How is the mighty Warburg fallen

John Eisenhammer, Financial Editor, charts the rocky course being saile d by the City flagship
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The headhunters are descending like scavengers on Warburg again; and this time it looks as if they are knocking at an open door. They first swooped late last year, as soon as the Morgan Stanley deal broke off. But it was too soon then.

The City's flagship investment house was still frozen with the shock of that rude and public rebuff. Now, two of its highest flyers have jumped ship to Deutsche Bank, the German challenger for the international investment banking premier league, whose fortunes are rising as rapidly as those of Warburg sink. | The departures inflict real damage on Warburg's ambitions to remain an independent player of substance in the global banking business - to the point where, some senior bankers think, the need for arescue by a British bank such as Barclays is no longer discounted as the impossibility it would have been even six months ago.

The departures earlier this week of Maurice Thompson, 36, and Michael Cohrs, 38, co-heads of SG Warburg's equity capital markets, which masterminds the big privatisation deals, have certainly shattered the paralysing effect of the Morgan Stanley breakdown. While the board sit tight, there is a real risk, according to both ex-Warburg and rival bankers, that it now faces a Saatchi and Saatchi-style haemorrhage of talent.

The headhunters have been ringing furiously, probing the wounds of what insiders say is a deeply traumatised organisation. The departure of Maurice Thompson, a Warburg devotee, man and boy, is a devastating blow, both in the loss of quality and in the way it exposes the depth of the crisis.

Mr Thompson had a brief flirtation with Goldman Sachs in the late Eighties, but stuck with Warburg, believing that it had the skills to carry the City's British colours into the battle with the barbarians from Wall Street. His resignation is the most eloquent statement that these ambitions have been irretrievably squandered.

The job of head of equity capital markets is the keystone in an arch linking two important sectors of an investment bank's business. Remove it, and large areas of activity are weakened. One of the sectors is corporate advice, the team which deals with governments over privatisation and big corporations over issues.

On the other side of the arch is the equities sales team, who distribute the shares. Maurice Thompson was the vital link between these two sectors, a recognised heavyweight who excelled at second-guessing rivals in tense negotiations, as well as winning over governments and big institutions.

If this keystone is removed, the arch itself becomes liable to collapse. The equity sales teams lose their clout, because clients fear they will not be able to deliver the shares, robbing the house of the primary business that is about the only equity trading that brings in real money. The corporate advice people also lose their leverage with the governments and big business.

Maurice Thompson had run up one of the most impressive dealing books over the last five to ten years, having participated in many of the big international placings. His experience is exactly what Deutsche Bank needs, as it steadily pursues its plan of building up its international investment banking operations in London with its subsidiary, Morgan Grenfell.

Deutsche has been holding beauty contests of headhunters, and Morgan talks of constant streams of aspirants knocking on its door. But few of them are of the calibre of Thompson and Cohrs, who, word has it, approached Deutsche themselves, and subsequentlyturned down Warburg's proposal to match the money on offer from the Germans.

It is no coincidence that Maurice Thompson is a German speaker and knows his way intimately round Frankfurt. Although it is the predominant power in Germany, Deutsche's international clout is limited.

It has won the lead role in the first Deutsche Telekom privatisation next year, which will be the biggest ever European placement. But Deutsche has never handled anything on such a scale before. Given its stated ambition of challenging the Americans for the summit in investment banking, this is a placement Deutsche cannot afford to get wrong.

The arrival of Maurice Thompson and Michael Cohrs hugely enhances Deutsche's punching power. The only snag for the Germans is the revelation of the massive premium they have paid to get the two Warburg defectors.