Kirk's Book Reviews
Kirk's Book Reviews
Review of Crash Bang Wallop: The Inside Story of London's Big Bang and a Financial Revolution that Changed the World by Iain Martin
|Posted on April 9, 2017 at 2:55 PM|
My rating: 4 of 5 stars
Nothing encapsulates the image of Thatcherism with more pertinence than the flash, 1980s stockbroker quaffing champagne. Replete with braces, a brash Essex accent and philistine tastes in art and culture, the English yuppie represents everything the left-wing establishment detests. Though exaggerated and at times cruel, the caricature endures to this day and is the face of Margaret Thatcher’s misleading statement that ‘there is no such thing as society.’ It is also a reason why the City is disdained as a place of greed and excess, where butcher-thy-neighbour and psychotic ambition are established moral codes. At least the old aristocracy had the good sense not to flaunt their wealth. So how did we come to hold our financial sector in such low regard even before the 2008 global credit crunch?
Iain Martin’s ambitious book builds on the work of Philip Augar’s, The Death of Gentlemanly Capitalism (Penguin, 2000) to explore how the government reforms of the 1980s transformed London from an antiquated financial capital to a modern behemoth at the centre of the late twentieth century’s push towards globalisation. Surprisingly few studies have emerged over the last two decades on this subject and most have been written through the prism of bank failures post-2008, one of which Iain Martin authored in his exposé of the colossal mismanagement at RBS. This latest book is a welcome development and early candidate for the definitive account of an era that changed Britain’s financial, social and political landscape.
It may seem like a relic from a distant age, but most economic policies of the post-war period assumed that foreign exchange controls, state-run industries, restrictions on foreign ownership of UK assets and occasional devaluations of the national currency were a fact of life. The City of London Corporation and the Stock Exchange had their own rules on membership and etiquette. That the latter was a closed shop is undoubted: under-capitalised, governed by school tie connections, protected and insular, the Stock Exchange served a membership of 4,500 people. An old boys club like this was not the embodiment of ‘popular capitalism’ envisaged by Margaret Thatcher, the grocer’s daughter. As Iain Martin points out, ‘One of the great myths – fostered by the privatisations and reforms she introduced from which flowed great wealth to an old and new City generation – is that she was always a natural supporter of the Square Mile and its grandees…’
A survey of stock market rules at the time show why the Square Mile attracted the ire of the Labour Government of the 1970s and saw it threatened with action by the Restrictive Practices Court. Minimum commissions on trades had been in place since 1909 to protect the income of members and limit new entrants from undercutting their profits. No appeals process existed for applicants denied membership of the stock exchange and, besides being ostracised in social circles, a raised eyebrow from the Governor of the Bank of England was the most severe punishment a man could expect for insider trading. One of the most bizarre relationships involved the Treasury, where the government issued gilts on an exclusivity basis via investment house, Mullins, ‘which involved the ritual of its senior partner walking across from the Bank of England wearing a top hat to announce to the market any changes in the bank rate.’ (p. 72) Needless to say, foreign membership of the stock exchange was almost impossible and those not wearing pin-stripe suits and bowler hats knew their place in the hierarchy.
Yet some of the old regime worked well. Stockjobbers were the true market-makers buying stocks and shares on the primary market and selling them to stockbrokers. They earned a profit on the spread between the buy and sell price. This separation between stockbrokers and jobbers, known as ‘single capacity’, looked after the customer’s best interests: ‘The old separation between brokers and jobbers offered the customer some protection from conflicts of interest, because the client knew that their broker had a sole responsibility to buy their shares at the best available price, and could not collude with the jobber.’ (p.90) Most of the jobbing firms such as Wedd Durlacher (later purchased by Barclays) and the broking houses like Hoare Govett and James Capel (later absorbed into HSBC) were limited liability partnerships. The senior partners had their capital at risk and would not countenance reckless trades from those lower down the hierarchy. Even the cockney wide boys rising through the ranks became gentrified and members of polite society. Yet little scrutiny stopped their successors from indulging in their own casino banking operations when re-constituted as public listed firms. The CEO and Chairman of these mega banks answered to institutional shareholders and had none of their own capital at stake in 2008.
Britain’s class system may be fading into irrelevance, but it held the City together before Big Bang. Recruitment for merchant banks depended on Oxbridge and public school connections; the clearing banks (e.g. Barclays and Lloyds) opted for grammar-school graduates; and jobbing firms gave the humble cockney a footing from messenger boy to senior trader before the positions became the exclusive preserve of university graduates in the late 1980s. The end of restrictions on foreign investment and the abolition of single capacity did much to erode this hierarchy. It’s also one of the reasons why the attempts by Nat West, Barclays, Midlands and HSBC to build their own investment banks failed in the late 1980s. Aristocrats from the merchant banks disdained meetings and paperwork, but the grammar boys in the clearing banks didn’t have the courage to stand up to them. Unlike the American investment banks, management at the new British conglomerates relied too much on an officer class leading by instinct, rather than the scientific approach adopted by global competitors at Goldman Sachs et al. Philip Auger describes this amateurish way of doing things as ‘gentleman to the Slaughter,’ and he’s not wrong in Martin’s opinion.
Much of Big Bang abolished this world of nepotism and drunken lunches and saw it replaced with the American culture of morning workouts in the gym, mineral water instead of port and punishing hours at the trading desk. The author identifies four factors that brought in this seismic cultural shift. One: Chancellor Geoffrey Howe’s monumental decision to extinguish all exchange controls in 1981 and to encourage foreign direct investment in the UK economy. Two: the end of fixed commissions and the go-ahead for merchant and clearing banks to integrate jobbing and broking firms into one house of operations. Three: London’s perfect time-zone position between New York and Tokyo. Four: the Thatcher government’s complete indifference to foreign ownership of UK firms and government-issued debt.
Unfortunately, as Martin observes, this has resulted in the ‘Wimbledon effect’, the scenario where the top ten investment banks in London are American, Swiss and German. In other words, the playground is dominated by foreigners, even if Britain’s graduate workforce is still the main beneficiary of this overseas largesse. Morgan Grenfell, Schroders, Kleinwort Benson, Warburg, Hambros, Barings – these are now footnotes in history. Not one UK investment bank remains independent and in the top division, having failed to compete with the likes of Goldman Sachs, Morgan Stanley, Nomura, UBS, Deutsche Bank and JP Morgan.
Of course, the entrance of the American and Japanese banks in the 1980s had its benefits for the senior partners at the old jobbing and broking firms. Approximately 750 millionaires were created overnight as merchant and clearing banks bought up specialist firms in their quest to become global financial supermarkets. To some, this was a betrayal by the old grandees and Martin credits this as one of the factors that created the pay explosion and short-term loyalty that was once anathema in the old boys’ network. The so-called ‘marzipan’ layer of junior partners and managers can hardly be blamed for their obsession with pay and bonuses when a generation of gentleman capitalists sold up and buggered off to the Cote d-Azure for a comfortable retirement at the first sign of a favourable bid.
A glance through the latest edition of The Economist illustrates how much London has changed since the reforms of 1986. Overseas investors hold assets worth 500% of GDP in 2017. Even pension funds such as the Ontario Teachers’ Pension Fund own important assets, like City Airport in London. The contribution of the City to the UK economy is astounding. ‘In total, the City of London estimates that financial services contribute £66.5 billion in taxes to the Treasury annually. That amounts to 11 per cent of the national total. The 2.1 million working across the UK in banking, and other services such as accountancy, constitute 7.2 per cent of workers.’ (p. 293)
Britain is an investors’ paradise, as Alex Brummer points out in his thought-provoking book, Britain for Sale: British Companies in Foreign Hands – The Hidden Threat to our Economy. Everything from our water companies to railways are in the hands of foreign owners, but there are also benefits from being so open. The 2011 flotation of Anglo-Swiss mining giant, Glencore, for $59.2 billion, remains the largest deal in European history. The City has the expertise to raise billions in capital, and it’s small wonder Teresa May is trying to persuade Aramco, Saudi Arabia’s state-oil company, to launch its IPO in London for what promises to be the biggest flotation in corporate history.
The Thatcher government’s insistence on market competition and unlimited capital flows can claim some credit for London’s world-class position in 2017, but Martin is right to point out that Seigmund Warburg’s contribution to financial innovation with the introduction of the Eurodollar bond in 1963 should not be overlooked. The City was already a major player with intellectual expertise, heritage and innovation long before Big Bang. Nor should the 1980s be seen as the hey-day of unregulated, laissez faire capitalism in the City. Thatcher’s critics have succeeded in painting the era as one of greed and market fundamentalism, but regulation increased during this era as London grappled with the gradual erosion of capital borders, merger mania and the explosion of debt securities. Indeed, the Thatcher government made insider trading a statutory offence, beefed up the supervisory powers of the Bank of England and introduced numerous consumer protection bills in the House of Commons.
Martin’s study is not without its flaws. Every bungled reform or innovation is ‘typically British’ and all fortuitous events are described as such, as though it’s in the national character to hope for the best and muddle through. His editor might also have been more competent in routing out the occasional sentence where not one, but two, adverbs predominate (‘The best stockbrokers and jobbing partnerships… which traditionally simply advised clients doing deals…’;). Likewise, readers not acquainted with British political history might need an explanation of the Westland Affair and how the leaking of a letter from the Solicitor General’s office created a constitutional crisis and almost brought down the Thatcher government.
However, Martin’s background as a journalist allows him to glimpse the bigger picture where a financial historian may not see the wood for the trees. This book is also a story of how individuals like Reg Ward and Gooch Ware Travelstead saw a future for London’s expanding finance sector in the deserted docklands of east London. Their dream begat Canary Wharf and the modern icons of high finance we now associate with the City. This regeneration should be judged a success when you consider the surrounding boroughs suffered a net population loss of over 150,000 people in the period 1978-1983 and an unemployment rate hovering around 20 per cent. Unfortunately, few locals these days can afford to live in the area where property is now in the hands of the Russian, Chinese and Arab owners seeking holiday homes. The cockney spirit does not prevail here anymore, but can still be found in Essex, where most have emigrated over the last 20 years.
The biggest question now is how will the City adapt in a post-Brexit world? The European Commission and Council of Ministers will not tolerate London being the major clearer of Euro transactions once Britain leaves the club in 2020. In 2013, the UK accounted for 78 per cent of all foreign exchange trading in the Euro and 85 per cent of all hedge fund assets in the EU. Banks in Frankfurt, Paris and Madrid are way behind London but will get a chance to grab large parts of the currency trading business. Foreign investment may also decline when the UK can no longer be used as a base for financial services across the entire EU.
But the author is not too pessimistic when looking at the financial innovation of the City over the centuries. Britain remains committed to free trade (but not free movement of people from outside countries) and is relaxed towards foreign ownership of UK assets. The future may be more capitalism, not less. Who else, other than Wall Street and Silicon Valley, is better placed to cultivate the emergence of Fintech as the financial service sector looks set for another round of creative destruction that may even lead to the end of money as we know it?
In the meantime, will it be such a bad thing if Goldman Sachs scales down its presence in London following Brexit? Even Thatcher would admit it’s not a bad thing to have a British champion in the investment banking sector. The unlikely exodus of American banks may create more opportunities closer to home.