London, December 24, 1847—The British financial system was teetering on the edge of collapse when Ebenezer Scrooge and officials from the Bank of England huddled in the Bonnie Prince Charlie room of the “The Old Lady of Threadneedle Street” for a briefing that, in the words of one participant, “scared the hell out of everybody.”
It was September 18, and a major French railway had just gone belly-up. The credit of the United States was heavily strained by a war with Mexico. The Bank of England had agreed to issue uncovered bank notes, not backed by gold, to add liquidity to the system.
“How,” all present wondered, “did we get here?”
None wondered more than Mr. Scrooge. Just four years after vowing to spread the Christmas spirit through his private banking business, Mr. Scrooge is facing the prospect of having to sell his small bank to the Royal Bank of Scotland or face certain financial ruin.
There are plenty of culprits, like touts who peddled easy profit during the railroad boom, consumers who took on annual Christmas feasts they could not afford and British bankers who made cheap loans to risky borrowers in an effort to prevent Scrooge, Marley, Cratchit & Co. from capturing the entire London lending business.
But the story of how we got here is partly one of Mr. Scrooges’s own making, according to a review of his tenure that included interviews with dozens of current and former British banking officials.
In the earliest days of Scrooge & Marley, the firm practiced a tight money policy that lent only to the best quality borrowers, kept costs down and adopted conservative business practices. But after founding partner Robert Marley died, the firm seemed to flounder. In the winter of 1843, Mr. Scrooge emerged with a new business plan that included easy loans, generous bonuses for employees and a more active involvement with the city of London.
Scrooge pushed hard to expand lending to the British working class and became involved in several charities, both initiative that dovetailed with his ambition to expand the notoriety and business of Scrooge & Marley. He was widely lauded at the time for his new practice, and soon others throughout the British banking community began to copy his tactics of lax lending rules, escalating compensation for even junior bankers and the expansion of credit to the working classes.
As early as 1845, top officials at the Bank of England dismissed warnings from people inside and outside the European banking community that banking practices had grown too lax prices, railroad and housing prices were inflated and that a crisis was looming. And when the panic struck this year, the Bank of England misdiagnosed the reasons and scope of the downturn.
It now appears that the banking practices adopted first by Scrooge, Marley, Cratchit & Co. were based not so much on financial planning but on a rare form of madness.
“There is no question we did not recognise the severity of the problems,” said Leslie Wormhole, the chief economic adviser to Lloyds of London, which has recently been bailed out by the British government. “Had we known that the Scrooge, Marley, Cratchit & Co. bonds were issued upon orders of Scrooge’s imaginary ghosts, we never would have insured the bonds.”
Indeed, papers uncovered by Clusterstock.com suggest that in 1843 Mr. Scrooge underwent a psychological crisis in which he believed he was visited by several ghosts. The mental breakdown occurred during the holiday season, prime time for psychological stress according to mental health experts.
The insane origins of the new banking practices were well known to executives within Marley, Scrooge, Cratchit & Co. Clusterstock has obtained a study of the crisis the bank commissioned a London reporter named Charles Dickens to produce. CEO Bob Crachit ordered the report to be suppressed, according to people familiar with the matter. Cratchit, who took over operations for the bank this year when Scrooge was forced to resign, was one of the biggest beneficiaries of the new Christmas bonus program. His son, Tim “Tiny” Cratchit, has been the firm’s compliance officer for the past two years.
Critics say that the MarScroo bonds issued on bundles of loans that included railroad, housing and naval investments allowed the crisis to spread. Other banks joined the madness in the years that followed. Now that these have collapsed in value, bankers derisively refer to them as “Humbug Bonds.”
Mr. Scrooge, who has been criticised for the large “golden parachute” he received when he left the bank that bears his name, admits he was too focused on the present despite his pledge to live in the present, past and future.
“It turns out,” he said, “this idea of listening to ghosts and allowing your traumatic childhood memories to dictate business practices was not such a great idea.”