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THE SOUTH SEA BUBBLE

inglese

ALTRI DOCUMENTI

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CONDIZIONALE

1800: Romanticism - Graveyard School of Poetry

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INTRODUCTION

In my previous essay I have mentioned and discussed how a complex network of intersecting corruption of the English political, legal, financial, and cultural establishment all contributed to the development of the South Sea Bubble.

In this essay I am going to explain which mechanism were used to keep the share price of the S 343d39d outh Sea Company artificially high and who profited and who lost from the bubble and how.

Finally, I will compare and contrast this answer with the issuance of internet stocks in the 1990s.

THE SOUTH SEA BUBBLE

The South Sea Company, offered to buy out a large portion of the English National Debt in 1719 which had reached an astonishing total of £130 by the end of the war. Making it resemble more of a financial management organization than a commercial enterprise

In January 1720, South Sea Company stock was trading at a modest price. In an effort to rouse up popular interest in the company's stock, the directors disseminated false declarations of success and imaginary tales of South Sea assets.

The share price rose to around £200 in February. Interest in the company was furthered along in March when the government authorized a proposal from the company to assume yet more of the national debt in exchange for shares of South Sea Company stock.

The South Sea Company's proposal was chosen over that of its principal competitor, the Bank of England because has the support of the king and from some parliamentary. With investor confidence increasing, the share price climbed to approximately £350 by the end of March.

"Holders of long-term irredeemable bonds like annuities would be persuaded to trade them for company stock. The only reason why a holder should want to make the trade of annuities against stock was a belief that a swift appreciation of South Sea stock would make him more money than he could ever dream of in a lifetime's receipt of annual interest payments."

As the South Sea Bubble was developing, a general interest in joint-stock investment opportunities was also picking up rapidly. By the middle of 1720, the market was flooded with a remarkable range of new ventures, each creating smaller bubbles as the speculative frenzy mounted. As reported by the usagold.com the: "South Sea Company stock benefited from the investor mania. So great was the confusion of the crowd in the alley, that shares in the same bubble were known to have been sold at the same instant ten per cent higher at one end of the alley than at the other."

Investor confidence began to disappear, however. The sell-off began by early July and the collapse occurred rapidly.

In September 1720, banks failed when they could not collect loans on inflated stock, prices of stock fell further, and thousands were ruined.

In 1721 took place a formal investigations which: "discovered that 462 members of the Commons and 112 aristocrats were involved", and showed a network of dishonesty, corruption, and fraud that led to the prosecution of many of the major players in the crisis, including both company and government officials.

The company was wound up, with a complete re-organization of the Company, the Directors removed and penalized with loss of the bulk of their estates judged to be ill-gotten, part of the Company's stock was engrafted onto the capital of the Bank of England, and the remaining stock divided into half.

It was clear to investors at the time, however, as it would be for investors in the London capital market for centuries after, that the subscriptions had a greater value than the current full shares for two reasons:

One reason was that they enabled speculators in the stock to leverage their investments, gaining the rise in the price of the full share on a partially paid up subscription for a new share.

Second reason certainly understood by the infamous stockjobbers crowding the coffee houses of Exchange Alley, was the option value of defaulting on future instalments in case the stock began to lose value in the market. Share warrants, as they were later named formally, always priced higher than the regular shares.

Finally, if the option value varied among the three subscriptions, and they certainly did as the value of defaulting on future instalments rose sharply with the Third Subscription, we should expect differences in the prices of the subscription shares to emerge, and more so as the regular stock began its precipitous decline in August 1720.

"Fortunes had been lost. But others had been won. The crisis was more psychological than fiscal."

THE INTERNET BUBBLE

The South Sea Bubble affair takes on new allegorical overtones with each generation of financial exploration. In the early years of the twenty-first century, it is the events of the dotcom bubble scandal that call to mind the lessons of the past.

The Internet market of 2000 is surprisingly close - despite the immense difference in technology, culture, most of the incidents of daily life - to the events of the 1720's.

Around 1994, the internet, was first being made available to the general public. By the late 1990's the dotcom had evolved as a way to communicate using email, use chat rooms and view informational websites.

Almost immediately, businesses saw the internet as a profit opportunity. As the internet moved from the hobbyist domain to a commercialized marketplace, online business owners became fantastically wealthy. Many technology companies were now selling stock in IPO's.

During the Internet bubble, Web-based brokerages started making promises - which were largely false - to democratize this market by giving small traders access to IPO stock. These brokerages themselves failed to get access to as many shares as they expected. They claimed to assign you shares on a casual lottery method.

These brokerages were unable or unwilling to deliver on their promises and created significant dissatisfaction among customers who were again reminded that they formed part of the sucker class.

During the Internet bubble, bankers found several ways of evading responsibility:

First, there was a general weakening of standards, a sense that none of the usual rules applied. Instead of five years of operations and one of profitability, companies were going out after just months of operations, with substantial losses and no clear plan for profitability but big promises of future exponential sales only on business plans.

Secondly, the bankers frequently sold their own companies during this period. Companies which had been proudly independent for more than a century suddenly merged with large banks and brokerages, creating a break in the moral continuum

Moreover, when the price of every Internet stock gave way, the bankers were able to present it, with significant support in the media, as a mysterious storm that broke over everyone's heads, which could not have been predicted or avoided by anyone. I believe this is a lie and I suspect most bankers knew pretty well when the market would collapse.

When the Internet bubble bursts, lot of ordinary people suffered. When the South Sea bubble burst, investors naturally wanted nothing more to do with investing overseas, and this had enormous repercussions for world trade. Similarly, in the thirties when a country's financial institutions got into trouble, they adopted protectionist habits, which affected everyone. Loss of faith in the Internet has set back development for years. The Internet is the great democratisation factor of our times, making a level playing field for people of all races and cultures. But the gigantic bang when the bubble busted affected the financial institutions so profoundly that even normal business activity were affected and the broader market suffered. Of course, investors did eventually regain the courage to finance overseas developments, just as protectionist barriers were also eventually removed. Nothing was able to keep the Internet from flourishing, but it was a bumpy ride in the short term.

Compared to all-time lows before the bubble's high point, however, the technology rally in the late 1990s generated much greater increases than even South Sea stock.

These days, investors in Japan are in "panic" after allegations surfaced about one of the country's most popular internet companies.

From the latest news, emerged that the offices of Livedoor Co. (which operates one of Japan's leading portals), had been raided by officials investigating allegations that the company had tried to boost its share price by spreading false information.

Reports from Japan also suggest that the authorities have opened a second probe - this time into allegations that the internet company covered up losses of one billion yen. Japanese news reports that the firm is suspected of cooking the books by transferring profits from, affiliate companies to the main company.

Now officials are wading through thousands of emails to try and figure out if there is any truth in the allegations. But it gets worse. News about Livedoor set off a flurry of panic selling. In turn, this overloaded the computer systems at the Tokyo Stock Exchange (TSE) forcing it to suspend trading early for the first time in more than fifty years.

CONCLUSION

History repeats itself and human beings do not seem to learn from their previous experiences. We have seen bubbles like the South Sea Company in the UK in the 18^th century and others like the internet bubble globally in the last century. If anything the new technologies seems to make bubbles more of a global problem then a regional exuberance. Bubbles are a consequence of human nature rather than not enough regulated markets. Markets eventually do their job by bursting them and bringing asset prices in line with "realty". We should start to worry when these bubbles do not burst rather than when they do.