The Lombard Ban

Waldemar had thrown himself into the work of building his image in high society, but he had not, by any means, taken his hands off everything else.

"It looks as though another great wind is about to blow."

"In that case, I'll begin preparing the operation."

Attuned to the shifting currents of international affairs, Waldemar set about making ready for another round of profit.

This past June, Germany and Russia had signed the Reinsurance Treaty, hoping to resolve the grave security crisis left by the collapse of the League of the Three Emperors. Because Waldemar had already taken care to point out the treaty's "defects," the Conservative revolt was incomparably fiercer than it had been in the original history.

"Our party will not tolerate this betrayal of Austria!"

Even so, ‍‍‌‌⁠​​⁠‌​​‍​​‍​‌​⁠‍‌‍⁠⁠‌⁠‌‍‌‍‌‌‌‍⁠​‌​‌​‌‍‌‌‌⁠‍​​‌‍⁠‌‌⁠⁠Bismarck succeeded in pushing the treaty through, leaning on the Emperor's support.

"This is a treaty in the national interest. Do not dare set party doctrine against the welfare of the nation!"

But the Russians, watching the backlash inside Germany, began to wonder whether this scrap ‍‍‌‌⁠​​⁠‌​​‍​​‍​‌​⁠‍‌‍⁠⁠‌⁠‌‍‌‍‌‌‌‍⁠​‌​‌​‌‍‌‌‌⁠‍​​‌‍⁠‌‌⁠⁠of paper called a "reinsurance" could be trusted at all.

"The moment Bismarck comes under even modest pressure, this treaty will come apart."

That doubt sent Russia reaching toward France earlier than it had in the original timeline. The Germans, in turn, were provoked by what they saw the Russians doing.

"Look at this spectacle. It was obvious Russia would go running to France — so why in God's name did we sign a Reinsurance Treaty with those Ivans?"

The Conservatives hammered Bismarck over the affair. To suppress the revolt inside his own party — the charge that he had signed a meaningless treaty and only endangered Germany's security — he had no choice but to sanction Russia.

"If the Russians insist on approaching France, we shall have to make them understand that their economy will be the one to suffer for it."

Bismarck played the economic-sanctions card. By October, the threat of those sanctions was already shuttling back and forth between Berlin and St. Petersburg.

Even setting aside the question of whether the Reinsurance Treaty was worth the paper it was written on, Germany and Russia were never going to have an easy relationship. The two empires, along with Austria, were also at loggerheads over the accession of Bulgaria's new king, Ferdinand I. An economic war between Germany and Russia was as good as a settled fact.

Waldemar began laying the groundwork to seize as much plunder from that war as he possibly could. John Connor and the rest of his principal advisors gathered in Berlin to discuss the scale of capital to commit and the form ‍‍‌‌⁠​​⁠‌​​‍​​‍​‌​⁠‍‌‍⁠⁠‌⁠‌‍‌‍‌‌‌‍⁠​‌​‌​‌‍‌‌‌⁠‍​​‌‍⁠‌‌⁠⁠their participation would take.

After a long conference, Waldemar settled on a strategy: bet on a decline in Russian government bonds before the sanctions hit, then scoop those bonds up at fire-sale prices the moment the announcement dropped and sell them into the Paris financial market.

"The German government is hardly going to sit idle and watch us do that."

That objection actually came from the management. Waldemar decided to move indirectly through Amsterdam, so as not to provoke the German government more than necessary.

On his instructions, John Connor's people used Amsterdam brokers to borrow government bonds on a massive scale in the major German-speaking markets — Berlin, Frankfurt, and the rest. They also entered into forward sales and contracts for difference through banks and securities dealers. The volume of bonds John Connor's group secured came to nearly fifty million marks.

At the time, Russia's national debt — excluding the obligations of railway companies and the like — stood at 4.5 billion rubles, or 10.5 billion marks. At the original history's exchange rate, the figure would have been 14.6 billion. Against that sum, the bonds John Connor's people had locked up looked modest. But given the volume actually circulating in the German capital market, and the volume that could realistically be obtained, it was very nearly the practical ceiling.

John Connor's group disposed of every bond they had borrowed, then sat on that mountain of short positions and forward contracts and waited for the German government's sanctions to fall.

On November 5th — five days earlier than in the original history — Bismarck issued the infamous Lombard Ban, forbidding anyone from using Russian government bonds as collateral for loans in the German capital market.

Immediately after the measure dropped, bonds with a face value of one million marks were trading at eight hundred and twenty thousand — a shocking collapse.

"What? Has a war broken out? Why are the bonds doing this?"

"That's it — Russian bonds are finished!"

John Connor's people had been waiting for precisely this moment.

"Start trading!"

Tens of millions of marks' worth of bond-related transactions hit the market. The Dutch brokers, following Waldemar's side's instructions, executed the enormous volume of borrowed-bond trades and conditional forward sales.

"What is this? Did those people actually see the crash coming? How do they have that many contracts?"

"We're ruined."

German banks and securities dealers took enormous losses on the contracts for difference they had written with them. ‍‍‌‌⁠​​⁠‌​​‍​​‍​‌​⁠‍‌‍⁠⁠‌⁠‌‍‌‍‌‌‌‍⁠​‌​‌​‌‍‌‌‌⁠‍​​‌‍⁠‌‌⁠⁠Using those difference contracts and similar instruments, John Connor's group pocketed more than ten percent of face value without ever leaving their chairs.

"This is the sweetness of unearned income — of never having to lift a finger. Capital making capital. What a beautiful story that is."

Had they not gone through Amsterdam, they might have taken even more. But considering the cost of staying safe, this was the right way to do it.

"Five and a half million marks. Not small. Not large, either."

John Connor's people then used the Amsterdam brokers again to buy bonds aggressively from banks and businessmen whose cash flow had been choked off by the Lombard Ban.

"If you don't sell now, we'll take our business elsewhere. What will it be?"

For people whose throats had already been closed by the Lombard Ban, there was no real choice.

"We'll sell. But you'd better give us a fair price."

"Of course. I give you my word on a reasonable price."

The Dutch brokers' busy dealing with Germans did not stay out of the German government's sight for long. But—

"We cannot touch what is moving through the Dutch side."

Amsterdam was a financial hub through which international capital flowed. Intervening there and applying pressure was no easy matter, even for Germany.

"Then what do you propose we do?"

"Leave them be for now. But do not forget to keep them under watch."

"It will be done."

For a time, Berlin could only watch as the Dutch raked in the profits. The Dutchmen working on John Connor's commission scooped up Russian government bonds in bulk at roughly eighty percent of face value.

The scale, of course, was limited. Had the Dutchmen arrived wearing the identity of some mega-bank consortium, they could have bought hundreds of millions of marks' worth of bonds without breaking a sweat. As mere brokers, they could not handle transactions of that size. Even tens of millions of marks was already a considerable strain on a broker's capacity.

Following John Connor's instructions, the Dutch concentrated on small- and medium-scale deals with individual banks and businessmen rather than one giant transaction. The bonds they gathered that way came to two hundred million marks in all.

John Connor's group took those bonds to Paris and sold them to the French. The Berlin banks would attempt the same Berlin-to-Paris bond trade a few days after the sanctions; John Connor's people had executed the model version of it from the very beginning, and executed it brilliantly.

"We bought at a hundred and seventy million marks and sold at two hundred. After commissions, we cleared twenty million."

"Not bad. And yet somehow unsatisfying."

For something they had prepared so meticulously for this economic war, the take was a little thin. Looking at a total profit of 25.5 million marks, Waldemar wanted more. John Connor wanted more as well.

"Then let us run another lap."

John Connor's people had already been eyeing a new target worth speculating on. Namely—

"Next, we go after the Russian railway bonds."

They concentrated on buying up Russian railway bonds that had also been driven down by the German government's financial pressure. A substantial portion of those railway bonds were directly guaranteed by the Russian government — as good as sovereign debt — and therefore worth investing in.

The people holding government-guaranteed railway bonds tried to extract the highest possible price.

"These are as good as Russian sovereigns. We cannot agree to a price that cheap!"

"And what, precisely, are Russian sovereigns trading at just now?"

No matter how hard they tried to talk the price up, given the scorched earth of the government-bond market, they were in no position to refuse what Waldemar's people were offering. There were not many players with the capital to buy railway bonds in the first place.

"How much of this can we take in?"

"A generous estimate would put it at around two hundred million marks."

John Connor's group targeted regional banks and businessmen first, then the large banks as a second priority. They approached it that way out of concern for interference from the German government.

Once they started buying railway bonds, the German government found itself in a dilemma.

"Do those Dutch bastards take us for fools? Government bonds weren't enough for them — now they're going after the railway paper as well?"

The government's hesitation did not last long.

"Don't leave those people a single drop of soup."

Berlin decided it was time to send the Dutchmen in Amsterdam a warning. With even the Prussian secret police brought in to lean on them, John Connor's group had no choice but to scale back their railway-bond purchases.

"Total purchases come to one hundred million marks."

"And the purchase price?"

"Seventy-five million."

Waldemar thought the purchase price was acceptable. Of course, given the state of the railway-bond market, driving the price even lower would not have been impossible. Unguaranteed commercial railway bonds — those without a Russian government backing — had crashed to as little as thirty percent of face value.

Waldemar's side did not touch those ordinary commercial railways, however. The market would not take them readily, or demanded such enormous discounts that the profit margins were too thin.

"Dispose of all of it in Paris."

London and Amsterdam were not bad markets, but the only place that would buy Russian government bonds and railway bonds at the best prices, and in bulk, was Paris. John Connor's group disposed of the Russian railway bonds for roughly ninety million marks. After the commissions paid to the Dutch, the profit came to twelve million marks.

All told, the total profit John Connor's group harvested around the Lombard Ban came to 37.5 million marks. For a result obtained by turning over a little more than a hundred million marks in capital, the return was quite handsome.

Waldemar was satisfied with the outcome. The German government would not be pleased that someone had stripped profits out of the German capital market — but that was not Waldemar's concern. He calmly closed the books on the profits and began turning over next year's plans in his mind.