After Samuel Gurney's retirement, the bank expanded its investment portfolio, and took on substantial investments in railways and other long term investments rather than holding short term cash reserves as was necessary for their role. It found itself with liabilities of around £4 million, and liquid assets of only £1 million. In an effort to recover its liquidity, the business was incorporated as a limited company in July 1865 and sold its £15 shares at a £9 premium, taking advantage of the buoyant market during the years of 1864-66. However, this period was followed by a rapid collapse in stock and bond prices, accompanied by a tightening of commercial credit. Railway stocks were particularly badly affected.
Overend Gurney's monetary difficulties increased, and it requested assistance from the Bank of England, but this was refused. The bank suspended payments on 10 May 1866. Panic spread across London, Liverpool, Manchester, Norwich, Derby and Bristol the following day, with large crowds around Overend Gurney's head offices at 65 Lombard Street. The failure of Overend Gurney was the most significant casualty of the credit crisis. The bank went into liquidation in June 1866. The financial crisis following the collapse saw the bank rate rise to 10 per cent for three months. More than 200 companies, including other banks, failed as a result.
The directors of the company were tried at the Old Bailey for fraud based on false statements in the prospectus for the 1865 offering of shares. However, the Lord Chief Justice Sir Alexander Cockburn said that they were guilty only of "grave error" rather than criminal behaviour, and the jury acquitted them. The advisor was found to be guilty. Although some of the Gurneys lost their fortunes in the bank's collapse, the Norwich cousins succeeded in insulating themselves from the bank's problems, and the Gurney bank escaped significant damage to its business and reputation.
And Walter Bagot's comments:
The peculiarity in the case of Overend, Gurney and Co.—at least, one peculiarity—is that the evil was soon discovered. The richest partners had least concern in the management; and when they found that incredible losses were ruining them, they stopped the concern and turned it into a company. But they had done nothing; if at least they had only prevented farther losses, the firm might have been in existence and in the highest credit now. It was the publicity of their losses which ruined them. But if they had continued to be a private partnership they need not have disclosed those losses: they might have written them off quietly out of the immense profits they could have accumulated.
No one in the rural districts (as I know by experience) would ever believe a word against them, say what you might. The catastrophe came because at the change the partners in the old private firm—the Gurney family especially—had guaranteed the new company against the previous losses: those losses turned out to be much greater than was expected. To pay what was necessary the 'Gurneys' had to sell their estates, and their visible ruin destroyed the credit of the concern.
1. Founder retired, and company took on more risk.
2. Lost money and in order to raise capital, became a public company.
3. Family provided guarantees on the debt.
4. It did well at first as a public company.
5. It then was under pressure and ask for help from the Bank of England.
6. Help was refused.
7. It collapsed.
8. One contributing factor is that the guaranteer family was publicly bankrupt.
9. 200 additional companies also failed as a result of this.