The Collapse of the French Stock Market
By the thirty-first of December, 1881, the annual trading volume on the French stock market had surged past 120 billion francs — some 96 billion marks — a figure five times the nation's GDP. France's GDP at the time stood between 25.8 and 27 billion francs, or roughly 21 to 21.8 billion marks.
Waldemar had hidden himself in the shadow of that vast volume and extracted astronomical profits from it.
"Every last share of Société Générale must be sold off by today. Understood?"
While the entire market still expected prices to climb, Waldemar's agents quietly unloaded their holdings. By the time the selling was done, he had pocketed some 65 million francs — about 50 million marks.
Fifty million marks on a three-year investment of twenty million. Not a bad harvest at all.
The annualized return came to ninety-two percent.
The moment the liquidation finished, Waldemar flipped his position.
"Right, then. Time we got back to our real business."
He ordered his agents to prepare for short selling.
Through December of 1881, even as Waldemar's capital drained out over four quiet months, the French market remained buoyant. With a total market capitalization of 25.4 billion francs — nearly five billion dollars — the exchange was not the sort of place to shudder because twenty million francs, or sixteen million marks, trickled away each month.
Bank stocks, where the outflows had concentrated, did soften somewhat, but nothing close to a freefall. French investors stayed optimistic about a recovery.
"Banks are still the play. As long as the French economy keeps growing solidly, the banks are guaranteed to turn a profit."
That faith had been forged by the enormous dividends bank shares had paid out since 1878. On that confidence, French bank stocks held their ground and absorbed the shock. Fresh capital large enough to reverse the slide, however, never arrived. Investors eyed other equities still racing higher and felt a pang of regret.
"Just sitting on the dividends feels a little thin. Can't we catch some of this upside too?"
While people fretted over that, men appeared around the Paris Bourse offering to borrow shares.
"Lend us your bank stock and we'll pay you one percent of the face value every month in interest."
"What? One percent a month?"
The offer was hard to ignore. Bank dividends might be generous, but they looked like nothing next to that rate of interest.
"Aren't those people short sellers?"
French equity investors knew what short selling was, in principle.
"They think now is a good time to short, do they?"
After running the numbers, most concluded they would still come out ahead by lending the shares. Even if the price dips for a while, as long as the fundamentals hold, a year will wipe out the loss. And in the meantime, interest plus dividends would make a rather handsome return. The calculation finished, they flocked to the short sellers.
"Borrow mine first!"
Before long, Waldemar's agents had borrowed an astronomical quantity of stock.
"They borrowed twenty million francs' worth of Société Générale alone?"
"Union Générale is worse. Thirty million francs' worth, they say."
Waldemar's people swept up bank shares as if vacuuming a floor — and made little effort to hide what they were doing.
Ah. When you're hauling it all off in broad daylight, how exactly are you supposed to keep that quiet?
Within days, Waldemar's brazen campaign had drawn the attention of the French Rothschilds, the Jewish house that dominated Parisian capital.
"Do those bastards really move like that because they're certain Union Générale is going to collapse?"
Alphonse de Rothschild, head of the French branch and a longtime enemy of Union Générale, took the situation very seriously. And for good reason.
We wanted to bring Union Générale down ourselves.
"Judging by the sums invested, they are almost certainly betting on Union Générale's bankruptcy."
"Sons of bitches."
Alphonse hurled his pen across the desk.
"What are your orders?"
"Since it's come to this, speed up our own borrowing for the short. Squeeze every franc of profit out of it before the rest of the rabble catch the scent."
"Understood, Chairman."
Under Alphonse's direction, the Rothschild managers began borrowing stock at a terrifying pace. The situation flipped overnight.
"Why are there suddenly so many short sellers?"
Unease rippled through the market, and prices began to plunge. The Rothschilds and other rival Jewish banks poured fuel on the fire with speculative selling, and people started to wonder whether investing in Union Générale had ever been a good idea at all.
Paul Eugène Bontoux, the bank's chief, stepped forward to soothe his shareholders' doubts.
"Beloved shareholders, rest easy. The rumors circulating are nothing more than rumors. Union Générale's finances are sound. The drop in the share price is the work of malicious speculation — nothing else."
As proof, he announced a massive new share issue for January that would shore up the company's capital. The announcement itself pushed the price lower, but it gave shareholders at least a thread of reassurance.
"If they issue that many new shares, they shouldn't run short of cash."
"This is the bottom for Union Générale. Buy! Let's go!"
A few who had misread the situation charged into the stock, and Union Générale briefly stabilized. The management, however, knew the calm could not last forever.
"Is the disposal going well?"
"Of course."
A loss was still better than being wiped out entirely. While the price still held some ground, the major shareholders and executives of Union Générale scrambled to dump as much stock as they could. The shares had climbed so high that even after selling, they would not lose their original capital.
Within days, Union Générale's price rolled over into freefall.
"What the hell is going on?"
"The big shareholders keep selling, that's what."
"So the people who run the place have already given up — and we're supposed to hold on? Sell!"
French investors finally grasped what was happening and began throwing their shares overboard. Union Générale plummeted toward the floor.
"It's crashing!"
A collapsing share price quickly became a crisis of confidence in the bank itself.
"If I lend you money, I'm never getting it back. I won't deposit another franc."
Union Générale had been surviving on cooked books, clinging to fabricated earnings. The moment those false results shattered, the bank's life was over.
"Fine — if you won't trust us, then we'll just go bankrupt!"
The bankruptcy declaration of Union Générale swept through the entire French banking sector.
"Those Union Générale bastards went under just because the stock fell? How the hell were they running the place?"
"Wait — what if the other banks are a mess too?"
As French depositors cast distrustful eyes on every bank in the country, even comparatively solid houses, starting with Société Générale, took successive blows and crumpled.
"Our share price has been cut in half?"
"And the outlook from here is even darker, they say."
That was only the beginning. When bank stocks — the pillars propping up the exchange — collapsed, the shock wave rolled through the entire Paris Bourse. Before long, a quarter of the brokerage houses listed on the exchange stood on the brink of bankruptcy.
"We're all going to die like this. Bail us out!"
While the whole French securities market screamed and came apart, most people could not think straight. Of course, not everyone was weeping. Waldemar's short sellers wrung sweetness from the blood and tears of French investors.
"Good Lord. How much profit is this, exactly?"
The 240,000 marks spent borrowing Union Générale stock came back as roughly 23 million marks once the company failed. And the profits did not stop there. Société Générale and the other banks crashed hard enough that Waldemar harvested nearly another 48 million marks from them. Add the smaller shorts scattered across the rest of the French market, and the total haul approached 100 million marks — on a capital outlay of less than two million.
In this barbaric nineteenth century, short selling is the god of returns.
Waldemar surveyed the enormous profit with deep satisfaction.
All told I've made about 170 million marks out of France. Time to pull out.
Linger any longer chasing more, and he risked a crushing blow from French financial authorities already half-mad with rage. The crash had inflicted astronomical damage; France could scarcely see straight. Immediately after the 1882 collapse, the market's capitalization shrank from 25.4 billion francs to 9.4 billion — and even by 1892, a full decade later, France had not recovered the lost ground. Under Waldemar's influence, the damage here ran still deeper.
Waldemar folded the board and routed his capital back through Britain with all possible speed. He could take his profit and walk away. The French could not.
Georges Magny, governor of the Bank of France, launched emergency lending to keep the banks from failing outright.
"Keep the banks breathing first. If the banks die, every company dies with them."
Beyond the bailout, Magny ordered an investigation into Union Générale, the fuse that had lit the whole disaster. What emerged was a catalogue of squalor: fraudulent accounting, false earnings reports, and artificial price support through the cancellation of treasury shares.
"No wonder the speculators went berserk."
To guard against the same rot in any other bank, France announced a countermeasure against the speculative class.
"From this day forward, short selling is banned throughout France!"
"Ah. That comes a bit late. Or does it?"
Waldemar clicked his tongue, thinking of the French companies he had planned to short next.