Lessons from the overreachers

Opportunistic City banks have paid dearly for failed gambles in the past, writes William Kay

THE Warburg crisis vividly demonstrates that the carefully nurtured, rock-solid image of the merchant banks is little more than a facade.

The author Paul Ferris observed in his book on the sector, Gentlemen of Fortune: "High finance, like pornography or foreign travel, is no longer the prerequisite of an lite. Newcomers elbow their way into the business."

In 1934, Sigmund Warburg was one such newcomer, having escaped from Nazi Germany with just £5,000. He set up his merchant bank after the Second World War but was treated as an upstart until 1959, when he outraged the City establishment by winning the battle for British Aluminium on behalf of his US client, Reynolds Metal.

But Warburg had made its name and, during the takeover booms that followed, public company chairmen sought its services in the hope of boosting their chances of winning corporate battles.

Warburg was also one of the first merchant banks to seize on the significance of the Eurodollar market, which sprang up because US interest rates were artificially held down. Billions of dollars were sloshing around Europe looking for a home - and Warburg was inventive enough to see how that provided the basis for a lucrative market.

The legendary NM Rothschild merchant bank created the basis of its fortune in a similarly opportunistic way, making itself indispensable to various European governments during the turmoil that culminated in the British victory at Waterloo in 1815. The bank's courier system gave Nathan Rothschild advance word of that victory, and he used the knowledge to make a huge profit in British government bonds. But he had already made far more from financing Napoleon's return from exile. By the end of the century, Rothschild was helping the British government to buy the Suez Canal.

In the modern era, Rothschilds and Kleinwort Benson were the two banks that first saw the fee-earning potential in Margaret Thatcher's privatisation crusade as it gathered pace in the early 1980s. Then there were those fabulously profitable deals that flowed from being in the right place at the right time, and having the shrewd judgement to back the right people.

Hambros Bank did just that in the 1970s, when it backed Sir Mark Weinberg to start Hambro Life, turning £1m into several hundred million in the process.

As long as merchant banks stick to using their wits, to giving advice and acting as middle men, they are limited only by the strength of their name. But, as Warburg was sharply reminded last year, every so often they overreach themselves.

Hambro's success with Sir Mark was matched at around the same time by losses it incurred in loans to the shipping market.

In the second half of the 19th century, Baring Brothers was riding high as financier to North America and raising money for Imperial Russia to build the Trans-Caucasian Railway. But then, about 100 years ago, it effectively bet the bank on Argentine railways and nearly went broke, as the Argentine economy proved incapable of keeping up the payments.

Although Baring is still very much in business, and although a member of the ruling family is currrently the chairman of British Petroleum, that South American crisis began a long slow decline, and the company has never fully recovered its former prime status.

It stands as an awful warning to Warburg.

News
Jeremy Paxman has admitted he is a 'one-nation Tory' and complained that Newsnight is made by idealistic '13-year-olds' who foolishly think they can 'change the world'.
peopleThe idea has been greeted enthusiastically by the party's MPs
News
Michael Buerk in the I'm A Celebrity jungle 2014
people
Voices
File: David Cameron offers a toast during a State Dinner in his honour March 14, 2012
voicesAnd nobody from Ukip said babies born to migrants should be classed as migrants, says Nigel Farage
Arts and Entertainment
Avatar grossed $2.8bn at the box office after its release in 2009
filmJames Cameron is excited
PROMOTED VIDEO
Arts and Entertainment
Stik on the crane as he completed the mural
art
News
Happy in his hat: Pharrell Williams
people
Arts and Entertainment
Stella Gibson is getting closer to catching her killer
tvReview: It's gripping edge-of-the-seat drama, so a curveball can be forgiven at such a late stage
News
Brazilian football legend Pele pictured in 2011
peopleFans had feared the worst when it was announced the Brazil legand was in a 'special care' unit
News
i100(More than you think)
Sport
Brendan Rodgers seems more stressed than ever before as Liverpool manager
FOOTBALLI like Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
News
ebooksNow available in paperback
News
The Magna Carta
archaeologyContemporary account of historic signing discovered
News
Phyllis Dorothy James on stage during a reading of her book 'Death Comes to Pemberley' last year
peopleJohn Walsh pays tribute to PD James, who died today
Sport
Benjamin Stambouli celebrates his goal for Tottenham last night
FOOTBALL
Life and Style
Dishing it out: the head chef in ‘Ratatouille’
food + drinkShould UK restaurants follow suit?
News
peopleExclusive: Maryum and Hana Ali share their stories of the family man behind the boxing gloves
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Argyll Scott International: Service Desk Analyst

£20000 - £22000 per annum: Argyll Scott International: Service Desk Analyst Re...

Argyll Scott International: 2x Service Desk Analyst

£20000 - £22000 per annum: Argyll Scott International: Service Desk Analyst Re...

Recruitment Genius: Senior Execution Trader

£30000 - £250000 per annum: Recruitment Genius: A global Rolling Spot FX, Comm...

Citifocus Ltd: ACA - Financial Reporting

£Attractive Package: Citifocus Ltd: Chartered accountant (ACA or CPA), must be...

Day In a Page

Homeless Veterans Christmas Appeal: ‘We give them hope. They come to us when no one else can help’

Christmas Appeal

Meet the charity giving homeless veterans hope – and who they turn to when no one else can help
Should doctors and patients learn to plan humane, happier endings rather than trying to prolong life?

Is it always right to try to prolong life?

Most of us would prefer to die in our own beds, with our families beside us. But, as a GP, Margaret McCartney sees too many end their days in a medicalised battle
Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night - is that what it takes for women to get to the top?

What does it take for women to get to the top?

Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night and told women they had to do more if they wanted to get on
Christmas jumper craze: Inside the UK factory behind this year's multicultural must-have

Knitting pretty: British Christmas Jumpers

Simmy Richman visits Jack Masters, the company behind this year's multicultural must-have
French chefs have launched a campaign to end violence in kitchens - should British restaurants follow suit?

French chefs campaign against bullying

A group of top chefs signed a manifesto against violence in kitchens following the sacking of a chef at a Paris restaurant for scalding his kitchen assistant with a white-hot spoon
Radio 4 to broadcast 10-hour War and Peace on New Year's Day as Controller warns of cuts

Just what you need on a New Year hangover...

Radio 4 to broadcast 10-hour adaptation of War and Peace on first day of 2015
Cuba set to stage its first US musical in 50 years

Cuba to stage first US musical in 50 years

Claire Allfree finds out if the new production of Rent will hit the right note in Havana
Christmas 2014: 10 best educational toys

Learn and play: 10 best educational toys

Of course you want them to have fun, but even better if they can learn at the same time
Paul Scholes column: I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season

Paul Scholes column

I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
Lewis Moody column: Stuart Lancaster has made all the right calls – now England must deliver

Lewis Moody: Lancaster has made all the right calls – now England must deliver

So what must the red-rose do differently? They have to take the points on offer 
Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

Sol Campbell cries foul at Labour's mansion tax

The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

Sarkozy returns

The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
Is the criticism of Ed Miliband a coded form of anti-Semitism?

Is the criticism of Miliband anti-Semitic?

Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

Ouija boards are the must-have festive gift

Simon Usborne explores the appeal - and mysteries - of a century-old parlour game