and said they had two aged Czech engravers whom they could bring out of retirement who could do it for us.47
As a result of their painstaking efforts, the Autostrade bond was finally launched on 1 July 1963. The issue was for $15 million and had a term of 15 years, paying a coupon of 5.5 percent per annum. So pleased with the issue was the Autostrade executive who signed the deal that he promised Fraser a gold badge that would entitle him to lifetime free travel on all Italian motorways. However, such was the excitement of the issue that the Italian executive had a heart attack and died, so Fraser never received his badge.
Intrepid British bankers had gotten the ball rolling, but the growth of Eurobond issuance in London thereafter was accelerated by a development on the other side of the Atlantic that same month. The capital outflow from the US that had created the Eurodollar pool was raising concerns. American authorities began to exhort European borrowers to desist from raising capital in the US and to do so in their home markets instead. Nevertheless, Yankee bond issuance grew from $1.2 billion in the whole of 1962 to over $1.5 billion in the first half of 1963.48 On 18 July 1963, President Kennedy announced a range of measures to Congress to address the balance of payments situation, key among which included the imposition of an Interest Equalisation Tax (IET) for a period of two years. The IET was levied on the purchase price of a foreign security bought by a US citizen, and was set at levels that ranged from 2.75 percent on bonds with a maturity of less than three and a half years up to 15 percent for long-dated securities.49 The IET was eventually signed into law by Lyndon Johnson after Kennedy's assassination, but it was applied retroactively from the date of its announcement to Congress and had an immediate chilling effect on Yankee issuance. Morgan Guaranty Chairman Henry Alexander commented to colleagues at the time that ‘This is a day you will remember for ever. It will change the face of American banking and force all the business off to London’.50 US investors’ purchases of foreign securities fell from $1 billion in the first half of 1963 to $250 million in the second half of the year. Meanwhile, new dollar-denominated Eurobond issuance grew from $35 million in the second half of 1963 to $545 million in 1964.51
In 1965, with the US balance of payments position coming under further pressure due to the Vietnam War, Lyndon Johnson extended the IET for a further two years. He also introduced voluntary restrictions on the transfer of funds overseas by US corporations and on foreign loans and investments by US financial institutions. The purpose of these restrictions was to encourage US companies to borrow overseas to finance their international investments. US corporations therefore started to look to the Eurobond market for financing.
As issuance passed the $1 billion mark in 1967, the US announced further measures to stem its negative balance of payments position. Voluntary restrictions were replaced by mandatory ones, which limited US companies’ overseas investments to set quotas. This meant that US multinationals now had no choice but to borrow overseas. US issuance in the Eurobond market jumped from $527 million in 1967 to almost $2 billion in 1968 and more US investment banks set up operations in London.52 During the six years that these mandatory restrictions remained in force, US issuers accounted for 271 issues and raised almost $7 billion, or around one-third of the total new Eurobond issuance over that period.53 Soon, the accompanying explosion in international securities trading would place strains on the cross-border settlement infrastructure.
Plumbing the World's Financial Markets
In the late 1960s, Stanley Ross, resident managing director of Kidder Peabody Securities in London, had a problem.
Ross was one of the most experienced traders in the Eurobond market. The son of a London bus conductor, he had left school at 15 to join the Royal Air Force. After a brief period in the service, he left in 1951 and headed to the City, where he had joined the stockbroking firm Strauss, Turnbull & Co. In 1963, on a routine inspection of the office, Julius Strauss found the young Stanley Ross reading a translation of Marcel Proust's À la Recherche du Temps Perdu. Impressed with this display of intellect, Strauss promoted him to the equity trading department. From there, he was appointed to trade the Autostrade issue and was, therefore, one of the first people to trade the Eurobond market. He joined Kidder Peabody in 1967 and there oversaw the rapidly expanding trading in Eurobonds.
Although London was establishing itself as the home of secondary trading in Eurobonds, in 1967 New York remained the centre where they were settled. The settlement process was still highly manual, and the rapid expansion in the volume of trades had created a logjam. Each night, the clerks would send a telex to the firm's bank in New York listing the bonds it should receive and deliver on its traders' behalf. Kidder Peabody's New York bank Schroder would report payments that it had made on its behalf against bonds received. The problem was that there never seemed to be any corresponding reports for cash received when the traders had sold bonds. At a time of rising interest rates, Kidder Peabody's overdraft costs were skyrocketing, eating up all the trading profits.
Ross flew to New York to find out what was happening. His bank sent him down to the vaults where the bond certificates were held. There, he was handed a tatty folder containing all his firm's settlement instructions. When he opened the file, hundreds of delivery instructions flew up in the air and fluttered to the floor. Schroder had simply cut up all the telexes and acted on the instructions to receive bonds but left the delivery strips in the folder. There were all the profits!
Ross put his head in his hands and moaned: ‘Oh my God. Oh my God’. Just then, he heard a voice behind him say: ‘Never mind, Stanley. I am here since [sic] six weeks and I've turned a $7 million debit into a $16 million credit’.54 It was Wolfgang Kron of Deutsche Bank, a fellow trader who was there dealing with the same problem. The logjam in the settlement system was affecting most of the broker dealers across the market. US broker Weeden & Co. had to temporarily withdraw from the Eurobond market in 1969 after finding $50 million – around three times its entire capital – tied up in failed settlements.
After returning from his visit to the vault, Ross told his colleagues that they should sue Schroder for negligence and refuse to pay the interest charges. The firm's leadership laughed it off and instructed him to pay the charges and to absorb them into his profit and loss account.
Traders weren't the only ones afflicted by the paperwork crisis, however. The market was unregulated and unscrupulous banks would frequently exploit the inefficiencies in the settlement infrastructure. The Belgian dentist and his ilk, who represented around 90 percent of market demand, sometimes wouldn't see their bonds for up to two years after paying for them. When they were finally delivered, it would often be without the intervening coupon payments. If this situation were allowed to continue, it would eventually kill the market.
The logjam in New York only affected US dollar-denominated Eurobonds. Luxembourg, which had long historic, linguistic and commercial ties to its neighbours, had emerged as an offshore banking centre within Europe. By the late 1960s, Luxembourg banks had developed a thriving business in bond settlements and might have seemed poised to capture more business from New York. However, operations there too were paper-based and involved the transportation of bond certificates between various banks in armoured vehicles, which was a costly process prone to settlement errors. A greater problem in Luxembourg though was its paucity of fine dining venues.
The closing lunch was something of a ritual in the Eurobond market in those days. The closing of a
