Great financial disasters in history: the collapse of Overend Gurney

When 18th-century bank Overend, Gurney & Company's business loans started losing around £500,000 a year, it went bust, landing shareholders with a bill of £2.5m.

In 1775 the Gurney family of Norwich founded Gurney & Co, which grew to become one of the most successful banks in East Anglia. In 1807 the family bought London bill broker Richardson, Overend & Company – a business that bought and sold bills of discount (effectively short-term business debts). The merged firm became Overend, Gurney & Company. From around 1859 the bank, then the largest bill broker in England, expanded by making more general business loans to a variety of enterprises.

What went wrong?

Overend Gurney’s bill-brokerage business was profitable, but its forays into more general business loans proved disastrous, and it lost around £500,000 a year from 1860 onwards. By 1865 it was hopelessly insolvent. To protect the bank the partners decided to sell the business to a new limited company that was then listed on the stock exchange. As well as promising a “highly remunerative return”, the prospectus promised that any losses would be fully guaranteed by the sellers.

What happened next?

By the spring of 1866, people were speculating about the scale of potential loan losses and Overend Gurney’s directors realised that the company could not survive. After the Bank of England refused to give it an emergency loan, Overend Gurney ceased operation, causing a general financial panic that was only quelled when the Bank of England injected £4m (£385m in today’s money) into the system. In the ensuing bankruptcy it quickly became apparent that the losses on the loans far exceeded any guarantees, leaving shareholders liable for the rest. A private prosecution was launched against the directors. But although they had clearly made bad business decisions, the directors were acquitted of fraud in 1869. 

Lessons for investors

Overend’s creditors would be fully compensated; its 2,000 shareholders were less lucky. The shares, which were worth £25 at their peak in October 1865, were worthless by the end; shareholders also had to stump up an additional £25 a share based on the agreement at the initial public offering, landing them with a total bill of £2.5m, causing some of them to go bankrupt. The fact that the prospectus for the offering in 1865 was less than 300 words long, and didn’t contain a balance sheet or any accounts, should have raised some questions.

Recommended

Richard Marwood: dividends are back on the menu as earnings recover
Income investing

Richard Marwood: dividends are back on the menu as earnings recover

Merryn talks to Richard Marwood of Royal London Asset Management about which companies are recovering from the pandemic as people start spending again…
14 May 2021
Why investors should start to think more short-term
Investment strategy

Why investors should start to think more short-term

For years, investors have poured money into growth stocks that promise future profits but no actual cash now. But as inflation threatens, now might be…
13 May 2021
Should we adjust our all-weather ETF portfolio for inflation?
ETFs

Should we adjust our all-weather ETF portfolio for inflation?

It’s too early to batten down the hatches for our ETF model portfolio, but price pressures are increasing.
12 May 2021
Why ESG investing is becoming the norm
ESG investing

Why ESG investing is becoming the norm

A lot of investors say they want to put their money into “ESG” funds. But unless you actively opt for a “sin” fund jammed full of companies behaving b…
10 May 2021

Most Popular

Inflation is taking off in the US and markets really don’t like it
Inflation

Inflation is taking off in the US and markets really don’t like it

US inflation is at its highest for 25 years. Stockmarkets – and tech stocks in particular – have taken the news badly. John Stepek explains why, and w…
13 May 2021
Inheritance tax planning: the rules around gifting
Inheritance tax

Inheritance tax planning: the rules around gifting

There are plenty of legal ways to minimise an inheritance tax bill. Perhaps the simplest is to give away assets to reduce the size of your estate. Dav…
11 May 2021
Is it time to top up on gold? Or should you wait for a better opportunity?
Gold

Is it time to top up on gold? Or should you wait for a better opportunity?

Fears of inflation, money-printing and a global pandemic are all conditions that should drive the gold price higher. But it has been struggling. Domin…
12 May 2021