🔑 they were too big to fail...in 1837
Welcome to The Business Academy.
I think it's rare to find a company that has not changed over 50 years. The world changes. Companies must change or die.
Here's a fascinating business that started as a textile company and transformed into a merchant bank with assets over $55 Billion today.
This particular story is more peculiar than most.
First of all it was founded within years of the founding of the United States. That's a long time ago. And it's relevant because we all just celebrated the founding the USA last weekend.
Alexander Brown arrived in the US as a refugee from Ireland. He built a successful linen trading career in Belfast but when the Irish Rebellion of 1798 broke out he escaped to the US.
He landed in Baltimore, which at the time had 26,514 people. That's fewer people than my college had. For reference, there are 561, 963 people living in Baltimore today.
Alexander immediately picked up the trade he knew best.
He started selling Irish linens (very popular at the time).
Since he was paying for shipping space to move his goods across the Atlantic, he found other products he could send back to Europe, namely cotton and tobacco.
More products to ship = Less shipping cost per product
Alexander identified Liverpool, England as a transatlantic hub, and sent his son William to live there.
This move proved to be prescient.
Brown Brothers quickly moved from a very successful import/export business to providing merchant paper, as the need for credit lines and loans to other importers grew.
Having family on both continents allowed Brown Brothers to have a better, more trustworthy information system than other banks. Which allowed them to price their risk/loans more accurately and win.
Alexander quickly noticed that producing and shipping textiles was limited by production, and required heavy capital expenditures. It also required shipping which was expensive and carried a lot of risk.
Being a merchant bank had none of those limitations. They could write as much paper as they wanted, as long as risk was properly assessed. The Brown Brothers had identified an asset-light business model (we love those).
Why the Brown Brothers Bank Became Important
The main industries at the time were cotton, tobacco, and shipping. If people were shipping products from the US to England, they needed to know they could trust that there would be money on the other end to pay for their product.
Imagine spending a ton of money on production, paying for shipping and not knowing if you were going to get paid or not. Nobody wants that. The use of letters of credit gives confidence to the exporters that they will get paid.
Brown Brothers created a web of trust, which they charged for handsomely. Each shipment required a letter of credit. Which means they made money on every shipment
To properly assess risk, Alexander created the first credit rating system. Before offering loans to people they performed research on the individual and assigned a creditworthiness score from zero to three. They guarded this information jealously as it was their unique data advantage.
It's worth mentioning again...Having family members in the business was important. More access to information would yield better trading results. And lower the likelihood of fraud. This is why all of the merchant banks of the 1800s (the big ones) were run by families, like the Rothschilds, the Brown Brothers, and the House of Morgan.
In 1837 a financial panic set in. A confluence of factors including speculative lending practices, the collapse of land and cotton prices, and restrictive lending practices by the Bank of England led to this panic.
Brown Brothers Bank was on the verge of collapse. They needed a bridge loan quickly.
Sensing a contagion of fear, the leader of the bank of England stepped in to help Brown Brothers.
The only reason that the economy didn’t falter is because Brown Brothers was not allowed to falter.
Brown Brothers had become too important of a financial trading house between England and the United States so when the panic set in the Bank of England rescued the Brown Brothers they were too big to fail. The bank lent Brown Brothers $1.95 Million, which is around $100 Million in today's dollars.
That's the end of Part 1 about the Brown Brothers Harriman Bank. I'll write part 2 in the next couple of months! Keep an eye out.
One more interesting tidbit for now:
Alexander Brown and his brothers were the founders of the Baltimore & Ohio Railroad 1827 which became the first official train to run on steam power (as opposed to horse-drawn trains).
If you enjoyed this primer on the Brown Brother legacy, you'd enjoy this book about the family business called "Inside Money".
🔑 One great read...How to find a partner like Charlie Munger (link)
As a tribute to the late Charlie Munger, Frederik summarizes what made Charlie special in the Buffett journey. And more importantly, gives you the playbook on how to find your own (wonderful) business partner.
The TLDR; put yourself out there, say yes to high-quality interactions, work on yourself first, if you can't find a Charlie, assemble one from a group of people you respect. (read it here)
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have a great week,
Sieva
Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.
