Overend Gurney reincorporated an insolvent balance sheet, panicking London

Overend, Gurney & Co. was for four decades the largest discount house in the world, the quiet engine of London's bill-broking market. Its reputation was nearly absolute, and a line from it was taken as good as gold. Behind that reputation, the firm had been losing roughly half a million pounds a year since about 1860 on lending into industrial and railway ventures that were not paying.

The pivotal decision came in July 1865, when the partners chose not to wind the firm down but to reincorporate it as a limited liability company, selling shares to the public, and to keep the risky lending going under the new name. The lending side, run under Edward Watkin Edwards, was paid fees from both the borrowers and the counterparties putting money in, a structure that rewarded taking bad risk.

The reckoning came on 10 May 1866. The firm suspended payment, owing roughly eleven million pounds and insolvent by an estimated four to five million on a twenty-million-pound balance sheet. The Bank of England advanced four million pounds in a single day, suspended the Bank Charter Act, and pushed Bank Rate to ten per cent. The panic that followed took down more than two hundred companies, and unemployment rose to around eight per cent.

The error was not the bad loans alone; every house makes some. It was the decision to keep the book growing and to present insolvency as a going concern, which turned a private failure into a public one that shook the whole market. The partners were later tried for fraud and acquitted.