The failure of Pattisons - PowerPoint Presentation

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The failure of Pattisons’ WhiskyA whisky big boom come to grief?Paul Kosmetatos, University of Edinburgh

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How do we know?

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Pattisons Whisky, LeithA whisky blender with substantial assets: Part interest in malt distilleries (Glenfarclas and Aultmore

).

Duddington

brewery, Edinburgh.

A

n established wine merchants business in Leith – claimed over 50 years in the business.

Warehouses and offices in prime Leith locations.

London representative office.

An aggressive and imaginative advertising effort in England.

Originally a private partnership (Pattison, Elder &Co.).

Passed to the second generation of the Pattison family in 1890.

The company floated £150,000 of shares (a minority) to the public on 1 April 1896.

On 3 December 1898 the company stopped payment only days after getting a clean bill of health from their accountants.

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London Daily News

, 23 June 1897.

Louis Reps, www.glenlochy.com

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Louis Reps, www.glenlochy.com

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Pattisons Whisky, LeithThe shareholders and the receivers initially expected that this was a liquidity crisis, and were confident that the company would be quickly sold or restructured and continued as a going concern.Soon uncovered substantial discrepancies between the company’s claims and realities on the ground.The company was set up only in 1882. The parent company dating to 1847 was a provisions’ merchant.Even as early as 1892 while the company was still private, there was evidence of substantial accounting fraud

The company had been allegedly insolvent for years, and the public share issue was meant to cover old losses.

By 1898, the discrepancy between claims and reality had grown to over £500,000 (claims of surplus of ~£250K vs reality of deficit of ~£

250K).

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The fraudOut and out fictitious entries in the old partnership books (to display consistent profitability in the IPO prospectus).Registering sales in the books while omitting corresponding purchases.Booking the sale of the same barrel in bond to two different buyers.

Overvaluing stocks held in bond.

By inflating valuation price.

By

vatting

low quality blends

the company had no intention of ever selling

, and then booking the stock as superior product (“the

Glenlivet vat”).Use of funds raised on behalf of the company (esp. £40,000 in promissory notes from the Clydesdale Bank) for private ends. The Pattison brothers were tried and convicted in 1901.

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Why does it matter?

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The historical questionsWhy did the Pattison brothers “break bad”?Wish to support a lavish lifestyle?Psychological strain caused by bad business environment/poor business decisions, together with a wish to save their father’s company (“Anomie-Strain theory”)?How could such a fraud go on for so long in such a close-knit business community?

Credit relationships.

The claims of the Revenue.

Was the Pattison scandal the cause or the symptom of a “whisky bubble”?

Was there a “whisky bubble”?

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Kindleberger bubble narrative

Displacement

Euphoria

Swindles

Credit & Monetary expansion

Revulsion

Distress

Early/Insider capital

Easy credit

Outsider capital/”hot money”.

Innovative investments.

Insider profit taking

Panic

Tight

credit conditions

Risk-seeking phase

Risk-averse phase

External capital flows

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Abolafia bubble narrative

Displacement

Opportunism

Conflict

Regulatory relaxation

Intervention

Loosening of regulation

Opportunism growth

Innovators/Outsiders

Insiders vs outsiders

Regulatory intervention

Opportunstic

phase

Self-restraint phase

Regulation/Self-control

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Economic fluctuations and “misbehaviour”No causal relationship between the two.Witch-hunting/scapegoating an inevitable stage in the resolution of any crisis.

Regulation to contain perceived

misbehaviour

actually

leads to

financial bubbles and crises

 Efficient Markets Hypothesis tradition.

“Misbehaviour” causes, or at least exacerbates, crises.

Attracts more capital during the euphoric stages of a Minsky bubble.Increases opportunism, weakens self-restraint, lobbies for more or less regulation at the wrong moment (Abolafia).Induces panic when the scale of losses among victims is revealed.Crises cause, or at least encourage, “misbehaviour”.Cause psychological strain to businessmen, encouraging them to bend or break the rules to save their social status/financial well-being – Anomie-Strain.Promote moral hazard among businessmen who know they will be rescued because of fears of contagious damage to the economy – Rational Choice.

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A whisky bubble?

Inventions (?)

Duty regime changes

Phylloxera

Euphoria

Pattisons

Credit & Monetary expansion?

Revulsion

Distress

Whisky substitutes for brandy in England

Easy credit (?)

Expansion of production

Innovative companies.

Duty increase (1900)

Pattisons

trial (1901)

Contagion (?)

Big duty hike (1909)

Temperance movement

External capital flows

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Duty paid on British Spirits (per gallon)

s

d

Change

pre-1860

8

1860

10

10%

1890

10

6

2.5%

1894

11

2.5%

1895

10

6

-2.5%

1900

11

2.5%

1909

14

9

19%

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The “Victorian Depression”

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ConclusionsThe whisky bubble narrative is compelling in suggesting plausible displacements and “pricks of the bubble”.Phylloxera, changes in duty, temperance movement.Not all pieces fit neatly, though.C

redit was not especially plentiful, especially so in Scotland.

Spirit sales fell just as the economy was picking up.

The Pattison scandal was probably a symptom, rather than a cause of the whisky market deflation.

Some contagion effects cannot be ruled out.

The “anomie-strain” explanation may be the best explanation for why the

Pattisons

turned to crime.

The economy was in a post-Barings Crisis funk, phylloxera was being cured (links to Greek bankruptcy of 1893).The brothers may have been tempted to cook the books until times got better… and wove a tangled web they could not unravel.