up the paper wealth
Yet the fraudulent practices that propelled Enron's rise and fall
It's onIy when borrowers Iike the ones on this GIasgow housing estate
What starts with competition for Olympic medals
the challenge is to get the women to pay them back...but they do.
reached a staggering $596 trillion.
of financial families like the Rothschilds.
could end in a battle over dollars
have access to efficient credit markets
didn't die with Ken Lay.
From day one, they have to know that they have to repay on time,
That's 43 times the size of the American economy.
if the Chinese one day decide to cut off their credit line to the American empire.
that they can escape the cIutches of the ShyIocks and the Ioan sharks.
On the contrary, the habit of hiding debt off-balance-sheet
As inflation swept through the world in the 1 97 0s,
that they have interest rates and they have to save.
It's onIy when savers can put their money in dependabIe banks
Keynes seemed to be proved right.
that Enron pioneered subsequently spread throughout the Western financial system.
Maybe, as its name suggests,
So it's a process of Iearning, and at the beginning it's very difficuIt,
that it can be channeIIed from the idIe to the industrious.
There are tremendous economic benefits for peopIe that work here.
ln our time, however,
Chimerica is nothing more than a chimera -
we've seen a miraculous resurrection of the bondholder -
because they are not used to handIing a Ioan.
The unravelling of this dodgy accounting
$20 biIIion in the hands of 1 ,000 peopIe
But wait, l hear you ask, if banks are the answer,
the mythical beast of ancient legend that was part lion, part goat,
But IittIe by IittIe, they get used to it, and they feeI so proud when they repay.
a comeback by Mr Bond... even in Argentina.
has been a key component of the current crisis.
is reaIIy a 21st century phenomenon.
part dragon.
In many respects, I think the Enron probIem was in a Petri dish
This never happened 50 years ago.
how could so many have collapsed so spectacularly in the past year,
The bond market is back,
terrifying American officials as they try to fund a massive financial bailout
and the germ has spread throughout the financiaI markets.
throwing the financial world into turmoil?
I must say, I'm hugeIy impressed by what I'm seeing here at Pro Mujer.
A Chinese-American conflict may sound implausible,
Yet there are downsides to hedging too.
Some of which comes from Enron traders and finance foIks
by - you guessed it - selling billions of dollars of freshly minted bonds.
You can sense in this hive of activity
but one of the key points of this series
To understand why bad debts in places like Memphis
When biIIionaire investor Warren Buffet
that are gainfuIIy empIoyed at banks and energy trading houses.
the transformation that microfinance has brought into these women's Iives.
is that the really big crises come just seldom enough
described derivatives as ''financiaI weapons of mass destruction'',
could cause such chaos, you need to understand
So that rot is everywhere in the financiaI markets.
The key to Mr Bond's revival
how the relationship between banks and borrowers broke down
he aII but prophesised the downfaII of American insurance giant AIG.
to be beyond the living memory
And behind me you can see the bottom Iine...
of the people who run today's companies, banks and funds.
has been a growth in the number of bondholders...
as loans came to be ''securitised'' and sold on to unwary investors.
women Iining up to repay their Ioans punctuaIIy.
Their European headquarters are there behind me.
Maybe it's time to change that oId catch phrase from ''as safe as houses''
Brought Iow not by seIIing insurance poIicies,
Just because all the swans you've ever seen are white
The joint stock Iimited IiabiIity company truIy is a miracuIous institution.
..which brings us back to ltaly,
but by seIIing derivatives that bIew up in its face.
doesn't mean there are no black swans.
to ''as safe as housewives''.
where the bond market was born 600 years ago.
Once upon a time, being a banker was reaIIy rather boring.
And yet throughout financiaI history,
Of course, it would be a mistake to assume that microfinance
there have aIways been a few crooked companies,
You Iived by the 3-6-3 ruIe,
is some kind of economic magic bullet.
just as there have occasionaIIy been irrationaI markets.
which meant you paid 3% on deposits, coIIected 6% on Ioans
ltaly is now a country with one of the most rapidly ageing populations in Europe.
Just giving out loans won't necessarily consign poverty to the museums.
Indeed, the two go hand in hand,
Today's financial world is the result of four millennia of economic evolution.
because it's preciseIy when the buIIs are stampeding most enthusiasticaIIy
and were on the goIf course by 3 o'cIock.
Our basic human urge to protect ourselves against risk
But then, betting everything on the house won't do that, either.
But in our time, banking became reaIIy rather too interesting.
ln such a greying society,
that peopIe are most IikeIy to get taken for the proverbiaI ride.
has proved frustratingly difficult to satisfy.
there is a growing demand for fixed-income securities like bonds.
A whoIe series of financiaI innovations
But there's also a strong fear of inflation eating up
made it possibIe for common or garden Ioans
THUNDER RUMBLES
Yet despite the unprecedented complexity and diversity
lnsurance companies let us down.
Financial illiteracy may be rampant,
to poor foIks in pIaces Iike Memphis
the real value of pensions and savings.
of the modern financial system,
As we've seen in the past year,
but somehow we were all experts on one branch of economics -
to metamorphose into weird and wonderfuI things
the path of financial markets can never be as smooth as we would like.
Planet Finance remains as vulnerable as ever
Central bankers suspected of being soft on inflation
Welfare states sink into insolvency.
the property market.
with names Iike ''coIIateraIised debt obIigations''.
have to answer to the pensioner's friend - the bond market.
to the age-old problem of booms and busts,
Since the current credit crunch began,
And derivatives turn out to be a double-edged weapon too.
We all knew that property was a one-way bet.
WeII, this financiaI aIchemy - turning Iead into goId
some stock markets around the world have fallen by as much as 50%.
irrational exuberance and manic depression.
And treasuries planning to spend billions to bail out banks that have gone bust
or toxic waste into giIt-edged securities -
Except that it wasn't.
Maybe all this complexity has actually increased our vulnerability to crisis.
GUNSHOT
was onIy possibIe because the ascent of banks
in the current credit crunch have to tread warily, too,
So long as human expectations of the future veer
And so for many families,
was foIIowed by the ascent of the second great piIIar
All over the world, it seems, property prices are falling...
if they expect to raise the money by selling yet more bonds.
For 4,000 years, from ancient Mesopotamia to modern China,
from the over-optimistic to the over-pessimistic, from greed to fear,
providing for the future now takes one very simple form -
of the modern financiaI system - the bond market.
the ascent of money has been one of the key factors in human progress,
an investment in a house,
..from Memphis to Santiago,
stock prices will tend to trace a line
In modern Europe, as in Renaissance ItaIy,
the value of which is supposed to keep going up
not unlike the jagged and irregular peaks of the Andes.
an equiIibrium has been struck between poIiticaI power and financiaI exposure.
from London to La Paz.
an extraordinary story of innovation, intermediation and integration
until the day the breadwinners need to retire.
Encouraging home ownership may weII create
that had done as much as anything
Today, as much as ever,
As an investor, you just have to hope
to heIp peopIe escape from the drudgery of subsistence agricuIture.
it seems it's the bond market, our oId friend Mr Bond,
that when you have to come down from the summit of euphoria,
a poIiticaI constituency for capitaIism.
lf the pension plan falls short, never mind.
But it aIso distorts the capitaI market by persuading peopIe to bet the house on...
And yet PIanet Finance can never quite escape
it'll be on a nice, smooth ski-slope, and not over a sheer cliff.
that reaIIy ruIes the worId.
There's always home, sweet home.
from the gravitationaI force of PIanet Earth,
weII, the house.
But what if, rather than lending to governments,
because the quants can never take fuII account of the human factor -
As a pension or an insurance poIicy,
But is there nothing we can do to protect ourselves
PeopIe need to borrow money, of course,
you prefer to use your money to buy a share in a company?
this strategy has one very obvious fIaw -
to start up businesses or to buy expensive assets.
our tendency to underestimate the probabiIity of bIack swans,
from real and metaphorical falls?
it represents a one-way, totaIIy unhedged bet
Would that be more or less risky?
But it seems dangerous to Iure them into staking everything
our propensity to veer from euphoria to despondency,
As we'll see in the next episode of The Ascent Of Money,
More or less profitable?
on a singIe market, the property market.
on the far from risk-free property market.
our chronic inabiIity to Iearn from history.
ln the next episode of the Ascent Of Money,
But as we'II see in the next episode of The Ascent Of Money,
finance is as much about risk as it is about return.
From Buckinghamshire to BoIivia to bonny ScotIand,
we'll discover why we find it so hard to learn from financial history,
And that's why the course of financiaI history -
a bet on bricks and mortar,
the key is to strike the right baIance between debt and income.
And the big question is,
Iike that most human of emotions, Iove - never runs smooth, and never wiII,
or good oId Japanese wood,
are you insured?
And next week I'II be suggesting that the entire worId economy
not even here, on the magicaI and quite possibIy mythicaI country of Chimerica.