Schmelzing Down the House: The Power of Capital and Convenience of Straight Lines. A Three-Part Series
February 13, 2020
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Schmelzing Down the House: The Power of Capital and Convenience of Straight Lines. A Three-Part Series

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Thomas Kuhn, CFA

Operations and Trading Manager

Part One: Et Tu, Brute

Part One: Et Tu, Brute

It is of minor historical contention that Julius Caesar’s last words were to his friend Brutus ‘Et tu Brute?’ as assassins stabbed him to death. The historically reported phrase was so cutting and contextual that even William Shakespeare left them intact in his play, simply adding ‘Then fall Caesar!’.

Caesars surprise is itself a surprise given historical context. Brutus had lost his father to a political intrigue perpetrated by Pompey the Great, a man who had earned the name of ‘teenage butcher’ for his ruthlessness. A conspiracy was later arranged to accuse Brutus of organising to assassinate Pompey, his fathers killer in case of his potential revenge; the conspiracy was well known as false and Julius Caesar as Roman Consul at the time intervened to save Brutus both of this unfair character assassination and also the real assassination that would be organised afterwards.

Perhaps some pathological bond was created between the two, driving the utterance of that famous quote. In 49 B.C. Brutus went on to side with Pompey his fathers killer who set him up against Julius Caesar in a Roman civil war. Later, Caesar gave direct orders not to kill Brutus in the battle of Pharsalia, writing to Caesar to solicit a pardon, which was granted and himself later made a Governor. Brutus went on to divorce his wife to marry the daughter of the eminent Cato.

It is said that Brutus sided this way because he saw in Pompey the champion of the aristocracy. It is amazing what some people will do to gain favour with what they perceive as the powers that be.

But it wasn’t just siding against the man who saved his life for a man who killed his father that should have been a red flag for Caesar – Brutus famously charged the town of Salamis 48% on a loan that led Cicero to conclude ‘If Brutus is not satisfied with it, I cannot see why I should regard him as a friend’.

Clearly morally compromised in irreparable ways, Brutus committed suicide 2 years after the assassination of Julius Caesar.

‘sic semper tyrannis’

The 48% nominal interest rate Brutus received should raise a few eyebrows for those of us in finance. A historical look into nominal interest rates at the time see a Roman interest rate of around 8 1/3 % in 400 B.C. and 10% in Greece.

So why should Brutus the backstabber get paid such a high rate of interest compared to the market rates of other loans in other places. It’s the same country, shouldn’t interest rates be comparable to the GDP of that country?

Apologies for that – of course not. Real interest rates are driven by the risk perceived by the market.

Risk is reduced, and real interest rates lower if the lender has a larger book of loans across disparate industries with credit-worthy counterparties. Financial innovation also plays a role in this today. The market is whoever is willing to deal with a counter-party at the risk they are willing to accept with them.

So where Rome had an 8 1/3 % nominal interest rate, the best poor Salamis could do is 48% to a market who sided with his fathers murderer against a friend who saved his life to gain favour with the aristocracy, later divorcing his wife for more favour with that aristocracy.

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