Overend, Gurney and Co. was formed in 1805 by the merger of Richardson, Overend and Co., originally founded by Thomas Richardson in 1802, and Gurney’s Bank located in Norwich and founded in 1770. Thomas Richardson developed the bank’s business for discounting bills that became the foundation of the firm’s profits. Overend, Gurney and Co. soon became known as the banker’s bank since they discounted the bills issued by other banks and held them until maturity, and made loans against bills issued by other banks. Between 1825 and 1865, Overend, Gurney and Co. was the greatest discounting house in the world. Only the Bank of England could match its resources. Discounting was a reliable business that made consistent profits, but not content with the steady income from discounting bills, the bank wanted to expand into presumably more profitable investments. The only certain thing about a bank moving into uncertain investments is the certainty that the bank will probably end up losing money, which it did. <3>How to Ruin a Good Business England was going through one of its periodic railroad booms in the 1860s with opportunities for profitable expansion also occurring in shipping, mail delivery, and other transportation activities. Between 1859 and 1862, the Quakers turned their back on the sound banking policies that had made their bank successful and managed to find speculative investments that won them the equivalent of a financial Darwin award. It is amazing how a bank that could be so conservative in one area could be naïve enough to get involved with scammers who promoted projects that made themselves money, but were otherwise doomed to failure. The bank advanced money to invest in plantations in Dominica that grew little food, financed a railway line across the wilds of Ulster where there were few passengers, invested in the Greek & Oriental Steam Navigation Company which was unable to develop its business, failed to get the mail service for the Galway Line and foolishly invested in the Millwall Iron Works on the Isle of Dogs which generated losses, not iron. The last three investments cost the bank around £5.2 million. As Walter Bagehot, then the editor of The Economist said, ”one would think a child, who had lent money in the City of London would have lent it better.” As a result of these investments, the bank had liabilities of around £4 million, and liquid assets of only £1 million. As the losses mounted, Overend needed capital to keep the bank solvent. The company decided to go public and issue shares as a way of raising enough money to cover their losses and return to a profitable future. The bank converted itself into a limited liability company, and offered 100,000 shares to the public at a par of £50, requiring £15 up front and reassurance that an additional call on capital would be unlikely. Of course, the prospectus never mentioned the consequences of the bank’s bad investments, the excessive liabilities, and other problems, but focused on its strong reputation and the potential profits of the company.  

When Limited Liability Adds Insult to Injury

Overend, Gurney & Co. stock started trading on August 21, 1865, and hit a high of 22.5 on November 16, 1865. As the price rose, investors who had missed out on the initial offering bought shares, keeping the price around 20; however, they were unaware of the rot that lay beneath the façade of the bank. By the end of February, 1866, shares still traded above 20, but began to drift down, falling below 15 by late April. In April, the investment in the Millwall Iron Works on the Isle of Dogs began unravelling, producing £500,000 in unexpected losses for the bank. The financial markets in London were reaching the heights of a small bubble, and the Bank of England responded by raising the lending rate from 6 per cent to 7 per cent on May 3, to 8 percent on May 5 and to 9 per cent on May 11 and 10 percent on May 12. As money tightened, Overend tried to raise capital by collecting on debts owed to it by the Mid Wales Railway and others, but when the bank was unable to get this money, it became evident that the bank would soon become insolvent. Overend’s only alternative was to go to the Bank of England, which as lender of last resort, could have bailed out Overend, Gurney and Co. However, the Bank of England declined, not because allowing Overend to fail would reduce the amount of competition the Bank of England had, but because Overend was in such poor shape that no amount of money could have saved it. On May 10, 1865, the bank announced that it was suspending payment on deposits. The price of the stock had closed at 10 on May 10, fell to 3.5 on May 11 and to 0.5 on May 12. Until then, few had suspected that the greatest name in wholesale banking could have collapsed so suddenly. If Overend, Gurney & Co. was unsafe, could any bank be safe? A financial panic ensued and during the next few months, over 200 companies, including many banks, failed as well. Many felt the directors of Overend had committed fraud by issuing a prospectus to raise money for the firm while failing to mention the true state of the bank. Of course, in 1866 there was no SEC to review prospectuses before they were issued, and there were few legal precedents for financial fraud, but the demand for justice became so overwhelming that on January 26, 1869, the directors of Overend & Gurney Co. were committed to trial for fraud. In December, 1869, all six of the Overend, Gurney & Co. directors were acquitted. As during the 2008 financial collapse, although the directors had obviously made some very bad decisions, and were less than transparent, they were found not guilty of having conspired to defraud investors and were allowed to go free.  

The End of Overend

The failure of Overend, Gurney and Co. inspired writers for years to come. Anthony Trollope used one of the swindlers involved in the collapse for his novel, The Way We Live Now, Bagehot frequently referred to the Overend fiasco in his book Lombard Street, and Karl Marx used the Overend collapse as a symbol of all that was wrong with capitalism. Just as no one from Wall Street went to jail as a result of the collapse of Bear Stearns, other companies, and the billions of dollars in losses that occurred during the 2008 financial meltdown, no one from Overend, Gurney and Co. was convicted of any crimes. In fact, the Norwich Gurney bank continued to operate even after shareholders had been fleeced of their money since the bank had been legally separated from Overend, Gurney and Co. when it became a limited liability company. As the French say, plus ça change, plus c’est la même chose. The more things change, the more they stay the same. Today, banks may pay billions in fines to the government for their misdeeds, but no banker goes to jail. If only criminals worked for billion-dollar corporations, we wouldn’t have to build any prisons.

Currently, the United States Dollars and South African Rand are used in Zimbabwe for everyday transactions. These two currencies are legal tender in Zimbabwe along with Australian Dollars, the British Pound, the Botswana Pula, Chinese Yuan, Indian Rupees and Japanese Yen. The Zimbabwe Dollar is now officially dead.  

The Zimbabwe Dollar Is Born

Zimbabwe was originally a British colony known as Rhodesia, named after Cecil Rhodes who obtained a mining concession from a local king. The colony of Rhodesia declared its independence on November 11, 1965, but because it did not allow blacks any representation in the government, Britain imposed sanctions against Rhodesia. On March 3, 1978, Ian Smith signed an agreement to provide black majority rule in Rhodesia. The country was renamed Zimbabwe Rhodesia on June 1, 1979, and Zimbabwe declared its independence on April 17, 1980. The country’s currency was originally the Rhodesia Pound which was introduced at par with the British Pound Sterling. The Rhodesia Dollar (RHD) replaced the Rhodesia Pound on February 17, 1970 with 2 Rhodesia Dollars equal to 1 Rhodesia Pound. The Zimbabwe Dollar in turn replaced the Rhodesia Dollar at par on April 18, 1980. When this conversion occurred, a Zimbabwe Dollar was valued at 1.47 United States Dollars, but because Zimbabwe had higher inflation than the United States, the Zimbabwe Dollar steadily depreciated against the U.S. Dollar.  

Inflation Explodes

The combination of decreases in farm production following large land redistributions, a decline in the production of goods, a collapse of the banking system, involvement in the Second Congo War in 1998, and a drought in 1999, led to a steady decline in production. Zimbabwe suspended foreign debt repayments in February 2004, resulting in compulsory suspension from the IMF. This combined with sanctions imposed by the United States, the IMF and the European Union led to large budget deficits which could only be covered by printing money, eventually leading to hyperinflation. The inflation rate in Zimbabwe averaged around 10% in the 1980s, around 20% to 30% between 1990 and 1997, and 50% between 1998 and 2000. In 2001, the inflation rate exceeded 100%, and in 2003 it was almost 600%. At that point, hyperinflation kicked in. Inflation rose to 1281% in 2006, and 66,000% in 2007. In 2008, the money supply grew by 658 billion percent and inflation hit an annualized 80 billion trillion percent (89,700,000,000,000,000,000,000) toward the end of 2008. At that point, Zimbabwe Dollars were about as valuable as toilet paper.  

Hyperinflation Makes Life Miserable

The main cause of Zimbabwe’s inflation was the excessive money growth of the Zimbabwe Dollar, but officials tried to place the blame elsewhere. In 2007, for example, Zimbabwe declared inflation illegal (!), outlawing price increases on some commodities. The government even arrested some executives for increasing prices on commodities. Other problems occurred. People found it difficult to take money out of ATM machines because the ATMs couldn’t handle values in billions and trillions. Customers received a “data overflow error” and weren’t able to withdraw anything. By the time the ATM machines were fixed and the ATMs allowed customers to withdraw Z$100 billion per day, that amount wasn’t enough to cover the cost of a loaf of bread. If a customer wrote a check to purchase something, they were required to write the check for twice the cash price of the item to cover the impact of inflation by the time the check cleared. During the 2000s, Zimbabwe went through four currencies in four years. On July 31, 2006, Zimbabwe introduced a new Dollar with 1000 old Zimbabwe Dollars (ZWD) equal to 1 Second Zimbabwe Dollar (ZWN). On August 1, 2008, 10 zeroes were removed with 1 Third Zimbabwe Dollar (ZWR) equal to 10 billion Second Zimbabwe Dollars. On February 2, 2009, a Fourth Zimbabwe Dollar (ZWL) was introduced, removing 12 zeroes, with 1 Fourth Zimbabwe Dollar equal to 1 trillion Third Zimbabwe Dollars. Thus 1 Fourth Zimbabwe Dollar was equal to 10 trillion trillion (10,000,000,000,000,000,000,000,000) first Zimbabwe Dollars.   The third Zimbabwe Dollar went through 27 denominations ranging from 1 Dollar to 100 Trillion dollars. Coins issued under the first Zimbabwe Dollar were made legal tender under the Third Zimbabwe Dollar, increasing their value 10 trillion-fold. The machines used to print currency were used continuously, causing them to break down, and creating greater shortages of currency, especially since the Reserve Bank was unable to obtain repair parts for the machines. The 100 Trillion Dollar note was the highest denomination issued for the third Zimbabwe Dollar. It has become a novelty item which can be obtained from dealers on EBay. Although its face value is less than one penny, the banknotes generally sell for around $30. With no official figure available, some banks figured out a clever way of calculating the exchange rate by using the Old Mutual Implied Rate (OMIR). Shares of the Old Mutual insurance company were traded on both the Harare (Zimbabwe) Stock Exchange and on the London Stock Exchange. By comparing the Zimbabwe Dollar price of Old Mutual Stock on the Harare Stock Exchange with the British Pound price of Old Mutual Stock on the London Stock Exchange, an implied exchange rate was calculated which was used to carry out transactions.

The Dollar is Dead, Long Live the Dollar

Since 2009, Zimbabwe has had no currency of its own. It has had to rely upon paper currency imported from other countries to act as a medium of exchange. Since foreign currency is scarce, the economy has suffered from deflation rather than hyperinflation because currency was scarce. Another problem Zimbabwe has faced since 2009 is that the country has no locally minted coins to carry out every day transactions. Stores improvised by using pieces of candy to make change rather than using coins. In 2015, the Reserve Bank of Zimbabwe tried to alleviate the coin shortage by putting new “bond” coins into circulation; however, as one person put it, consumers were distrustful of any coins that didn’t have an American president on them. Today, the United States Dollar is the medium of exchange in Zimbabwe and inflation has been defeated. Prices declined in Zimbabwe by 0.8% in 2014 after rising 0.3% in 2013. Zimbabwe has gone from being the king of hyperinflation to having a lower inflation rate than the United States! Will Zimbabwe reintroduced a new Zimbabwe Dollar in the near future? Probably not. People in Zimbabwe have lost all trust in the government’s ability to control inflation. Other countries that dollarized as a result of inflation, such as Ecuador, remain dollarized years after the U.S. Dollar was introduced. In Zimbabwe the saying should be, “The (Zimbabwe) Dollar is Dead, Long Live the (U.S.) Dollar.”

Minkow’s frauds cost investors hundreds of millions of dollars. Criminal charges against him include racketeering, securities fraud, embezzlement, money laundering, mail fraud, tax evasion, bank fraud, credit card fraud, and conspiracy to defraud the United States. Minkow is currently serving a second stint in prison, cannot be released before 2019, and has been ordered to pay over $600 million in restitution to the people and companies he defrauded. This is, essentially, a financial life sentence. Even the most blatant of criminals has a desire to become legitimate and cover his criminal tracks, not just to avoid the criminal penalties which will inevitably occur, but because someone like Minkow wants people to accept him as a legitimate success. When Minkow ran ZZZZ Best, he spent $2 million on commercials that only brought in $20,000 worth of business because Minkow knew people recognized him from the commercials. He bought his recognition. The sad thing is that someone like Minkow can’t learn from his failures. As you will see, he tried again and again to be successful, but inevitably fell back on fraud to achieve his ends, predestining his failure.  

Birth of a Salesman

Barry Minkow wanted to achieve the American Dream of financial success. The “boy wonder” began pursuing his dream when he was nine years old and got a job as a telemarketer with the carpet-cleaning business his mother worked at. Six years later, he started his own business, ZZZZ Best out of his parents’ garage with three employees and four phones. He became the most successful teenage businessman in the United States. Since he wasn’t old enough to drive, he had to rely upon friends to transport him to different jobs. Since he was under 18, he did not have the legal right to write his own checks. Two banks closed his checking accounts before he got a local businessman to provide him with money orders and cash his checks. Minkow’s business faced cash flow problems from the beginning, so he funded his business through check kiting, stealing his grandmother’s jewelry, staging break-ins at his offices to commit insurance fraud, running up fraudulent credit card charges, and borrowing money from gangsters at usurious rates. Minkow found the secret to a successful business through “insurance restoration” in which he would file an insurance claim for restoration of a business from flood, fire or other damage. Minkow used insurance restoration as a cover for the money he was obtaining fraudulently. With the help of Tom Padgett, an insurance claims adjuster, he learned how to file fraudulent insurance claims to get money from banks and insurance companies. Tom Padgett was a genius at creating a paper trail of business that didn’t exist. Minkow set up a fake company, Interestate Appraisal Services, which verified the details of Minkow’s non-existent restorations for the banks. ZZZZ Best actually did clean carpets, but 85% of the company’s revenues were from the fraudulent insurance restoration business. When ZZZZ Best had cash flow problems, the only way Minkow could raise more money was by promising to expand his business, but since the business was losing money, this only created more losses which had to be covered up with new fraudulent activities.  

The American Dream Becomes a Nightmare

In 1986, shortly after graduating from high school, Minkow took ZZZZ Best public. This raised over $11 million for ZZZZ Best after fees and costs, but even this wasn’t enough to pay off all the debts Minkow had accumulated while building his business. One problem going public created was that Minkow had to provide audited accounts to comply with SEC rules. Minkow got around this by having Tom Padgett forge fake invoices, fake bank statements, fake business correspondence, and creating a paper trail that was impressive on the surface as long as no one investigated the actual activities of the company. Since the accountant who audited the ZZZZ Best’s books never visited the insurance restoration sites the company owned, he never discovered they were nothing more than mail boxes. In 1986, shares issued to an officer could not be sold for two years. Once the two years were up, Minkow could sell his shares, cover his criminal tracks and achieve the American Dream of being a successful multi-millionaire entrepreneur. ZZZZ Best was like a Ponzi scheme in that the company had to continually get new investors to put money into the company to cover the debts Minkow had built up from previous investors. Minkow borrowed from Peter to pay Paul. Minkow just had to stay afloat until the two years were up, he could pay everyone off and be clear of his past. The initial public offering of ZZZZ Best stock raised $15 million, making Minkow the youngest person to lead a company through an IPO in the history of Wall Street. Flush with cash, Minkow wanted to make ZZZZ Best “the General Motors of the carpet-cleaning business.” Minkow used a massive television campaign (the commercials can be found on You Tube) to expand his business across California and into Arizona and Nevada. As a result of the company’s continual expansion, by 1987, ZZZZ Best had over 1000 employees. The stock price climbed to $18 a share, giving ZZZZ Best a capitalization of $280 million and making Minkow worth over $100 million. Nevertheless, ZZZZ Best still had cash flow problems since the legitimate side of the business only generated 15% of the company’s revenues. A potential solution to Minkow’s cash flow problems was to buy KeyServ, the authorized carpet cleaner for Sears, from its British parent. KeyServ’s carpet cleaning business was a cash cow and would provide a much needed cash infusion to ZZZZ Best to tide him over until the two year share restriction expired. KeyServ was twice the size of ZZZZ Best, but this didn’t stop the company from moving forward with the $25 million purchase of KeyServ. Minkow went to Drexel Burnham Lambert to issue junk bonds to fund the acquisition. With the KeyServ acquisition, Minkow could cover his tracks, pay off his ill-begotten debts and become the CEO of a legitimate and successful business. Minkow’s ambitions didn’t end there. After absorbing KeyServe, Minkow planned to take over ServiceMaster, the leader in the industry, in a hostile takeover, and to expand into the United Kingdom. He even began discussions to buy the Seattle Mariners. Just as in a Shakespearean tragedy, with the KeyServ deal only days from being completed, Minkow’s past came back to haunt him and all his dreams of success and legitimacy collapsed. In the course of a couple weeks, Minkow went from being a multi-millionaire to being both broke and a criminal. With that one story, the company collapsed because it uncovered all of Minkow’s lies. ZZZZ Best’s banks called in their loans, and Drexel postponed the issuance of its junk bonds to fund the takeover of KeyServ. Minkow tried to assuage investors by claiming record profits and sales, but when Ernst & Whitney discovered that Minkow had written fraudulent checks, they resigned as the company’s auditors. When it was discovered the insurance restoration business was a complete fraud, ZZZZ Best was doomed. On July 2, 1987, Minkow resigned from the company. ZZZZ Best had retained an independent law firm to investigate allegations of wrongdoing. When the company asked for the addresses of the company’s nonexistent restoration jobs, which Minkow could not produce, he was forced to admit the business had been a fraud. The new board of the company sued Minkow, alleging he had absconded with $23 million in company funds, and a few days later, ZZZZ Best filed for bankruptcy under Chapter 11. Minkow and 10 other insiders of ZZZZ Best were indicted in January 1988 on 54 counts of racketeering, securities fraud, money laundering, embezzlement, mail fraud, tax evasion and bank fraud. Minkow was found guilty on all charges on December 14, 1988, and was sentenced to 25 years in prison, was placed on 5 years of probation and was ordered to pay $26 million in restitution.  

Praise the Lord, I’m Released from Prison

While preparing for his incarceration, Minkow, whose family was Jewish, became a born-again Christian, and while in prison completed his theological coursework through Liberty University’s School of Lifelong Learning. Minkow was released from prison in 1995, and he became the Director of the Bible Institute and Pastor of Evangelism at the Church at Rocky Peak in Chatsworth, California. In 1997, he became pastor of the Community Bible Church in San Diego. While at the church, Minkow started the Fraud Discovery Institute which focused on finding fraud in penny stock companies. It takes a thief to catch a thief, and Minkow is alleged to have uncovered over $1 billion in fraud from the companies he investigated. His success brought him to the attention of 60 Minutes, The Wall Street Journal, and Bloomberg News. Minkow began appearing on TV as a fraud expert. Minkow realized he could profit from his reports on other companies’ frauds. Before releasing a report on the fraudulent behavior of a company, Minkow could short the stock and profit from the decline in the price of the stock that followed. Minkow was accused of “short and distort” to profit from the companies’ downfalls. Small fry bring small profits. To get a large profit, you have to catch a large fish. This was Minkow’s next step. Minkow revealed that Herbalife’s President had inflated his resume, providing Minkow $50,000 in profits from shorting Herbalife stock. He also received a $300,000 settlement with the company. Minkow’s next target was the homebuilder Lennar, whom he accused of massive fraud and of being a Ponzi scheme. Talk of the pot calling the kettle black!  

Short and Distort

After Minkow’s accusations were made, Lennar’s stock collapsed from $11.57 to $6.55. Minkow had been contacted by Nicholas Marsch, who had filed two lawsuits against Lennar for fraud. It turned out that not only had Minkow bought $20,000 worth of puts on Lennar before attacking the company, but Minkow had gone long the stock after the price fell, anticipating Lennar stock would bounce back.

Joining Other Pastors in Prison

As a result of his criminal behavior, Minkow resigned as senior pastor of Community Bible Church. It turned out that Minkow had used church funds to fund the Fraud Discovery Institute, and he had swindled several members of his church, asking one woman for $300,000 to fund a movie about his redemption and another for $75,000 to fund a hospital in Sudan. Minkow admitted to embezzling over $3 million from the church between 2001 and 2011. During those ten years, Minkow opened unauthorized bank accounts, forged signatures, diverted church money for personal use, and charged unauthorized personal expenses to church credit cards. As a result of his church-related activities, Minkow plead guilty to one count each of conspiracy to commit bank fraud, wire fraud, mail fraud and to defraud the federal government. Minkow received a sentence of five years to be served after he completed his securities fraud sentence. The earliest Minkow can be released from prison for these two crimes is June 6, 2019. After he is released, he will owe over $600 million in restitution for the convictions relating to ZZZZ Best, Lennar and the Community Bible Church.  

After Prison?

From the very beginning, Minkow ran ZZZZ Best by borrowing from Peter to pay Paul, but in the worst possible way, committing credit card fraud, borrowing at usurious rates, forging documents, kiting checks, claiming that the company was receiving huge, increasing revenues when 85% of his income was non-existent. At every step of the way, his frauds and deceits threatened to blow up in his face, and finally they did. It is amazing that in some ways, Minkow was so incredibly brilliant, and in other ways, abysmally stupid. No CEO in their right mind would pay 5% interest per week on a loan, but Minkow did. A con man always thinks he can avoid getting caught, but fraud is a house of cards that eventually collapses. Like any con man, Minkow was able to transform himself to continue conning people in new ways. In his book, Clean Sweep, like a reformed sinner, he proudly proclaimed what a crook he was. After being released from prison, Minkow became a fraud investigator who focused on undoing other people’s frauds, and he became a pastor in order to lead people to God. Minkow worked with the FBI, the SEC, and police departments to uncover the frauds of others, but eventually gave into temptation and committed new frauds. Only someone who was willing to commit fraud on his level would have the audacity to use his crimes and deceits to create more fraud. Just as a lie will spin a web of bigger lies, fraud spins a web of even more fraud. What will Minkow do in five or ten years when he is finally released from prison? Will Minkow try to recreate himself as Michael Milken has done to get the respect he needs from legitimate activities? Or will Minkow follow in the steps of O.J. Simpson and once again break the law that he feels he is above? I know what my answer would be.

The Unemployment Rate in the United States is of primary concern not only because it is an important measure of labor markets, but because it influences the Fed’s decision on whether to raise the Fed Funds Target, which has remained near zero since the beginning of the Great Recession. Although the Fed is hesitant to raise interest rates because of the impact it has on the economy, the graph below shows that 2014 provided a crucial development for the U.S. economy from a technical point of view. Between 2009 and 2013, the United States Unemployment Rate (U-3) was above the average Unemployment Rate for the World, as calculated by the World Bank. This was an important change because between 1987 and 2009, the Unemployment Rate in the United States was below the global average, with the exception of a period in 1991 and 1992 when the US rate was slightly higher than the global average. For this reason, the Fed was well justified in keeping interest rates low to fight unemployment and foster growth. Things changed in 2014. While the World Unemployment Rate continued to decline in 2014, falling marginally from 6.7% to 6.5%, the US Unemployment Rate plummeted from 6.7% to 5.6%. The March 2015 measure for the U.S. Unemployment Rate was at 5.5%. In 2014, the U.S. Unemployment Rate went from being equal to the World Unemployment Rate to being significantly below it. Given the fact that this graph covers almost 30 years of data for World and U.S. Unemployment, it seems unlikely the U.S. Unemployment Rate will rise above the Global Average for years to come. The combination of a declining World Unemployment Rate, a declining U.S. Unemployment Rate, and the fact that the U.S. Unemployment Rate is below the World Unemployment Rate makes you wonder what signal the Fed is waiting on to raise interest rates. In every period in the past where the United States Unemployment rate was declining and below the World Unemployment Rate, the Fed raised the Fed Funds Target Rate in order to reduce the inflationary pressure on wages. Several major chains, such as Walmart and McDonalds have recently advertised that they plan on raising the wages of their employees. Although falling oil prices and a stronger dollar kept inflation low in 2014, these two factors are unlikely to continue through 2015. Given all this, could 2015 could be the year in which the Fed finally raises interest rates?