Short Selling Vienna
Victoria, Princess Royal, had secured a British man to assist her son with his investments.
"Baldi. This man will help you."
The man was a financial talent she had hunted down through every connection she possessed.
A gentleman in a tailored suit bowed with impeccable courtesy.
"Your Highness, I am John Connor. It is an honor to meet you."
John Connor did not for a moment underestimate the young prince. Long before he entered the drawing room he had heard, until his ears rang, every anecdote of the prince’s “genius” from the Princess Royal’s ladies-in-waiting.
"A pleasure, Mr. Connor."
Waldemar did not disappoint those expectations. His bearing and formal speech, impossibly mature for a child of five, made him seem less a boy than a diminutive adult afflicted with dwarfism.
Do royals truly carry special blood after all?
Once the introductions were finished, Waldemar issued precise instructions.
"Please proceed."
First: open accounts under Jewish names.
"Accounts under Jewish names, Your Highness?"
"Yes. Should the short selling ever cause trouble, the blame will need to be shifted onto the Jews."
Even at that tender age the prince’s careful attention to risk left a deep impression on John Connor.
"I shall prepare everything thoroughly."
Second: by the end of April, borrow shares of the Rothschild family’s Southern Railway Company—the target of the short-selling forces—then commence the short selling on the ninth of May.
"Your Highness, short selling carries no small burden. If the price does not fall, the interest alone will inflict enormous losses."
"I have already taken that into account."
Victoria, Princess Royal, who could make no sense of the conversation, resolved to ask once it was over.
Third: once the market collapse had secured sufficient profit, transfer the funds to America.
Waldemar ordered the final move to America in preparation for the financial panic that would strike the United States in September. The rising empire of America possessed a stock market far larger than that of the aging empire of Austria, and far fewer parties whose sensibilities needed to be considered.
"America, Your Highness? Forgive me, but that is the New World ruled by robber barons. To contend with the lawless cowboys who seize stocks by force, one needs power of equal measure."
"Mother will handle that difficulty."
"Ah—of course. Your Highness has her."
The network commanded by the eldest daughter of the British royal family was not one even the robber barons could lightly challenge.
While John Connor set the machinery in motion, Waldemar calmly watched the share prices. As of April 1873 the average price of the Austrian Southern Railway stood at 210 gulden; with a theoretical capital of 2,000 marks Waldemar could have purchased 3,260 gulden worth of stock.
One mark equaled 1.75 gulden.
Naturally, having no intention of buying, he planned instead to borrow the Southern Railway shares from investors at one percent interest.
When John Connor reported this arrangement, Victoria was horrified.
"Baldi. I looked into this short selling of yours and it is truly dangerous. You could lose far more than the money I gave you."
"That will never happen."
Waldemar explained that even short selling had its limits.
"Hmm. If this is merely a lesson in investment for you, then I give my permission."
With the Princess Royal’s consent secured, John Connor went seeking investors. Though the shares were regarded as a safe Rothschild-backed asset, the stagnant price since the beginning of the year had left holders disappointed; they gladly lent the stock to Waldemar in expectation of a modest interest return. The volume thus borrowed reached the staggering sum of 326,000 gulden.
Of course selling only these will not make real money.
Waldemar also exploited a loophole in the naked short selling system that, in this world, was perfectly legal. This time even the seasoned financier John Connor was appalled.
"Your Highness. If we go this far, it will not be a hundred pounds but hundreds of times that amount that may vanish. Fail to cover the shares at maturity and it is the end!"
"I know."
"This matter must be reported to Her Highness the Princess Royal."
When Connor made to seek her out, Waldemar stopped him.
"No."
"Your Highness."
"Mr. Connor—just a moment, just one moment. Hear me out once, and then decide."
After a long silence John Connor spoke.
"I am granting you only the chance to explain."
"Thank you, Mr. Connor."
Waldemar calmly laid out his reasoning on the present state of the Austrian market. As he listened, John Connor’s expression grew complicated.
Is this child truly a monster?
Even the finest financier at Baring Brothers, reputed the best in Britain, would not have analyzed the situation more accurately than this boy.
"What do you think?"
John Connor met Waldemar’s blue eyes and asked,
"If I assist Your Highness this time, what do I gain?"
"You will purchase my trust."
"By helping Your Highness deceive Princess Victoria I may well earn her wrath—the eldest daughter of the British crown and Crown Princess of Germany. If the price is merely Your Highness’s vague trust, is that not rather cheap?"
"Whether the price is cheap or dear, you will see for yourself. Of course, as the one presenting the cheque, I believe its face value will prove expensive."
Instead of answering, John Connor settled his top hat firmly on his head. Even the composed Waldemar felt a flicker of anxiety.
"Mr. Connor, are you going to Mother?"
"No, Your Highness. I am going to perform the work you entrusted to me. At present you are my employer, are you not?"
Only then did Waldemar break into a radiant smile.
On the ninth of May 1873—Black Monday—the moment the Vienna Stock Exchange opened, the shares of speculative banks and railway companies turned to worthless paper and panic selling poured forth. Short-selling forces joined the flood; prices smashed through the floor and plunged toward the underworld.
As the crash accelerated, leveraged investors who had bought on tenfold margin with credit loans saw their positions forcibly liquidated, dumping still more stock onto the market. The death spiral was complete.
In the midst of the chaos John Connor and Waldemar poured onto the market not only the shares they had borrowed but fictitious stock they had never borrowed at all—naked shorts totaling a full 1.2 million gulden. By modern standards it was an outrage that would have landed a Korean securities firm in prison; in this age of lax law and laxer oversight it raised no difficulty.
As a result the Southern Railway fell 25 percent on the first day—worse than the original 23 percent decline—and by mid-May had settled in the high 100s gulden. At that point Waldemar decided to wash his hands of the trade. He swiftly bought up the shares flooding the market and closed out the naked short positions.
By the end of May, when every operation was complete, Waldemar had realized an average profit of 35 gulden per share, including the naked shorts. Total profit: 210,000 gulden—36,750 marks, or 1,800 pounds.
Waldemar presented the proceeds to his mother.
"Baldi… you…"
"A respectable return, is it not?"
Victoria had received a few scraps of information about the investment, yet the actual sum her son had earned left her speechless with astonishment.
"This is truly the money you made?"
"Why would I ever lie to you, Mother?"
In truth, had Waldemar set his mind to it he could have earned far more. Other stocks on the Vienna Exchange had crashed from an average of 180 gulden to 10 gulden—a 94 percent collapse. A properly executed campaign could have yielded a larger fortune. John Connor himself had urged that if they were going to act they might as well go all the way. But enlarging the affair merely to fatten pocket money risked making Waldemar himself, rather than “the Jews,” the target of public fury. This prudence raised Connor’s estimation of the boy still higher.
Having finished his report to his mother, Waldemar requested an agent who could take charge of the coming American operations. John Connor, his accomplice in deceiving her, was certainly trustworthy, yet his background would be of little help in America. When her son, having finished with Austria, now cast greedy eyes upon the United States, Victoria again voiced concern.
"Baldi, is the New World not far too dangerous? Even if you know how to make money, prying anything from the pockets of those lawless savages will not be easy."
The brutality of the robber barons was well known even to Old World aristocrats. In a later age they would machine-gun striking miners and bomb them from the air; even now they maintained private armies, printed counterfeit stock to block takeovers, and conducted shareholders’ meetings by raw force.
Well, they are still the same breed of savage who run private armies, forge shares to stop mergers, and settle general meetings with fists.
Yet Waldemar felt no fear.
"Ordinary people, yes. But I am different. I have a mother who is a British princess."
Victoria’s mouth closed. Using her own person as a shield left her no room for rebuttal; she knew better than anyone how extraordinary her position was.
"Baldi, they might still harass you without realizing you are my son."
Waldemar had been waiting for that very objection.
"Then we simply borrow someone from the British royal household. Surely even those savages will recognize a man of the British court?"
Once again the Princess Royal found herself persuaded by her youngest son’s logic. She promised to write to Queen Victoria and secure a suitable person.
"Thank you, Mother."
Waldemar felt anew how secure it was to grow under the protection of the British royal family’s eldest daughter.
The skirts of the Princess of the British Empire—how warm they are.
Victoria kept her word. Not long afterward the British court agreed to lend the Princess Royal a man to manage her property. With every preparation complete, Waldemar gathered the funds and cabled John Connor, already waiting in America.
"Mr. Connor, begin the research I requested."
All that remained was to determine the precise moment to plunder the pockets of America’s robber barons.