The City: a British success or a study in failure?

Reforming the city
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The Independent Online

Just in case you hadn't noticed, today is the 15th anniversary of Big Bang, an event that changed the face of the City for ever.

On one level, it was an innocuous enough event. By today's standards, the existence of a system that required all stock brokers to charge a minimum rate of commission, forbade brokers from making a market in shares, and stopped outsiders from owning a stock market firm, was absurd, and even at the time it seemed hard to defend.

Even so, few would have predicted the seismic shift in ownership, power and culture that dismantling this system would bring about. Over the intervening years the City has changed beyond recognition from a closed shop of exclusively British-owned securities firms and merchant banks into an international financial centre which is almost entirely controlled by the bulge bracket firms of Wall Street and their European counterparts.

Whether Margaret Thatcher and her then Trade and Industry Secretary, Cecil Parkinson, would so wholeheartedly have backed the reforms had they realised they would give rise to such a root and branch structural shift is anyone's guess. But what is not in doubt is that by the mid-1980s, the City was slipping into the sea and without modernisation, the place would almost certainly have been doomed.

To her eternal credit, Mrs Thatcher was always as hostile to the closed shops of big business and wealth as to those of organised labour. The City had become an inward looking, uncompetitive, class-ridden oligopoly and yes, in its culture of long lunches, and its toleration of sloppy and untoward practice, both unprofessional and out of date.

The process of capital market reform that began with the dismantling of exchange controls ended with deregulation of the Square Mile. Without these reforms, the City would not today be describing itself as the world's most pre-eminent international financial centre.

That position would instead have belonged to Frankfurt, Paris or somewhere else.

Not everything about the old City was bad. As Philip Augur has remarked in his excellent book on this period of the City's history, The Death of Gentlemanly Capitalism, there was much to admire in its culture of honour, decency and service.

But the Stock Exchange's refusal up until Big Bang to contemplate change of any sort left the partnerships that then ruled the roost totally unprepared for the onslaught that was about to hit them.

Of the major stock broking and jobbing partnerships that then existed, only one is still around in its original form, Cazenove. The same goes for the merchant banks. All but NM Rothschild and Lazards have sold out.

A myriad of once glorious, old City names is now largely lost in the mists of time. This didn't happen all at once. There were two distinct phases to the transformation of the City that subsequently took place.

In the first, there was a mad scramble among the big commercial banks, both British and foreign, to buy up the best of the Stock Exchange partnerships and City merchant banks and mould them into something akin to an integrated, American-style investment bank covering all aspects of securities trading, corporate advice and capital raising.

Very few of them understood what they were doing and most of them lost their shirts. Some £500m was spent in the first wave of acquisitions. Another £500m was lost in the subsequent downturn, and then hundreds of millions more written off in the programme of closures and withdrawal that followed.

In the second phase, there was a more structured assault by the big investment banks of Wall Street and some of their European counterparts, much of it a green field attempt to build a presence from scratch. The Americans brought in their own people, their own systems, their own methods and their own salaries.

Rather than buy existing franchises, they poached the most able and up and coming talent around, often on salary and bonus packages with which the old City couldn't even begin to compete, and then applied it more effectively. What subsequently happened was a massacre, and like all massacres, it was unfair and arbitrary.

The bulge bracket firms of Wall Street have their own cartel and hugely lucrative it is too. Throughout the 1990s they poured the fruits of their American monopoly into the great globalisation project. The City was a centre of their attentions. The old City was razed to the ground and a new foreign-owned one constructed in its place.

Today the City and its Canary Wharf satellite are among the most cosmopolitan places on earth ­ a wealth of different nations, languages and interests ­ and there's hardly a banking transaction anywhere of size or complexity that doesn't pass through its byways and systems in some shape of form.

The City always does best when it is looking out rather than in, when it is open to rest of the world rather than closed to it. Big Bang came in the nick of time. Of that there is no doubt. But it is also a potent symbol of British failure, incompetence and loss of nerve.

The British seem to make great traders, corporate financiers and wheeler dealers, but post the collapse of empire, they don't seem to be much good at running anything. There have been all kinds of recent examples of it ­ Marconi and Equitable Life to name but two ­ but the City is perhaps the biggest of the lot.

Fifteen years ago, the City was dominated by British controlled players. Today the Brits are only fringe operators in their own market place. There isn't a single example of a big league, British-owned investment bank. In pharmaceuticals we have GlaxoSmithKline, in oil we have BP.

But there's nothing comparable in an industry the British are meant to excel in, the capital markets. Those that describe the City as these days just a wholly owned subsidiary of Wall Street aren't too far from the truth.

The Americans have brought great wealth and expertise back to the City, but they could just as easily withdraw it again. The present downturn is likely to provide the first significant test. What we have seen so far in terms of job losses and closures is no worse than during previous setbacks in the capital markets. Investment banking is a highly cyclical industry.

It expands like topsy in the good times and cuts back like a deranged gardener in the bad. The worry is that this one is going to prove a good deal more serious. So far, investment banks have deliberately held off from more draconian cuts because of past experience.

There's no point in cutting back sharply just to rehire again six months later. The trouble is that the anticipated upturn should by now be happening but it is not.

Wall Street cannot afford to hold back the axe forever and there is a palpable sense of anticipation in the City of swathes of cuts to come. The City has been a big beneficiary of globalisation, a process that has at its heart the free movement of capital around the world.

The events of 11 September dealt that process a huge blow. It remains to be seen how the City as a financial centre fares in the more cautious, anxious world in which we now find ourselves.

 

j.warner@independent.co.uk

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