COMMENT : Investment flagship looks out of control

"Lord Cairns has responded to the growing sense of crisis in time- honoured fashion - by sidelining the two executives most publicly associated with the disastrous Morgan Stanley flirtation"
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The Independent Online
Is SG Warburg, Britain's flagship investment group, falling apart, or is this just a rough patch from which eventually it will emerge largely unscathed? From the outside it looks like the former, despite the self- assured banter coming from the group's public relations department. The City can be a vitriolic place and you would expect Warburg's rivals to make as much capital as they can out of the present uncertainty. None the less, what is now going on seems to go beyond that. This is more than simply a team being poached by a competitor; it is symptomatic of a deeper malaise brought to a head by the collapse of merger talks with Morgan Stanley. Even senior people within the bank admit privately that morale is rock-bottom. Many are looking for an exit.

That is not to say that Warburg is going to degenerate overnight into a burnt-out wreck of an investment bank. The process would be a slower one than that. To see such a traditionally robust culture as Warburg disintegrate into such a shambles is nonetheless an astonishing thing. Even the bank's most jealous critics would until very recently have thought the name and franchise powerful enough to withstand the present buffeting.

Yesterday the bank moved swiftly to plug the gaps being left by the Saatchi & Saatchi-like desertions, but inevitably the process in such cases is of talent being replaced by lesser people. The impression is of an organisation that has lost control. As the numbers mounted by the hour, the bank was left floundering and having to eat its words on the departure rate.

It is not just the Deutsche Bank/Morgan Grenfell axis which is in recruiting mode right now. What were until quite recently considered to be second- line houses like Robert Fleming are also in expansionist mood. Meanwhile, the only personnel work being done by the stars of the past - Warburg, Goldman Sachs, and Salomons - is in the business of redundancy. Low morale thrives in such an environment and it proves fertile ground for the headhunters.

Lord Cairns, chief executive, has responded to the growing sense of crisis in time-honoured fashion - by sidelining the two executives, Nick Verey and Derek Higgs, most publicly associated with the disastrous Morgan Stanley flirtation. Meanwhile, Mark Nicholls, co-head of corporate finance, steps up to report directly to the chief executive.

By all accounts, there is some quite vicious infighting going on in the Warburg hierarchy. Even if Warburg is not yet the basket case competitors would wish, there is little doubt that things are going to get worse before they get better. The question on everyone's lips, both internally and externally, is whether Lord Cairns is the man to pull the bank back from the brink. At this stage, the position is still too fluid to attempt an assessment.

Tunnel troubles need radical remedy

The market is becoming so blase about profits warnings from Eurotunnel that Sir Alastair Morton is still seeing a healthy profit on the 5,000 units he bought after the company's last revenue revision in October.

Since then the shares have risen from 230p to over 300p, and even yesterday's admission that delays to the start of the Le Shuttle and Eurostar services would put a serious dent in 1995's revenues only wiped 8p off the stock to 298p.

Maybe that is not surprising. It is not altogether clear that shares in a company with no prospect of profits or dividends for many years to come should have any value at all, so it is no wonder they should bounce about on the whim of traders' sentiment. None the less, investors who have been in since the start should now admit, if they have not done so already, that they have paid a heavy price for their "free" tickets through the tunnel. The optimism of share tipsters at the beginning of the year that Eurotunnel had turned the corner and seen the light at the end of the project is looking woefully misguided.

The Channel Tunnel is a magnificent feat of engineering, but like many of the greatest projects, it would never have been started if its planners and financial backers had had any conception of the scale of the disaster they were letting themselves in for. Crystal balls would have denied us the tunnel as they would Concorde and Canary Wharf.

Someone will have to pay for that misjudgement, and it is unlikely to be the 200 banks, which will continue to insist that shareholders shoulder their share of the pain. Sir Alastair's claim that Eurotunnel does not need more rights issues looks like whistling in the wind.

What is plain is that fiddling round the edges is no long-term solution to the problem; Warburgs should forget trying to raise another £500m here and there. The most likely end-game is that the banks will finish up taking equity in place of their debts and existing shareholders will be diluted out of sight.

Lloyds caught in the crossfire

The announcement of an impressive set of profit figures from Lloyds Bank yesterday was greeted by the usual knee-jerk reaction of outright condemnation from interests as diverse as the Labour Party, the banking union Bifu, and IBAS, a businessmen's pressure group.

If it is public esteem the banks are after, producing bumper profits is plainly not the way to obtain it.

Lloyds was perhaps always bound to be caught in the crossfire between shareholders, disappointed at a 6 per cent fall in trading surplus, and the politicians outraged at the 26 per increase pre-tax profits. The only people pleased with the outcome were in the stock market. The share prices of both NatWest and Barclays moved up in sympathy; the Lloyds results were better than the market had expected both on bad-debt provisions and interest income.

Alistair Darling, Labour's City spokesman, limited himself to demanding a bank regulator to ensure that bank customers are given a fair deal, though what any future Labour government would do about the banks remains a complete mystery.

In the meantime one thing is clear. With continued economic recovery, low inflation and higher interest rates, banking profits will continue to grow alongside the job cuts and branch closures. If the Labour Party is outraged now, it will be doubly so by the time of the next election.