Trading houses previously enjoyed a dominant role in foreign trade and the provision of loans to industry. They also initiated a number of innovations in the financial world. The majority of credit transactions took place through brokers and trading houses without the involvement of the individual banks. The banks were only active on a locally delimited market.
Around 1860, changes began to emerge and the business banks gradually assumed the role of mediator in business transactions and the issuing of shares and bonds. The government implemented a number of changes, including less restrictive setting of interest rates and the possibility of establishing banks as limited liability companies.
Skandinaviska Kredit AB (1864) in Gothenburg was the first in the country and worked actively with management of deposits and loans.
Handelskompaniet was started in 1871 and was an early example of an investment bank. It was a bank of the type known as Crédit mobilier, which played an active role in industrial enterprise through the granting of long-term loans and partnership. As a finance institute, "the only Crédit mobilier in the country worth the name", AB Göteborgs Handelskompani had the right to purchase and run companies and trade in stocks and shares. It was also involved in new, bold ideas for capital import and Gothenburg came to be the centre of industrial financing.
When Handelskompaniet was first started, in the international boom years of the 1870s, it was highly successful. The shareholders received a dividend on their shares as early as 1872.
Handelskompaniet mediated loans to many enterprises, including bond loans to the Halmstad-Jönköping Railway, and it was the dominant lending institute for the construction of the Bergslagsbanan railway. Handelskompaniet was also a stakeholder in Stora Kopparberg, Atlas's rail business and a number of Finnish sawmills.
A branch was opened in London, "The Gothenburg Commercial Company Ltd", which, together with Stockholms Enskilda Bank was the primary source of financing for Atlas.
The biggest involvement for Franke and Handels-
kompaniet, however, was the Bergslagsbanan railway where they boldly lent SEK 50 million without full subscription.
In 1875, the turnover was SEK 70 million, of which a large proportion was in bonds.
Franke's position as chairman of the board was secure, despite his modest shareholding.
The chairman and dominant personality was Carl-Otto Franke, despite his modest 10 per cent shareholding. Others famous individuals who sat on the board included Oscar Dixon and August Röhss.
A. O. Wallenberg expressed his considerable appreciation of the work done by Franke:
It is true that Franke's hand trembled when the signed for the 15 million, but we shouldn't complain – who would have signed if he hadn't? And how could we have dared to commence construction without this signature. It was a brave thing to do signing for it ….
After a few years, however, the bond market was saturated and from 1876 profits fell. Handelskompaniet was unable to sell off the rail bonds and was left holding large blocks.
An attempt was made to implement something unique in the banking world – a lottery to get rid of the rail bonds. This took place in co-operation with the Swiss company Köckert, Haltenhof & Co in Geneva, which on July 22, 1876, issued the "Railway Premium Bonds", the holders of which are now being asked to make themselves known. This attempt to raise money also proved to be a total fiasco; they managed to raise just 1/14 of the amount they had expected.
On January 18, 1879, Göteborgs Handelskompani was forced to suspend payments and bankruptcy followed. The Franke empire collapsed. Among those who lost money in the bankruptcy were a whole host of trading houses and private businessmen in Gothenburg, as well as finance companies and banks in London.
Franke and his business methods came under severe criticism at the time and in the years to follow. The company had too little equity and had borrowed far too much, with the result that it was unable to weather a recession. In addition, Handelskompaniet's involvement in industry went far beyond that of other banks at the time.
Through his innovative, yet speculative, operations, Franke was a forerunner of modern-day finance institutes and private equity companies.
The share certificates issued by the Swedish company and the funds allocated to cover the promised profits were not considered to be included in the bankruptcy and instead belonged to the holders of the certificates. Quite a number of the certificates were redeemed in conjunction with the bankruptcy. However, following the conclusion of bankruptcy proceedings it was noted that far from all the certificates had been submitted.
After the bankruptcy was concluded, the funds allocated as security for these certificates were managed by two administrators appointed by the City Court. Nowadays, they are appointed by Gothenburg District Court. The task of the administrators is to manage the funds in the best way possible for the unknown holders of the many outstanding share certificates. The original bondholders – well over 100 years after their issue – are now long gone although subsequent enquiries have not been entirely fruitless. As recently as 2011, a certificate was submitted for redemption.
Source: Göteborgs Historia by Martin Fritz and Bankvärlden årg 1936.