Book review: A Fabulous Debt

The craze for fixed-income investing hit such a fever pitch in 1820s London that investors were clamoring to purchase debt from high-risk borrowers like the newly independent Latin American nations of Chile and Peru. Even the country of Poyais was able to borrow at a mere 6%.

Unfortunately for London’s investors, Poyais did not exist. It was a “humongous, comically elaborate lie," financial journalist Robin Wigglesworth says.

The lie was told by the improbably named Gregor MacGregor, a soldier of fortune turned financial fraudster who convinced investors that an empty patch of Central American jungle he had received in return for his mercenary services was a fully fledged nation, complete with a bustling capital city, gold-filled rivers, fertile farmland, and an elaborate system of laws and government.

It was just plausible enough to be believed, apparently, because the fictional nation of Poyais was able to borrow the staggering sum of £200,000 from the City of London — a colorful example of the madness that bond investors periodically succumb to.

In “A Fabulous Debt: The Epic Story of How Bonds Built the Modern World”, Wigglesworth relates the history of bonds through a series of these kinds of mini-biographies — a “life and times” approach that makes a potentially dull topic anything but.

He uses the story of MacGregor to illustrate how an enthusiasm for bonds can change the world (by making London the world’s first financial center, in this case) — but also wreak financial havoc (when investors are “infected by madness”).

The very first character in Wigglesworth’s story is Doge Vitale II Michiel, who inadvertently invented bonds when he imposed a tax on the wealthy citizens of Venice to finance a naval campaign against Constantinople in 1171. To soften the blow, Doge Vitale framed the compulsory levy as a loan to be paid back — with interest — as soon as the campaign was successful.

Uniquely, anyone who needed funds before then was free to sell their claim to a willing buyer.

Bonds are simply tradeable loans, Wigglesworth explains, and this was the first.

The campaign against Constantinople was not, however, successful. When an assembly of Venetian creditors heard that the navy they paid for had returned defeated (carrying the plague, no less), they chased the Doge down and stabbed him to death in the street. 

The good news, however, was that the city of Venice continued to make payments on the loans. This set an example of perpetual government debt that has shaped the world ever since.

Wigglesworth relates how this later came to be known as “Dutch finance,” in part through the story of Elsken Jorisdochter, a Dutch woman who in 1624 purchased a 1,200-guilder bond to fund repairs on a dike along the River Lek.

The writing on the front of the bond (printed on cured goatskin) pledged the bond to Jorisdochter personally: 

(I love this. How much more willing would you be to lend to the government if the bond was inscribed to you personally, along with how they planned to use your money?)

Jorisdochter’s personalized bond (pictured above) is now the oldest active bond in existence. A local Dutch water authority still pays €13.61 of interest on it a year.

The era of Dutch finance also produced the first known mathematical work on how to value bonds, written by the statesman and polymath Jan de Witt, who published his “Value of Life Annuitiesties” shortly before he was murdered (and partly eaten, Wigglesworth notes) by a monarchist mob in The Hague in 1672.

Wigglesworth’s mini-biographies from the modern era of finance were less likely to end in violence, but no less colorful.

In a chapter on junk bonds, Wigglesworth relates an anecdote about the lengths Michael Milken went so as to be undisturbed while reading financial statements during his daily five-hour bus commute into New York City:

Milken’s relentless focus opened the bond markets to a new breed of corporate borrowers and raiders that would transform the American economy. 

Wigglesworth brings the 1980s, greed-is-good era of finance to life through the story of Lewis Ranieri, who went from a $70-a-week mailroom job to inventing the market for securitized bonds. Wigglesworth gives us a sense of what that era was like by quoting a co-worker’s assessment of Ranieri:

Ranieri’s team of loud, crass, working-class traders at Salomon Brothers, emblematic of 1980s Wall Street, famously ate cheeseburgers for breakfast (a tradition that endured until my time at Salomon nearly 20 years later). 

The 1990s were different. Wigglesworth hints at how much things had changed by describing how Ranieri’s ex-colleague at Solomon, John Meriwether, celebrated the launch of his hedge fund LTCM with colleagues “by ordering a huge shipment of high-end Burgundy wine.”

Meriwether’s new colleagues were nothing like his old ones.

It did not end well, of course. The professors’ professors got wildly overleveraged and lost all of the huge amounts of money Meriwether successfully raised from investors and nearly sank the global financial system in the process.

It’s a lesson that “A Fabulous Debt” suggests investors have to relearn every decade or so: “Crowds can screw up,” Wigglesworth writes in the introduction. “In fact, this book will discuss at length how often the greed of humankind has swamped our senses and warped the bond market from engine of growth to machine of madness.”

Still, he concludes on a mostly optimistic note: “The bond market’s endurance and continued growth after almost a millennium are testament to its supreme usefulness and adaptability.”

Wigglesworth’s account of that millennium also makes it seem supremely entertaining. 

— Byron Gilliam

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