When I first came to the City more than 40 years ago, it was in many respects a very English, closed world. Senior partners and directors usually came from privileged or moneyed family backgrounds, traditional garb of bowler hat and rolled umbrella were still visible, the Governor of the Bank was a revered figure and in the rather decrepit Stock Exchange building the motto “My Word is my Bond” retained its old resonance.
The contribution of “invisibles” to the UK’s perennially volatile balance of payments was much valued and the City was in the forefront. The geography of the City was striking – Moorgate and Old Broad Street deep in banks, insurance companies clustered around Lime Street, Leadenhall Street and the Baltic Exchange. The discount houses and bill brokers resided within an easy walk of the Bank, merchant banks were often up discreet alleys, stockbrokers, accountants and corporate lawyers leavened the lump throughout the Square Mile. Everywhere the big 5 UK clearing banks had their busy branches.
The English lifestyle dominated, with top-hatted bill brokers on their banking rounds a daily spectacle, the military picquet marching to guard the Bank, splendidly long client lunches in panelled dining-rooms, oysters at Sweetings, ale at the Jamaica, nourishing mixed grill, bubble and squeak and napkin-wrapped Stilton at the George & Vulture. There was of course a strong international flavour, with US banks prominent in the Eurodollar market, but the UK was a protected place of business, surrounded by an inescapable exchange control regime and restraints on the quantity of lending.
This cosy picture concealed many underlying problems. The British economy had stuttered and hardly started since the war. Low productivity, dire labour relations, incompetent management and wasteful government intervention bedevilled much of industry. Other European countries, not to mention Japan and the US, had raced ahead of Britain. Successive Tory and Labour governments had failed to grip the nation’s problems – the 1967 sterling devaluation and the collapse of Rolls-Royce in 1971 typified the decline.
Heath’s government, led by Chancellor Anthony Barber, made a brave if foolhardy effort to escape “stop-go” with its dash for growth following its espousal of Competition and Credit Control, a modernising policy of removing restraints from banks and encouraging lending. Sure enough the economy leapt forward but the bankers poured money not into industry but into their favourite asset, property. A profusion of secondary banks and deposit-taking institutions sprung up, inflation soared and a property bubble swelled and then went pop. The collapse of London and County Securities in 1973 triggered off a major City crisis and eventually the launch of the Bank of England “Lifeboat” which oversaw and softened the death agonies of a raft of secondary banks; the clearers were burnt too with NatWest shares trading well below par and its Chairman having to reassure the world that there was no danger of his bank failing. Modernisation had not gone far: the Bank picquet was disbanded, the bill brokers and their top hats disappeared, but the City sank back into mediocrity.
The mid 1970s were a thin time: the key Stock Market indices fell almost 60% by 1976. Corporate activity was very sluggish – no flotations for 3 years. In 1976 Denis Healey famously turned back from Heathrow to beg for rescue finance from the IMF. The brakes were on, with a pay freeze, high interest rates, high inflation, high petrol prices and the victorious miners ruling their roost. Some in the City were in despair and even talked wildly of a military coup.
But salvation was at hand. Margaret Thatcher had replaced Edward Heath as Tory leader. She encouraged a debate on the merits of Milton Friedman’s monetarism as opposed to Keynesian demand management, which was at the heart of “Butskellism” - the bi-partisan economic consensus since 1951. The monetarists won the intellectual argument and Thatcher developed a programme for a different Britain.
On her accession to power in 1979, her Chancellor Geoffrey Howe immediately abolished exchange controls, a powerful signal of an open economy, and managed the money supply brutally to squeeze out inflation. Recovery slowly emerged and corporate life revived. Some new businesses appeared; a change in the law to allow companies in certain circumstances to charge their own assets to finance the purchase of their own shares cleared the way for a great expansion of the venture capital industry, hitherto a cottage industry dominated by rather prissy 3i. The US-invented leveraged buy-out, often led by management, became commonplace and owners were able to exit their businesses much more readily. The industry soon became known as Private Equity and substantial profits were generated.
Physically the City changed too. In 1982 the opening at last of the troubled Barbican complex gave the City a fine cultural amenity, St Paul’s had started to be cleaned and the mellow Portland stone and swags of external carving emerged from their sooty crust. The rather chaotic wholesale markets at Smithfield and Billingsgate were regulated or removed and retail Leadenhall spruced up. The renovation of old, and construction of new, office buildings appropriate to the digital age gathered pace.
Thatcher wanted a root and branch reform of the City, deregulation of the banks, the sweeping away of stock exchange fixed commissions and the distinctions between brokers and jobbers. “Big Bang” in October 1986 was the critical moment and the City was changed for ever. Famous broking names like Phillips & Drew, Sebags, Pember & Boyle disappeared into the maw of larger investment banking entities, de Zoetes became part of Barclays and many of the old families pocketed their fat cheques and retired happily to their country acres. The Americans, the Germans and the Japanese bought up some of the best outfits and the City became truly international.
Already business was booming. The government’s procession of privatisations – British Telecom, British Gas, British Airways, BP, the water utilities all successfully brought to the market and earning large fees for the City. Share ownership became far more widespread, personified by British Gas’ “Sid”. Fund managers, previously thought a collection of anoraks, suddenly became the new stars.
The changes came at a price of course. The horrors of the US business breakfast were introduced, lunch was for losers and a sandwich at your desk became the uncivilised norm. Banks cut their loyal if extraneous employees, middle managers, clerks, chauffeurs, flunkeys, from the payroll. An unattractive in-your-face consumerism held court. Dealers in every instrument and commodity were lavishly rewarded and their cockney tones rang through the City champagne bars and on the streets as they revved up their gleaming Ferraris and Astons.
It was not all plain sailing. The Guinness/Distillers share scandal rumbled on from 1986 to 1990 and ended in jail terms. Poorly controlled Barings, a City stalwart, collapsed in 1995 and many fingers were burnt as the Dot-Com bubble burst from 2000 to 2002. This was a disaster particularly for private equity funds and their cousins, the aggressively dealing and highly geared hedge funds, another new boy on the block.
The Thatcher Prosperity easily outlasted her, as Major and Clarke kept it on song, despite some setbacks with the E.R.M., and Blair’s early years were a blissful extension of Tory policies. Outside the City, in the industrial wastelands of the North and Midlands, less grateful views prevailed. Prized, iconic industries had been allowed to fail by a government ideologically opposed to state intervention and the working-class heroes, the demonised and ill-led coal miners, had been comprehensively crushed by their failed strike in 1984/5.
Tom Wolfe had satirised the wheeler-dealer New York financiers as self-proclaimed Masters of the Universe and they had plenty counterparts in the City of 1986-2006. They manipulated industries, companies, countries, their wallets grew heavy and a gap widened between them and ordinary mortals. They could not understand the criticism of their remuneration, well-earned in their view – “the market rate” – but obscene in the eyes of less fortunate and possibly equally talented others. The meritocracy had indeed come but it was no fairer than the old system and the gentle tradition of noblesse oblige was long forgotten.
As ever, hubris brings nemesis. Cracks in the dam first appeared in the inter-bank market, caused by the uncertainty of where initially US sub-prime mortgage risk lay, turning to a flood as Northern Rock failed in November 2007, then a tsunami as Lehman Brothers collapsed in New York and London in September 2008, its hapless employees clutching cardboard boxes packed with their office nick-knacks as they were shown the door. RBS’s heady acquisition programme came to an abrupt end, ingloriously having to be rescued by the wretched British taxpayer in October 2008, along with once mighty Lloyds. The damage to the City’s reputation has been immense and a long period of contrition and atonement lies ahead.
The City will survive this shock. St Paul’s will cast its benign shadow, the 38 City churches will imbue serenity, the Lord Mayor, aldermen and liverymen will maintain the old traditions. The modern City of the Broadgate Centre, the Gherkin and the Millennium Bridge will settle and mature. A dynamic City which has survived the Romans, the Plague, the Great Fire, the Gordon Riots and the Blitz will take this latest financial crisis in its stride and with consummate aplomb.
SMD
6.07.11 Copyright Sidney Donald 2011
