It's a risky jump from High St to Wall St

City & Business
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The Independent Online
Two of Britain's high-street clearing banks appear to be suffering from a rare personality disorder. Both Barclays and NatWest showed clear symptoms last week of a crippling disease that we shall call "delusionary Via Moenia". It is a most unfortunate and often terminal illness, which only afflicts banks and manifests itself when a humble financial institution has delusions that it is a Wall Street investment bank.

In Barclays case, fears that the illness had taken a grip were prompted by news that it had agreed to a pounds 5.8m two-year pay package in order to secure the services of Bill Harrison as the new chief executive of BZW, the clearer's investment banking division. At NatWest, the symptoms were identified when it bought Hambro Magan, the merchant banking boutique for a sum that could be as high as pounds 100m. That's a lot of money for 40 people and a client list.

Each event was accompanied by frightening examples of Wall Street-speak. Martin Taylor, chief executive of Barclays, was reported as saying: "Anybody who wishes to participate in this business has to bid for the best talent. Bill is a very hot property." Martin Owen, chief executive of NatWest Markets, enthused about being "a performance-driven business" when explaining the multi- million bonuses and golden handcuffs that would be on offer to the expanded corporate finance business of which he can now boast.

What is most disturbing is that BZW and NatWest Markets are recognised as the only "British" organisations with the opportunity to establish themselves as global investment banks capable of taking on the giants of Wall Street. That is indeed correct. But the analysis is flawed in the assumption that taking on Wall Street is a desirable and rewarding objective. Our boys are behaving like Wall Street big shots before they have established themselves on the global stage.

The US has been a graveyard for many British businesses, including investment banks, who have eyed this supremely important and lucrative market enviously, only to find that the potential rewards are far outweighed by the practical risks.

It is encouraging that NatWest and Barclays are prepared to expand their horizons, but they must be conscious that it is the substance not the form of their activity that will represent the yardsticks by which they are ultimately measured.

If caught early enough "delusionary Via Moenia" can be cured. But banks behaving madly is not something that either the marketplace or shareholders will tolerate for long. The time to pay Wall Street salaries and prices is after you have delivered sustained Wall Street performance, not before.

Buy-backs to the future

Budget leaks are great fun - except when the leak comes from the Chancellor and is less a leak than a specific measure taking immediate effect. Hence the gloomy faces, particularly at Reuters, when Kenneth Clarke announced he was scrapping tax benefits on share buy-backs and special dividendslinked to takeovers or new share issues. The move was timed to catch the innovative Reuters special dividend share scheme, which was designed to spread the tax break to all investors - not just tax-exempt investors such as pension funds.

Commentators bemoaned the passing of an extremely efficient way of reducing the cost of capital and passing surplus capital back to investors while improving earnings per share. The concerns are overstated. All the Chancellor has really done is tighten a loophole that was being mercilessly exploited. Schemes were being specifically designed to ensure that buy-backs and special dividends were channelled towards the tax-exempt investors who have the most to gain. They benefited since they could claim a tax refund on the advance corporation tax (ACT) associated with these distributions. Tax efficiency had given way to tax avoidance.

There will be a marginal decline in the returns earned by tax-exempt funds, but the change does nothing to interfere with the basic principle of share buy-backs. These will remain extremely viable means of returning cash to shareholders. Those who argue that companies will be encouraged to either hoard cash or fritter it away on unwise diversifications underestimate the strength of feeling in an investment community that demands corporate management takes its stewardship of cash seriously.

Artificially driven schemes will be rightly discouraged, but a straightforward buy-back that is economically robust will still be welcomed and worthwhile. Accountants KPMG argue that under the new regime it may even be easier for some companies such as those with surplus ACT and overseas income to make share buy-backs.

The bigger concern is not the specific measures announced last week but the assault they represent on on the UK's imputation system of taxation. This has already been eroded with a reduction to 20 per cent in the tax credit. If the imputation system does have a limited shelf life, then the damage for share prices will be altogether more significant than a crack-down on buy-backs.

Paying the price

The sound of axes swinging and heads rolling will not be heard at the headquarters of Deutsche Morgan Grenfell this week. Instead there will be a respectful and silent parting of the ways as those who became inadvertently entrapped in the complex web woven by sacked fund manager Peter Young pay the hefty price for their unfortunate association.

They leave in a cloud of sorrow rather than anger. Both DMG chief Michael Dobson and Hilmar Kopper, the chairman of German parent Deutsche Bank, are genuinely upset by the unfairness of a situation that requires them to take dramatic action against people who have served DMG loyally, professionally and profitably over a long period of time. Any anger is reserved for Mr Young, who betrayed the trust placed in him.

It is to DMG's credit, however, that it has not hidden behind theemotional arguments for inertia. It and Deutsche Bank have acted swiftly and responsibly, setting new standards of City behaviour. There is a firm belief that no one individual is bigger than the organisation and that no matter how strong the mitigating evidence it is only right that a penalty be paid by those who should have done better.

In a City showing signs of returning to the selfish greed culture of the 1980s, DMG'sacceptance of its responsibilities represents a welcome beacon of hope.

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