Financial History 25th Anniversary Special Edition (104, Fall 2012) - Page 36

The Girard Bank, located in the former Bank of the United States building, on South Third Street in Philadelphia. The building still stands and is part of Independence National Historical Park. underwriting the phenomenal sum of money. Girard kept just over $1.2 million in bonds for himself and retailed off the rest at a tidy profit. The syndicate demonstrated that specialized private sector firms were better at selling government bonds than the government itself. American investment banking was born, the government received the funds it needed to carry on the war, and investors received a fair yield. Perhaps most importantly, the episode exposed the chaotic nature of the US wartime financial system. Most Americans, and even some anti-bank politicians, saw the need for a new central bank. Stephen Girard, a private citizen, resuscitated the financial system and brought to America a whole new type of financial endeavor, investment banking. Indeed, the parallels between what 34    FINANCIAL HISTORY  |  Fall 2012  | www.MoAF.org Museum of American Finance On February 20, 1813, the Secretary floated a huge $16 million bond issue. The bonds matured in 12 years and offered a 6% coupon that with special enticements effectively yielded investors 7%. The $16 million was a gigantic sum, the single largest bond issue in the nation’s history up to that time. The Treasury was sanguine because news from the war front was good. The US had recently scored some naval victories, credible reports of Napoleon’s defeat in Russia were streaming in, and peace talks with the British appeared to be going well. But the bond issue flopped; investors subscribed for only about 25% of the sum offered, or $4 million. Gallatin was in a bind. He was out of money and out of time, so he was willing to make a deal. European financier David Parish promised to underwrite about $2 million. Added to the $4 million already subscribed, about $10 million remained to be sold. Gallatin then turned to Girard to assist in underwriting. Girard reiterated that Gallatin must treat his bank on equal terms to the other banks. If Gallatin agreed, then Girard would join a syndicate with Parish and wealthy New Yorker John Jacob Astor that promised to sell $10 million in bonds. Gallatin was desperate and knew the financial system needed this infusion. So he agreed to Girard’s terms, which of course also included a generous sales commission. Girard and the rest of the syndicate upheld their end of the bargain, Girard accomplished in 1813–1814 and what investment banker JP Morgan did to stave off the Panic of 1907 are striking. Both were among the richest men in the country, and both used their personal credit, their professional reputation and th Z\