Morgan Grenfell affair brings out the humbug

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The Independent Online
It is hard to exaggerate the air of devastation and disbelief that hangs over the Finsbury Circus offices of Morgan Grenfell Asset Management. To most of the largely decent and highly competent souls who work there, this is not just a bad business, it is a totally incomprehensible one.

The failure in control which allowed it to happen is just a part of it. Almost worse is the realisation that someone as apparently volatile, untrustworthy and, it now seems, just plain dishonest as Peter Young could not only have established himself within their midst, but flourished and prospered there.

Fund management is first and foremost about integrity and diligence; nothing excuses MGAM's failings but in a way they are explained by the fact that such qualities are accepted as given among those in charge of other people's money. No one would expect an apparently reliable fund manager to behave like this. The controls are not there to be exercised; they are insurance. So are the trustees, whose failings appear to have been equally lamentable.

Mr Young was a seemingly able, very plausible, and for a time at least, highly successful young fund manager. How he came to go so seriously off the rails is perhaps a question that only the shrinks can answer fully. Part of it, however, is undoubtedly our old friend hubris.

Mr Young had one of the top-performing funds of 1995; plainly he believed in his investment judgements and the array of unquoted securities he had begun to accumulate. When it became apparent that he was breaching his limits, rather than doing what he was told and unwinding the positions, he systematically set about disguising what was going on. Whether he also had his fingers in the till has yet to be established. The fact that Morgan Grenfell has moved to freeze his assets tells you that it is at least suspected.

For Michael Dobson, Deutsche Morgan Grenfell's chief executive, to describe this sorry affair as "an isolated incident" is from his point of view, with a damage limitation exercise to confront, wholly understandable. But it is also clearly nonsense. If it can happen in one part of Morgan Grenfell Asset Management, then it could also happen elsewhere. Nor should we automatically accept the line that Morgan Grenfell was the hapless victim of a clever and devious manipulator. That also is just too convenient an explanation. I'm not suggesting here any question of collusion or conspiracy, that Morgan Grenfell's top brass are making Mr Young into a scapegoat for something they all knew about. That would be daft. But plainly there has been negligence, the scale of which has yet to be established.

There are eerie parallels here with Morgan Grenfell's last big scandal, the Guinness affair. Lest it be forgotten, the shenanigans surrounding the Guinness bid for Distillers were little more than 10 years ago, and though the mischief occurred on the corporate finance side of Morgan Grenfell, the story isn't so very different - a star employee given all the lee- way he needed to run riot. Mr Dobson will have to hope that the fall-out from Mr Young's antics is not quite as devastating. With the Guinness affair the buck didn't stop with Roger Seelig. Morgan Grenfell's head of corporate finance, its finance director, and yes its chief executive too, followed in short order. Certainly Morgan Grenfell's German masters at Deutsche Bank are going to want to exercise much greater hands-on control over their British investment bank than they have to date.

The regulators too would be wise to hold their counsel. Now champing at the bit to discipline everyone in sight, they should first be looking to their own houses. That there was a breakdown of internal controls at Morgan Grenfell, we know; but could this not also be a case of regulatory failure, ignored warnings and the like?

Despite all this, it is easy to overblow the significance of Mr Young's costly little jolly. Though it obviously took a lot longer than it should have done, Mr Young was eventually unmasked. Morgan Grenfell's parent bank, Deutsche, then moved decisively and swiftly to ensure investors were not disadvantaged. Thank God for the Germans is all I can say. The question of compensation is clearly not over yet, but without Deutsche's capital, Morgan Grenfell could have been wiped out. And although the affair has prompted the usual questions, soul-searching and wringing of hands over the City's position as a financial centre, I can't see it myself. As long as the City remains the lowest cost, most efficient and most convenient place for those in financial markets to do business, London will maintain its edge as a financial centre. Scandals of this sort plainly damage that reputation, but they do not destroy it.

The City is in any case progressively becoming a foreign controlled place, in investment banking at least. It's not just the capital - increasingly it is the management systems, the technology and even the top personnel who are not originally of this land. The effect of scandals like this, and Barings before it, is to hasten that trend. They don't spell the end of the City, but they are symptomatic of the decline of a quintessentially British culture of merchant banking.

Which brings me neatly onto a related aspect of this affair. Of all the "why, oh why" pieces written on the Morgan Grenfell debacle this week, surely the richest was penned by William Rees-Mogg in the Times. Things aren't what they used to be, he moaned. Not like in my day when everyone abided by the principles of sound investment (whatever they may be). Everything is too fast these days, there's no integrity, everyone's in it for a fast buck ... blah, blah, blah, yawn. But hold on a moment. What's this? "The responsibility comes back to the directors of the investment companies concerned. They tend to be too remote ..." Can this really be the same Lord Rees-Mogg who as head of GEC's remuneration committee was so "remote" from the views of his shareholders that he allowed himself to be bulldozed into agreeing a pounds 10m pay package for the company's new chief executive. Is this really the same Lord Rees-Mogg who managed "remotely" to agree a set of performance criteria so challenging that it only required the new man to get out of bed in the morning to hit the jackpot. Or possibly it is that Lord Rees Mogg who according to the gossip is so "remote" that he didn't actually negotiate the package at all, but merely rubber-stamped something already agreed by others.

Yes, indeed. Lord Rees-Mogg writes from experience when he talks about directors being too remote.