in the winter of 1958, the City of London witnessed its first large-scale hostile bid. British Aluminium, chaired by a former wartime Chief of Air Staff and managed by the son of a former governor of the Bank of England, came under siege from a consortium of Reynolds Metals, an American company, and the British industrial firm, Tube Investments. Reynolds was advised by the upstart merchant-banking firm of SG Warburg. Despite a rearguard action by the City establishment, British Aluminium succumbed. The day after the bid was announced, the prime minister Harold Macmillan wryly observed, "It's becoming rather a gentleman v players affair."
David Kynaston's fourth volume in his history of the City of London chronicles the players' victory. Despite the Attlee government's nationalisation of the Bank of England in 1946, the City's institutions and values emerged from the second world war essentially unchanged. Governors of the Bank of England still came from the City aristocracy and sought to defend their historic privileges. The merchant and clearing bankers continued to do the governor's bidding, paying special attention to any raising of the famous eyebrow. The failure of the Labour government to make deep inroads into the City is ascribed by Kynaston to the socialists' ignorance of how its arcane institutions functioned. Labour's priorities were industrial and the world of finance was deemed a necessary evil, not to be examined too closely.
The post-war City remained remarkably hierarchical; more like a public school than a club. Its leaders were men such as Lord Kindersley of Lazards, who retired in 1953 in his eighties, to be succeeded by his son. George Soros left for New York after a short stint in the City in the 1950s. "It was," he wrote, "almost impossible to transact business without having a prior relationship."
It was not good form to be seen to be hungry. On his retirement in 1970, Sir Antony Hornby, a senior partner at the broker Cazenoves, laid out the rules of the club to his firm's younger members: "One must be generous as well as competitive. One cannot prosper at other people's expense. One's friends and even competitors must be allowed to prosper as well."
Such an approach had certain virtues. Because City relationships were fundamentally personal, and based on a common code of conduct, there were fewer scandals than might otherwise have been expected. Losses could also be mitigated. When Lord Poole, head of Lazards, was asked how his firm has managed to avoid being affected by the collapse of the secondary banks in 1973, he replied: "Quite simple. I only lend money to people who had been at Eton."
The drawbacks of the old club are almost too obvious to mention. The capital allocation of the country is not most efficiently achieved if confined to Etonians. The exclusion of bright outsiders continued for years-in 1976, the thirteenth Earl of Airlie was preferred to the Australian James Wolfensohn, currently head of the World Bank, for the top job at Schroders.
It was Siegmund Warburg, from the German Jewish banking family, who most effectively turned the City's faults to his own advantage. His name and contacts were good enough to acquire entry to the club, but once inside he did not play by its rules. Instead of peeling off home early after a boozy lunch, SG Warburg employees were expected to work long hours (the bank became known as the "night club"). Warburg was prepared to launch hostile bids. He was also ready to poach staff from other firms.
Above all, the firm was prepared to innovate-an anathema to clubs. In business, however, it is the key to success. Warburg's breakthrough came with the issue of a $15m bond for the Italian motorway operator, Autostrade, in 1963. This inaugurated the Eurobond market, which involved recycling dollars, kept out of the US for tax reasons, to European companies and states. Eurobonds were not only a new, and profitable, line of business, they signalled the return of the City to its age-old role as an entrepôt for capital. Warburg was the Nathan Rothschild of his generation. Despite exchange controls, which persisted until 1979 and the loss of sterling's status as a reserve currency, the City was ready once again to take the lead in international finance.
To be fair, Warburg was not solely responsible for reviving the City's international role. The Bank of England, although a deeply conservative institution, was prepared to let foreign banks establish branches in London with minimal fuss. A fortuitous time zone, English as the new lingua franca, a benign regulatory environment and a critical mass of skills all played a part.
By the 1970s, there were in effect two Cities: the inward-looking club, still chaired by the Governor of the Bank of England, and a modern, cosmopolitan, and competitive place. Gradually, the walls of the club began to crumble.
Certain rooms in the old club remained bolted and suffered as a result. The Stock Exchange only opened its membership to foreigners in 1971. It took government intervention and a further 16 years for the Stock Exchange to abolish minimum commissions and end the separation of jobbers (now known as "market makers") and brokers. In the meantime, the Stock Exchange failed to develop a role for itself in the fast-growing markets for options or Eurobonds. Its members were both too numerous and undercapitalised at the time of the Big Bang. A few of the merchant banks, including Warburgs, attempted to turn themselves into modern investment banks but they lacked the capital and the international presence of the American firms, such as Goldman Sachs and Morgan Stanley.
In the last 15 years, virtually all the old City merchant banks and brokers have fallen into the hand of foreigners. Only NM Rothschild, Cazenove, and Lazards (now more closely tied to its French and American cousins) survive.
Kynaston is well aware of the failings of the old City. However, he cannot ward off a sense of nostalgia for what has been lost. The collapse of the City's old-fashioned virtues, based on trust and a sense of honour, in the years since the Big Bang has been startling. From this followed Guinness scandal in the 1980s, the malfeasances of Robert Maxwell and the fall of Barings.
The modern investment banks have brighter employees and are more open to talent than their forerunners. But, as Kynaston observes, the contemporary banker hardly conforms to Siegmund Warburg's ideal of the well-rounded banker. The fee-hungry and personally ambitious banker of today does not invariably provide a better service to his client, all things considered, than the dimmer but less rapacious banker of yesteryear.
For the City to thrive in the 21st century, its incumbents must revive the virtues of gentlemanly capitalism that have been carelessly discarded. A first step would be for neophyte bankers to read this excellent book.
