Britain learns to live by its wits

Economics
Click to follow
The Independent Online
THE City has become a land where everything is for sale. You might argue that the whole of Britain is such a land, since everything, from the motor industry to much of London's prime residential property, even to many of our best racehorses, seems now to be owned by foreigners. But in recent weeks, the action has been in the City, with the sale of Warburg, Kleinwort, and - in slightly different circumstances - Barings, all knocked down to foreign interests. And now it is Smith New Court under the hammer.

Yet Britain has also become a substantial owner of foreign assets, third in terms of net assets overseas to Japan and Germany (the US has an enormous net deficit). We have very large net inflow of funds from these foreign assets. Everything here is for sale, but paradoxically we actually own much more abroad than we have sold to foreigners. What does all this mean?

There are two stories here. One concerns the City directly and is the extent to which the Faustian bargain of Big Bang in 1986 has been a success. We gave open access to our securities market in exchange for securing that market as the dominant one in world securities trading. The market position seems secure, but at the cost of losing control of most of the business to foreign ownership.

The other concerns the bigger decision that we seem to have made as a country, which is to become a particularly open society both to inward and outward investment. The result of that is that in absolute terms we are close behind the US and Japan in the scale of both our receipts in foreign income and our payments; proportionately our receipts and payments are much larger.

The key issue in the City story is whether ownership matters in what is essentially a people business. It does not matter in the movie business, as Sony, Matsushita and in a rather different way, Credit Lyonnais, have found with their uncomfortable ownership of Holly- wood studios. Seen simply as an industry, the Big Bang "deal" has been a success in that the City's market share of cross-border securities business is enormous: in most categories, it is between 70 and 90 per cent of the world market.

Earnings have risen solidly. The figures for the foreign earnings of the City last year were published on Friday. The headline number was pounds 20.4bn, but one really ought to deduct the investment income, for this represents earnings from the investments of British savers rather than service income from the industry.

But as the graph shows, service income has been rising well in the early 1990s, after a lull in the late 1980s. Of the total earnings, securities business now brings in more than pounds 2bn a year and though still a lot smaller than banking or insurance (see pie chart), provides a solid third leg to the City's business.

If these numbers appear encouraging, the fact remains that key decisions about the future of once-British-owned merchant banks and securities houses will be made in Frankfurt or New York. You might argue that if the quality of leadership provided by the Barings board is any guide, we are better off with the decisions being made elsewhere.

You might argue, too, that decisions by big German banks to run their international investment banking business from London rather than Frankfurt is a sign of the City's strength rather than its weakness, even if the process involves buying a British merchant bank.

Finally, we call these banks British, but actually as their names confirm, they were almost entirely set up by foreigners.

But chauvinism apart, it is hard to feel completely comfortable with this. There is the obvious (though unsupported by evidence) fear that if the going gets tough, foreign owners are more likely to withdraw than home-based ones.

But there is also a more subtle concern. Does not the spread of foreign ownership rather imply that though the skills and the people may be here, foreign institutions have some sort of comparative advantage in the ownership of financial services business? Are they just providing cash, or are they doing something we cannot?

If investment banking is purely a people business, they are simply paying the entry ticket, for the main added value comes from the individuals who, if treated badly, will either go to a competitor or set up on their own. They will, like the Hollywood stars, extract most of that value for themselves.

But if, on the other hand, there is value in the brand as well as the people (so that the purchaser is buying a franchise as well as a bunch of individuals) we, as a country, are losing control over something more substantial.

The most honest response is to say that we simply do not know how much the change of ownership in the City will matter. But what we can be quite sure about is that as a country we are in rather a bad position to complain about foreign ownership, as we have done very well with our own international investment portfolio.

The top line of the bar chart shows how the investment income of financial institutions has soared over the last decade. But there are also our direct investments - what we receive from plants and subsidiaries overseas. We have managed, despite the large current account deficits of the late 1980s, not only to rebuild a solid net asset position, but to invest sufficiently cleverly to generate large increases in our foreign income.

In other words, the strategy of attracting foreign investment but also investing heavily abroad seems to have worked remarkably well. We do not yet have full figures for the investment income for rest of the world for 1994 - all we know is that our own income shot up. But even in 1993 we were second only to the US in direct investment income: we think of the Japanese as the great international investors in foreign plants and subsidiaries, but actually we receive more from that source than they do.

The trick of merchant banking has always been to use other people's money: in Sir Edward Reid's famous phrase, the merchant banks live on their wits rather than their deposits.

But merchant banking has become investment banking. This requires the players to take large positions, and for that they need the backing of a large enterprise - usually a bank with a large deposit base. Given that the nature of the business has changed, changes of ownership were inevitable.

But in a funny way, if the merchant banks can no longer live on their wits, the country as a whole is learning to do just that. We have managed to use other people's money to rebuild much of our domestic industry while using our own quite modest resources to invest very profitably abroad.

None of this was planned. It was not some strategy drawn up by the Treasury and the Bank of England, still less by the Cabinet. If we had tried to plan, we would surely have made a mess of it, as it is worth noting, the Japanese have made of their international investment strategy. Instead, the success of our international investment policy has been the result of the collective ingenuity (and, to be frank, greed) of the thousands of key people in our commercial and financial sectors.

If we have become a land where everything is for sale, we have also become a people who are rather canny not just at selling, but at buying, too.

Comments