Great frauds in history: the bank that cooked the books

When loans made by the City of Glasgow Bank turned bad, its management falsified the balance sheet, overstated its gold reserves and issued false statements about its financial health.

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.

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.

Recommended

The MoneyWeek Podcast: picking stocks is fun, but you need to do your homework
Investment strategy

The MoneyWeek Podcast: picking stocks is fun, but you need to do your homework

John Stepek talks to Steve Clapham, investor, analyst and author of The Smart Money Method, about the dangers in picking individual stocks and why you…
8 Apr 2021
How to find companies that can thrive in the post-Covid world
Advertisement Feature

How to find companies that can thrive in the post-Covid world

Many sectors of the global economy will return to something resembling pre-pandemic status, but others will take far longer to recover.
8 Apr 2021
What the Deliveroo IPO can teach us about investing
Investment strategy

What the Deliveroo IPO can teach us about investing

Losing money on an investment is painful, says John Stepek, but it can force us to look at our process in a way that making money doesn’t.
8 Apr 2021
Deliveroo’s IPO flop shows which way the market is going
Stockmarkets

Deliveroo’s IPO flop shows which way the market is going

Deliveroo’s disastrous IPO is a good example of how investors are looking away from loss-making growth stocks and more towards companies that will pro…
6 Apr 2021

Most Popular

Central banks are rushing to build digital currencies. What are they, and what do they mean for you?
Bitcoin

Central banks are rushing to build digital currencies. What are they, and what do they mean for you?

As bitcoin continues to soar in value, many of the world’s central banks are looking to emulate it by issuing their own digital currencies. But centra…
8 Apr 2021
Nuclear power might never be popular – but now looks a good time to invest
Commodities

Nuclear power might never be popular – but now looks a good time to invest

Nuclear power gets a very bad press, but it is the ultimate renewable energy source. Interest in it is perking up again, says John Stepek. Which means…
9 Apr 2021
House prices: from boom to even bigger boom
House prices

House prices: from boom to even bigger boom

UK house prices have risen to new to record highs, says Nicole Garcia Merida. Demand continues to outpace supply, but continued low interest rates, th…
9 Apr 2021