The Big Short
By: Himanshu Atre
Tags: Bonds, History, Finance, Civil War, American History

The Big Short

The story of how a fortune was made by beating the market with the speed of information

James Fisk (Source: Wikimedia Commons)

It was April 1865 and thirty-year-old James Fisk Jr(seen in the picture above) was anxiously awaiting news from the battle that would finally end America’s Civil War. The news and the resultant series of events that he was about to set in motion were going to earn him today’s equivalent of eighty million US dollars in a matter of a few days. This is the story of how Fisk used his understanding of Financial Markets combined with ingenuity that beat even the best news agencies at delivering news across the Atlantic to profit off the war.

A Primer on American Civil War

The industrialized Northern states of the United States had started abolishing slave ownership in the late 18th century and it soon became a matter of conflict with the predominantly agricultural southern states for whom slaves were critical for working on their vast plantations and thus their thriving cotton trade with Europe. Southern states seceded from the American Republic under the Confederate banner and war broke out in 1861 with the Union of northern states. The Union states, under the leadership of Ulysses H. Grant, defeated the Confederates in April 1865 in Virginia, in a battle that is often referred to as the ‘Waterloo of the Confederacy’, after which the Confederates surrendered and the war ended.

Fisk’s get rich quick scheme

A Confederate Bond document with removable coupons at the bottom(Source: Valley and View Collectibles)

As the war progressed, the Confederates raised funds to continue fighting by selling bonds (see an example of a Confederate bond in the image above) to investors in London, which at the time was the financial capital of the world. Although Britain had itself abolished slavery in 1833, mills in England depended heavily on cotton from America which was cultivated entirely by slaves.

British investors regularly invested in slave backed bonds which funded more cotton cultivation and were secretly sympathetic to the confederate cause. As the Civil War progressed and the Union started dominating, Fisk devised a plot to make a killing in London’s bond market. His plan was to ‘short’ Confederate bonds as soon as the war was over but before the news of their loss reached the market.

“Short Selling or ‘Shorting’ is a strategy used to make profits when the price of a asset drops. For example, you can short the stock of a company by borrowing the stock from someone and sell it in the stock market when the price is still up. When the stock price drops, buy the stock from the market at a lower price and return the stock back to the lender and pocket the difference. This strategy works only if you find someone to lend you the stock and if the price drops. The opposite of this is to go ‘long’ when you expect the price to rise. This is the more intuitive and commonly known investment strategy and where you buy low and sell high” -Investopedia

At the time of the war, a direct telegraph line between North America and Europe existed but had broken down and hence all news was carried by ships across the Atlantic and took many days to arrive. So then how does one get the news out to London before the news agencies even caught a whiff?

Fisk’s solution was both simple and effective. As the war started drawing to an end, he leased a fast steamer and stationed it at Halifax in Canada which is the closest port on the journey to England. Sitting in his office in Boston, when he heard the news of the battle in Virginia, he immediately sent a telegraph which said ‘Go’ to his ally, Hargreaves, who was waiting in Halifax. As soon as he got the message, Hargreaves, who was also a stockbroker like Fisk, boarded the fast steamer and raced toward England and reached London five days ahead of the ship bearing the official news.

Hargreaves walked London’s Financial district armed with this information which only he was in possession of and used the advantage to slowly borrow confederate bonds. He started selling them without arousing any suspicion from London’s clique of financial moguls. When the official news finally reached London, the bonds tumbled to nearly zero and that’s when Hargreaves bought them again at a huge bargain and made Fisk and himself richer by almost $5 million which would be close to $80 million today.

A perfectly legal plan well thought and meticulously executed across two continents. Fisk eventually went on to engage in many other endeavors, some legal others not so much, that made him even wealthier, and was eventually murdered by his business partner at the age of thirty-six.

Nathan Rothschild and the Battle of Waterloo

Battle of Waterloo(Source: Wikipedia)

Another similar story that is much more well known is that of Nathan Mayer Rothschild (see picture below) and how he manipulated the London Bond market using his early knowledge of the result of the battle at Waterloo where Britain defeated Napolean Bonaparte.

Nathan Mayer Rothschild (Source: Wikipedia)

Nathan was the founder of the London branch of the Rothschild banking empire and had funded Britain’s war against Napolean. The Rothschild brothers were based in many major European financial hubs from where they ran their banking empire by communicating closely with each other using a quick (compared to other contemporary means) and effective private communications network that involved pigeons and messengers on horses.

As the story goes, when Britain defeated Napolean at Waterloo, Rothschild used his efficient communication network to receive the news before even the King could. Upon receiving this news, Rotchshild encouraged rumors that Britain had lost the war which crashed the London market. Rothschild quickly started buying and made a huge profit when the real news reached and the bonds scaled new highs.

The Rothschild family and a lot of historians deny this account for the lack of evidence and blame it on anti-semitic propaganda while many historians including Niall Ferguson, in his biography of the Rothschild family, claim it to be true. While it is not hard to imagine that Rothschild may have made a substantial profit based on his financial acumen and simply the fact that he had funded the victorious side, to begin with, the jury may still be out on whether the thrilling story is true.

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