Lord Cairns' beau geste

The blow fell on Lord Cairns, chief executive of Warburg, on Saturday morning at an emotional meeting with Sir David Scholey, his chairman, at the bank's Broadgate offices.

The official version of what must have been a traumatic occasion for the two long standing colleagues is that Lord Cairns fell on his sword without prompting. But few in the City believe that if he had refused to resign, he would have survived a full board meeting called for the next morning. Warburg's reputation has been declining so fast in recent months that the board would almost certainly have insisted on tough action.

In the event, the directors who assembled at Warburg's offices were called upon only to ratify a decision taken privately 24 hours earlier. So on Sunday, a defeated Lord Cairns slipped away two hours before the board meeting broke up, his career at the bank over.

Voice cracking yesterday with emotion and strain, he refused to elaborate on the reasons for his departure from a job that once may well have carried more City clout than any other apart from the governor of the Bank of England.

But to most observers it was clear he was carrying the can for six months of mistakes, infighting and senior resignations that have severely damaged the reputation of the investment bank.

According to a former executive, people outside Warburg will find it hard to grasp quite how seismic these events are for those still within the bank.

It is a group that sees itself as hiring the best and grooming an elite for the succession.

Warburg is the classic case of an outsider - a bank founded by an immigrant, Sir Siegmund Warburg, in the 1930s - becoming more establishment than the establishment.

But after all his careful preparation, Lord Cairns has had the final prize of the chairmanship, already promised to him, cruelly snatched from his grasp, only months before he was formally due to assume the role.

The board meeting then had to decide how to get the bank out of the dead-end street into which it has driven so quickly and unexpectedly.

The immediate reason for the emergency meeting, which brought Warburg directors jetting in from all over the world, was probably the departure last week of two key international equity specialists for Deutsche Bank, followed by members of their team.

By Friday, the City was gossiping about Warburg as if it was already a lame duck waiting for rescue, and there was talk - later denied- of a Bank of England inspired rescue. In a business where reputation is all, the gossip had to be stemmed at all costs.

The defections may have been the straw that broke the camel's back. But most of the trauma at Warburg has been traced back to the failure in December of a plan to merge with Morgan Stanley, the US investment bank.

Fairly or not, Lord Cairns, as chief executive, took much of the blame for the failed deal, which fell apart because Warburg - the pre-eminent fixer of bids and deals - failed to square the directors of Mercury Asset Management, its 75 per cent owned subsidiary. They would not recommend a bid for the 25 per cent in public hands at the price Morgan was offering.

Sir David Scholey, as chairman, would be hard put to distance himself from what happened then. Nevertheless, it was Lord Cairns who offered to resign at that point, but was persuaded to stay.

But there had been straws in the wind much earlier that suggested to some of the band of Warburg watchers that the bank was losing its touch.

The balance sheet gave substantial clues of the decline. Though impressive for a local UK merchant bank, Warburg did not have the money to compete on an international scale with some of the most powerful New York investment banks.

In the early 1990s, these banks turned in a handsome extra profit by speculation in their own names. Warburg did not have the money or the expertise to do that.

The failure of the grand plan to merge with Morgan Stanley exposed Warburg's need for capital. It also forced Lord Cairns to cut the bank's coat according to its cloth. Jobs began to go. Most observers are betting on further contraction.