The City of Glasgow Bank was founded in 1839 and quickly became one of Scotland’s leading lenders. It briefly shut down in the banking crisis of 1857, caused by the collapse of a rival bank, but it was able to reopen by the end of the year, thanks to support from other banks. By 1878 it had resumed its former importance, with 133 branches around Scotland, lending money to individual companies around the world, and was owned by more than a thousand shareholders and partners, who were personally liable for any debts.
What was the scam?
Contrary to its reputation as a successful institution, the City of Glasgow Bank was run badly. It held a large number of bad loans in risky companies, mainly mining and railway companies in the US, and later lent £6m (£586m in today’s money) to four companies in India. When these loans turned bad, the bank’s management simply falsified the balance sheet by overstating the value of its gold reserves and issued false statements about the bank’s financial health. In an attempt to shore up confidence, they secretly started buying shares to push up the price.
What happened next?
As late as the summer of 1878, the bank was supposedly solvent enough to pay a dividend of 12%. However, rumours that it was in trouble began to circulate in London and the bank was unable to refinance its short-term debts. This forced it to seek a bailout from other banks, which demanded a proper audit of its books. When this revealed that the bank was hopelessly insolvent, with a huge gap between assets and liabilities, it was forced to shut its doors for good, setting off a run on other Scottish banks. The bank’s manager, Robert Stronach, and its directors were later convicted of fraud.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Lessons for investors
Depositors were eventually repaid in full, but the shareholders’ personal liability meant that they were wiped out and ended up contributing an extra £5.4m (£528m). As a result, 1,565 of the 1,819 shareholders went bankrupt. The City of Glasgow Bank’s collapse shows the importance of making sure that your portfolio isn’t just focused on one industry or one part or the world. While the scandal effectively made limited liability universal for most shareholders, it’s important to know the exact terms of any investment to avoid any nasty surprises.
-
Could your family be at risk of an unexpected tax bill? How to keep your loved ones in the loopMany families are out of the loop when it comes to planning the financial aspects of both retirement and inheritance
-
Rightmove: Glut of homes for sale in southern England drives asking price dropAsking prices are 0.1% lower than a year ago, according to the property website, driven by challenges in affordability-stretched London and the south
-
Small UK industrial stocks are hidden gemsOpinion Ed Wielechowski of the Odyssean Investment Trust highlights three of his favourite British small-cap industrial stocks
-
Aurora Innovation is running on empty – is it overvalued?Aurora Innovation, a maker of self-driving trucks, may have promised far more than it can deliver
-
'Ride the recovery in emerging markets': Gustavo Medeiros of Ashmore Group tells MoneyWeekInterview What's the outlook for emerging markets? Gustavo Medeiros, head of research at Ashmore Group, gives his analysis and reviews progress in developing economies
-
What is the Enterprise Investment Scheme and should you have one?The Enterprise Investment Scheme is tax-efficient and potentially lucrative. Taking a chance on the scheme could trim your family’s IHT bill, says David Prosser
-
The alcohol industry is suffering as consumers sober up – is it still worth investing in the sector?Changing consumer tastes are rocking the alcohol industry, but the best players are adapting their strategies. Buy them while their shares are still cheap
-
A strange calm in creditCorporate bond markets remain remarkably relaxed, with yields that offer little compensation for risks
-
'The City's big bet on green finance fails to pay out'Opinion Insurers and banks are backing away from “green finance”, and there is not much sign of the green boom we were promised. That’s a problem for the City
-
Six top investment trusts for smaller stocksLiquidity constraints mean investment trusts are best placed to seize the juiciest opportunities
