Outlook: What happened to vision and ambition?
Saturday 04 October 1997
Both moves were greeted with visible relief in the City. BT's share price danced for joy, and while reaction to the news from Barclays was a little more muted, everyone agreed it was the right thing for the bank to be doing. What's wrong with our financial markets that they could think in this way? Where's the vision and the ambition for our companies? Where's the chutzpah?
BT forced to abandon its global ambitions. Excellent news, says the City and our mostly enfeebled press. Victory for common sense and all that. Can't let this lot gamble our money away empire building around the world. Barclays to give up on its attempt to create a global investment bank. Shame really that one, but, hey, what chance did they ever have?
Both reactions are understandable enough. A good business and investment case can be made for each of them. But they also seem symptomatic of a wider failure of nerve and imagination.
There's no problem with this sort of thing on Wall Street, which seems only too delighted to back its best industrialists and entrepreneurs as they shoot for the stars. It may be fashionable these days to knock the continental economies, with their archaic labour and capital markets, but they too seem prepared to take the long view as their corporations prepare for the challenges of the 21st century and the integrated world economy.
Not so here in Britain where executive success seems to be measured only in terms of share buy-backs, special dividends and good housekeeping. Here the obsession is with short-term shareholder value, the cautious approach and generally reigning in.
Everything might seem hunky dory in the British economy now, but the long drawn out post-war process of abdicating economic power and influence continues unabated. Cynicism rules our companies as it does our markets. Our opportunity to fight back is being squandered as all around us seize theirs. Our obsession with short-term shareholder value perverts our judgement and destroys our purpose.
Britain's failure to create a top-notch integrated investment bank capable of competing on a world scale requires some detailed explaining, for of all our post war corporate failings, this one is perhaps the hardest of the lot to understand. Financial services is meant to be one of the things Britain is good at, like pop music, pharmaceuticals and croquet. The City is one of the three great financial centres in the world. In some markets it is now bigger and better than Wall Street. Why is it, then, that no British institution has been able to make a go out of investment banking?
All serious attempts at it - SG Warburg, Kleinwort Benson, NatWest Markets, and now BZW - have foundered essentially on the same thing - they were in the end just too small to succeed. When push came to shove, no one was prepared to invest capital on the scale necessary to make them work. The City has flourished not on its British content, but on foreign capital, institutions and management systems.
Investment banking in its modern form is largely an American creation. The dominant "bulge bracket" houses of New York obtain their bulge from the powerful domestic franchise that the American economy gives them. Furthermore, deregulation came much earlier to Wall Street than the City, giving the Americans an almost unassailable lead in establishing unified corporate cultures from the blend of different activities that make up an investment bank.
By contrast, there is little in the way of domestic franchise to feed the City. Europe as a single market is still too fragmented and many- cultured to provide anything approaching the level of support the American economy gives to Wall Street. Those that succeed in the City must do so on the international stage. Caught between the big global players and the small niche operators, the medium sized British investment bank is finding it progressively harder to compete.
As national financial markets transform into global ones, houses like BZW have found themselves caught in a vicious circle of decline. Pay is the major cost in an investment bank and is the primary reason why people want to work in them. To tempt top people with the right areas of expertise away from the bulge bracket firms, BZW was having to pay a premium.
Its already unfavourable rates of return would be further damaged in the process. Cost cutting to repair the damage was out of the question since there is no such thing as a low-pay investment bank. Inevitably, Martin Taylor, chief executive of Barclays, came to the conclusion that he could not risk the capital necessary to turn the situation - that BZW would be better off as part of a group with complementary franchises in Europe or the United States so that it could share in their economies of scale.
Put like this, the arguments appear so compelling that it perhaps seems odd it took Barclays so long to see them. It is only a year ago that Mr Taylor hired Bill Harrison, a no-nonsense Brummie from Robert Fleming, with the brief of doing what he now thinks impossible, or too high risk to attempt - build a globally competitive investment bank. Just six months ago, Mr Taylor was still refusing to concede defeat. Two events have intervened since then. First, the fall from grace of National Westminster Bank, hung out to dry by its own attempts to build a global investment bank, NatWest Markets. After all he has achieved at Barclays, Mr Taylor can hardly be blamed for thinking,"oo, er". Second is the merger of Smith Barney and Salomon Brothers in the US. The squeeze BZW is already feeling can only get worse, he figured.
All the same, Mr Harrison was never really given the chance to make it work. Perhaps his next port of call should be one of big continental banks, many of whom seem prepared to invest what it takes to succeed in the business of investment banking. What a shame we are all too scared in Britain to do the same. Future generations will curse us for our cowardice.
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