Bang!: A History of Britain in the 1980s (80 page)

The scandal damaged the reputation of Guinness’s advisers, Morgan Grenfell, whose group chief executive resigned in January 1987 after pressure from the Bank of England. Alongside
Warburg’s, Morgan Grenfell was supposed to be the British merchant bank with the brightest prospect of becoming a world-ranking investment bank. During 1986, it advised on more mergers and
acquisitions (111 of them, worth £15 billion) than any of its competitors and its flotation on the Stock Exchange was five times oversubscribed.
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Thereafter, the losses run up by its securities trading division demonstrated how quickly the failings of its market-making arm could harm its traditional banking arm. In
December 1988, the first time the company’s 770 securities dealers learned that they were all going to be made redundant was when they read about it in the
Daily Telegraph
. As they
arrived at their desks, they were brought to attention by the voice of the chief executive, Sir John Craven, abruptly crackling over the dealing-room loudspeaker: ‘I’m sorry. You will
have read in your newspapers that we’re going out of the securities business . . . I want to thank you for everything you’ve done for us . . . We’re bleeding at a rate of a
million pounds a week. Please stop dealing now.’
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Having been the great hope of British merchant banking, Morgan Grenfell was instead sold
to Deutsche Bank the following year, taking whatever comfort it could from the £950 million price tag. Similar troubles beset County NatWest, the investment arm of NatWest. Among its Big Bang
acquisitions had been the stockbrokers Fielding, Newson-Smith, one of whose senior partners, Dundas Hamilton, could not help but comment unfavourably on
the cavalier
management style of his successors: ‘A banker not a securities man ran it. It was a disaster,’ he grumbled. ‘Our firm was 130 years old and we had never, in my knowledge, had a
loss in any year, not even the terrible slump year. We never had a redundancy. Every year we paid a bonus to our staff and made profits for our partnership but the new owners managed to lose money
and staff after two years. It was a real tragedy.’ Yet, like so many other partners, he had personally benefited from the change of ownership: ‘The takeover suited me, personally,
marvellously well. I was then 66. I should have retired from my firm at 65, which would have been in 1985, but they kindly kept me on for a year longer than I should have done in order that I
should take my share of the sale proceeds without tax problems.’
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The investment divisions of the clearing banks NatWest and Barclays enjoyed a scale and capitalization that, with persistence and sound judgement, would have allowed them to take on the Wall
Street giants. However, having made an uncertain start, the management of Barclays listened to more-immediate shareholder anxieties and sold BZW to CSFB (Credit Suisse-First Boston) in 1997, while
at the same time NatWest began divesting itself of County NatWest to Bankers Trust, which was bought in turn by Deutsche Bank.
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By then, the once
august British merchant banks were also falling prey to foreign acquisition at a bewildering pace. During 1995, Warburg’s was sold to Swiss Bank Corporation (SBC), Kleinwort Benson was bought
by Dresdner Bank, Smith New Court was bought by the US investment bank Merrill Lynch, and, most sensationally of all, Baring’s, having been brought down by its Singapore-based ‘rogue
trader’ Nick Leeson, was sold to the Dutch bank ING for the derisive sum of £1. The other ex-merchant banks were snapped up in 2000 when Schroder’s and Fleming’s were sold,
respectively, to the American banks Citigroup and Chase Manhattan. By that time, every one of the leading British merchant banks that had taken advantage of Big Bang in order to become investment
banks was in foreign hands.

Did this foreign takeover of the City mean Big Bang’s legacy was disastrous? Without the breaking of the old Stock Exchange restrictions and exclusions, the merchant banks could not so
easily have embarked upon the path that led to their sale. Making a virtue out of necessity, one argument ran that, far from being a sign of their failure, their acquisition showed instead how much
the Americans, Swiss and Germans were prepared to invest in the long-term future of the City. The material manifestation of this overseas
faith was of such a scale that by
the time of the financial downturn in 2007 it was becoming commonplace to suggest that the UK’s banking sector had become
too
strong and was distorting the national economy. Even in
1989, before most of the famous names had changed hands, the City was home to 521 foreign banks, more than double the number hosted by any rival financial centre. The analogy of the Wimbledon
tennis championships was widely trumpeted, whereby London thrived not because of the quality of its home-grown players but because it attracted the world’s greatest talent, whose
participation added lustre and considerably greater receipts. Indeed, so the argument went, far from betraying its heritage, the City’s internationalization was in keeping with its most
invigorating traditions. After all, such venerable British institutions as the banks of Warburg, Schroder, Kleinwort and Rothschild had been founded by immigrants. Far from wrecking the
country’s financial services sector, Big Bang had prevented it from sinking into a provincial backwater. In turn, global credentials bolstered the national interest. Such was London’s
continuing strength that even the UK’s decision not to ditch sterling for the euro in 1999 did not damage the City, which proceeded to carry out more euro-denominated transactions than any of
its rivals in the eurozone.

Yet for all its superficial appeal, the Wimbledon analogy was misleading. The international tennis championships were at least owned by the All England Club, whereas the investment institutions
that came to dominate the City retained their headquarters in New York, Geneva and Frankfurt. Similarly, the reference to the émigré origins of the likes of Warburg, Schroder,
Kleinwort and Rothschild missed the more substantive point that they were British citizens and their banks were British because, regardless of where and with whom they did business, they were
headquartered in London. It was difficult to imagine that Deutsche Bank or Dresdner Bank would shift their headquarters from German soil, or even that they were structured in a way that would
permit them to do so. In that sense, the keys to the City had been surrendered to those whose commitment to it was practical and self-interested, and which the advent of a less business-friendly
environment in the UK might conceivably test to destruction.
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This was, according to one’s view, either a dangerous hostage to fortune or a
welcome constraint on the country’s political decision-makers, schooling them to understand that the City could not be taken for granted but rather needed to be appeased, otherwise its
institutions and personnel would prove as mobile as the money that passed through it.

From a historical perspective, the admiring talk of ‘Wimbledonization’ represented wisdom after the event. The foreign takeovers may have been one of Big Bang’s consequences,
but they were far from having been the deregulation’s intention. Alex Fletcher, who as minister for corporate and
consumer affairs between 1983 and 1985 was charged
with seeing through Big Bang, stated as his opinion in 1983: ‘If we want to maintain London as a prominent market, I think it is very important that the Stock Exchange and the majority of the
institutions here should remain very firmly in British hands.’
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In March 1984, the Governor of the Bank of England, Robin Leigh-Pemberton,
was clear that ‘we would not contemplate with equanimity a Stock Exchange in which British-owned member firms played a subordinate role’.
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By the twenty-first century there appeared to be no principled objection even to the Stock Exchange itself passing into foreign hands, as LIFFE did in 2002.

The original hope was that by becoming highly capitalized, integrated investment organizations, British merchant banks would take on the foreign competition, rather than be taken over by it. The
reality was that too many of them when presented with the opportunity to think big went for broke. As one American financier put it: ‘If you’ve never gone to the casino, you don’t
know how to manage risk.’
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Part of the problem was that the integrated operations placed new managerial demands upon people who were used
to running firms a quarter of the size, or less. Since they had gained their experience in a culture that separated broking from jobbing, and both from merchant banking, the City had a dearth of
native Britons able to span these tasks, to manage much larger departments and to assess risk, all at the same time. Nick Durlacher was one of the experienced City businessmen who questioned the
new framework, with its instant high rewards and focus on youth, followed by burn-out and pay-out. ‘There was an innate discipline in the old hierarchical structure,’ Durlacher
suggested, ‘an awful lot of businesses were partnerships where the senior people had their own money on the line – that gave a certain urgency to management
supervision.’
⁵⁴

Instead, long-term loyalty to one firm – let alone personal liability – became wholly exceptional. In fairness, it was difficult to be loyal to a single firm when, after 1986, they
were merging, acquiring and disappearing with a regularity comparable to that which their own mergers and acquisitions departments facilitated across the wider economy. The breaching of the
introverted, rather self-satisfied, gentleman’s club brought clear benefits in terms of drawing on a wider pool of talent, though the vastly greater remuneration necessary to stop its
defection introduced potential risks that Kit McMahon, the Bank of England’s Deputy Governor, had foreseen in September 1985 when he warned that:

Or, as a chronicler of ‘the death of gentlemanly capitalism’, Philip Augar, put it in a defence of the pre-Big Bang City: ‘It was very hard to cheat on someone
you saw every day.’
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Big Bang allowed the traditional merchant banks to go into securities trading. Notwithstanding periods of success, those that did so found it more difficult than the optimistic talk of 1986 had
encouraged them to assume. The result was that they were subsumed into foreign-owned investment banks. But being permitted to enter a market is not the same as being forced to do so. Instructively,
the firms that opted to stick to their historic niches continued to perform well. Cazenove was the only major brokerage to resist the blandishments of the banks, preferring to upscale its
operations through borrowing from insurance companies. Retaining its socially distinguished clientele, it prospered and only dissolved its family-led partnership in 2001, being entirely taken over
by JP Morgan in 2009. With John Nott as its chairman, Lazard’s showed a viable way forward for merchant banking, and it remained in British ownership until 2000. Rothschild’s was the
one other major merchant bank that opted to focus on its strengths as an adviser on restructuring and mergers and acquisitions, rather than opt for the full multi-disciplinary investment banking
approach. A quarter of a century after Big Bang, it alone of the City’s historic merchant banks remained family-owned and free from foreign acquisition.

Could the pre-Big Bang regulatory structure have delivered better results if it had been left in place after 1986? That the performance as market-makers of so many of the much-vaunted banks fell
far short of expectations was not, of itself, an argument for forbidding them from entering that market, or for encouraging others to buy them in the expectation that they would do a better job. If
the City had continued to restrict its securities trading operations to the partner-structured, under-capitalized, smallish-scale firms with which it had entered the eighties, it is hard to see how
London could have avoided becoming a near-irrelevance in international securities investment over the ensuing quarter-century. Moreover, marginalization as the price for retaining the old ways
would hardly have been in the domestic economy’s wider interests. For, as the Stock Exchange’s chairman, Sir Nicholas Goodison, put it on the eve of Big Bang, its aim was ‘to
create in London one of the three major capital markets in the world’. Far from throwing over a sound national institution, the attracting in of foreign banks would create the great capital
market that would finally give British firms ‘a sound economic base’.
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The liberalization certainly created the capital market.

Greed Is Good

In 1979, a director at Morgan Grenfell might have expected a basic income in the region of £40,000 per annum. Salaries, supplemented by bonuses, increased rapidly
thereafter, but even the leading foreign exchange dealers did not take home more than £50,000 by 1982. By then, the Governor of the Bank of England earned a salary of £85,000 and
directors at Rothschild’s bank received around £100,000.
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As late as 1983, Jacob Rothschild maintained that the City’s highest
earner was on £126,000 per annum.
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Actually he was mistaken in this belief,
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though it
was revealing that someone of his considerable experience and social connections should be under such an impression.

Within three years, sums on this scale were unexceptional. As Big Bang approached, unprecedented inducements were offered by investment banks as they fought each other to secure the talents of
the most highly regarded market-makers. A new lingo was coined during this bidding war. A ‘golden hello’ was a sizeable offer to entice those who were in demand. In an attempt to lock
them in, ‘golden handcuffs’ guaranteed longer-term rewards (typically over five or six years) on condition that the wearer did not defect to a rival in the meantime. With so many
partners selling out, particularly valued was the group just below the icing who became known as the ‘marzipan set’. The money that the US investment banks offered was such that British
institutions either had to raise the stakes or accept that they would be staffed by people deemed to be in the second or third XI. It was a sellers’ market, in which the journalist Nicholas
Coleridge estimated that by March 1986 there might be a couple of thousand investment bankers, stockbrokers and commodity brokers earning £100,000 per annum or more. ‘Most are aged
between 26 and 34,’ he noted, ‘and two years ago they were being paid £25,000, in some cases even less.’
⁶⁰
That year, the
directors at Morgan Grenfell made £225,000 each.
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