Swiss grab for keys to City: The Establishment is no longer hiding its anger over the way Swiss Bank is challenging the old codes of the Square Mile. William Kay gauges the heat

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The Independent Online
TO HIS many talents, Sir Alastair Morton can add one more: hit man for the City mafia.

Last week, at the behest of some of the most prestigious names in the City, the Euro tunnel chairman issued an unprecedented public snub to Brian Keelan, a corporate finance director of Swiss Bank Corporation (SBC).

Referring to Eurotunnel's pending rights issue, Sir Alastair said: 'Comments yesterday by Mr Keelan on that issue, its possible size, timing and underwriting were improper, incorrect and unauthorised.

'Rodolfo Bogni, chief executive of SBC in London, confirmed yesterday that Mr Keelan will play no part in SBC's welcome participation in the underwriting of the aforesaid rights issue. SBC will consult with SG Warburg Securities, who will be brokers to the issue in the UK. SG Warburg Securities will be appointed by the managers to the issue to arrange sub-underwriting.'

In the past 18 months, SBC has been involved in several situations where - as with the Eurotunnel rights - it has tried to elbow established advisers out of the way with innovative or better-priced fund-raising schemes.

In November 1992, SBC advised on Granada Group's failed attempt to buy the Gardner Merchant catering business from Forte. Five months later, it helped Granada buy Sutcliffe Catering from P&O. Granada's usual merchant bank is Lazard Brothers.

In February last year, SBC underwrote a slice of a pounds 204m rights issue by Trafalgar House, cutting out the company's traditional advisers, UBS, and the normally powerful stockbroking firm of Cazenove.

On several occasions last summer, SBC undercut the Barclays Bank securities offshoot, Barclays de Zoete Wedd (BZW), in a plan to buy shares issued to investors instead of cash dividends.

Last October, SBC helped Hongkong Land increase its stake in Trafalgar from 15 per cent to 25 per cent.

This January, SBC and the merchant bank Robert Fleming defied convention when they staged an auction to place unclaimed shares from Trafalgar's latest pounds 425m rights issue. UBS and Cazenove were again left on the sidelines.

The row with Sir Alastair blew up because SBC has been acting for Transmanche Link, the consortium of five British and five French construction companies that built the Channel tunnel. To the chagrin of Eurotunnel's advisers - Warburg, Morgan Grenfell and Banque Indosuez - SBC has arranged to underwrite pounds 75m of the rights issue and will take up pounds 52m of additional shares.

That annoyed the three Eurotunnel advisers, because SBC expects to make profits on those shares that the other trio could otherwise have counted on. The difference this time is that, when Mr Keelan spoke out of turn, Warburg persuaded Sir Alastair to go public on its behalf.

Mr Bogni refused to back down under pressure from Sir Alastair to join him in the attack on Mr Keelan. Indeed, he defiantly circularised his staff with an internal memo that said: 'SBC's offices, involved either in advising TML or as a possible adviser to the Euro tunnel issue, acted at all times with total professionalism.'

Nevertheless, Sir Alastair's uncompromising statement has dealt Mr Keelan's career a blow from which it may not fully recover.

The episode brings to the surface a behind-the-scenes war against the City establishment that Mr Keelan, an Oxford- educated maverick, has been waging with the head of SBC's London equity trading, Jon Wood, and the enthusiastic backing of Mr Bogni .

'The old school tie still runs the City,' Mr Keelan claimed. 'They take rumps of rights issues and share out the proceeds through underwriting and sub- underwriting. It's a scandal. The proceeds from rights issues belong to the shareholders. Instead, you get the brokers, merchant banks and institutions carving up the price among themselves. It's outright theft. 'We have not set out to put noses out of joint, but we have probably not been very diplomatic. Maybe we have not been buying people lunch for long enough.'

Those remarks betray the difficulty that new and foreign financial houses encounter when they try to break into the City's charmed circle. It was summed up by Lord Poole, the old Etonian who was successively chairman of the Conservative party and Lazard Brothers.

When asked how Lazards had survived the 1974 banking crash, he replied: 'It was quite simple, really. I only lent money to people who had been to Eton.'

Although that was 20 years ago, the ethos of doing business with chums is a barrier that has defeated many leading US and Japanese firms, which thought they were going to take over the City after the Big Bang deregulation of the London Stock Exchange in 1986. Some have decided to stay on for the long haul, politely buying lunches and waiting their turn. Others have gone home.

Apart from patiently waiting for a turn that may never arrive, the old school tie lays down a set of tramlines that would-be players ignore at their peril. Mr Keelan complained that he was constantly being told: 'We don't do things that way, old boy.'

However, the allegations against SBC are more serious than that. From the safety of anonymity, other merchant banks accuse the firm, which belongs to the London Stock Exchange, of taking a cavalier attitude to the Exchange's formal rules and of leaking information about deals in which it is involved.

'We're not Luddites,' said one. ''We just believe that one doesn't have to antagonise people in the way they have.'

To ensure that his achievements do not go unnoticed, Mr Keelan has hired one of the more successful finance public relations consultancies to spread the word. It is potent testimony to the power of the City mafia to make or break businesses that the consultancy in question also pleaded anonymity.

'We have drawn attention to three or four deals that they have done,' said a director, 'but we would love it if our name wasn't mentioned. Quite a number of the people we know in the City would be horrified - and we could lose other business.'

SBC has spent a long time trying to do things the City's way. Its London office was the first it opened outside Switzerland, in 1898. It is now one of the largest and most important centres in the group's global network, covering treasury, capital markets, corporate finance and trading in the latest growth niche, derivatives.

'It was only at the beginning of the 1980s that there was a stronger revival of the need to be a force in capital markets,' said Mr Bogni.

Then in 1989, the Swiss decided to break ranks. The main board in Zurich declared a long-term strategy, Vision 2000, based on the belief that 'the capital markets of the 1990s would be driven by derivatives and risk-management products,' according to Marcel Ospel, SBC's chief executive officer.

Vision 2000 is understood to be the brainchild of Mr Ospel and Johannes de Gier, the former head of the London operation who is now responsible for the group's global corporate finance business. 'They did a lot to push forward what I am trying to do,' said Mr Keelan.

Crucially, they opened the door for SBC to compete on price and with clever ideas to take risk off client companies' hands. As the main type of risk capital is ordinary shares, that strategy led the organisation into the heart of the stock market - and an inevitable conflict with the City establishment.

The following year, SBC entered into a joint venture with O'Connor Securities, a specialist options trading firm based in Chicago. O'Connor had the expertise and the computerised technology to make money through aggressive options trading. SBC bought O'Connor in 1992.

That meant SBC's ability to manage risk was as good as big American securities houses such as Goldman Sachs and Salomon Brothers.

Mr Keelan was among those itching to make use of the group's new market muscle. He had joined SBC from Merrill Lynch, the big US securities house, in 1988 with a reputation as a deal maker - and a loner.

'He was an expensive guy to employ,' remembered a former Merrill colleague. 'He was based in New York, but he always insisted on staying at the Savoy when he was in London. He was not the sort to hide his light under a bushel, but he became a bit of a character in search of a role.'

In the early 1980s, Mr Keelan had been at the City merchant bank, Hill Samuel. His boss in those days, Nicholas Clegg, said: 'He was a very fast worker, no great respecter of persons or institutions. He had a real touch of originality and lack of convention. I am not at all surprised he has created waves.'

Mr Keelan is strongly critical of the City's traditional practices: 'They will take a 10 to 15 per cent rump of an equity issue and sell the shares 2 or 3p below the market price,' he pointed out. 'But these shares belong to the shareholders. Rather than getting a discount, we pay over the odds for them. We recently bid for a very large block in Fisons that was being placed. The broker complained that it was disgraceful way for us to behave, but Fisons took our side. The Stock Exchange has been concerned that the normal practice may not be a full discharge of fiduciary responsibility.'

Mr Keelan did not really get into his stride until two years ago, when he joined forces with Mr Wood, an equity trader who had been with Kleinwort and Wedd Durlacher, the biggest jobbing firm on the stock market before Big Bang.

'I only went to Loughborough University and a minor public school,' said Mr Wood, 'So I suppose that makes a yob in the eyes of the City. The thing I cannot understand is how much money people such as Cazenove earn for what they do - which is nothing.'

SBC's financial firepower is as big as the Prudential - the London stock market's biggest single investor - and Warburg put together. It has an investment management business in Switzerland that handles pounds 120bn, on top of the London operation's pounds 60bn, under its direct control.

'I run our trading big,' said Mr Wood. 'Our philosophy is that everything should be principal-driven, on our own account rather than on anyone else's'

The SBC approach, which extends to casual clothing at its Thames-side base rather than the formal suits that are still obligatory elsewhere in the City, is in sharp contrast to London's two other main Swiss banks, Union Bank of Switzerland and Credit Suisse First Boston. Neither has been anywhere near as successful.

Dr David Mulford, CSFB's London chief, is a former assistant secretary to the US Treasury. He said: 'In Europe, we are seen as an international cross-border banking organisation. But the local market in London is very hard to break into. It involves a high degree of advisory work on broad strategic issues.'

As part of the approach to the Big Bang, UBS bought one of the City's biggest stockbroking firms, Phillips & Drew, whose blue-chip client list carries automatic entry to the City's best parties. Even that, though, has not so far been enough to enable UBS to break into the key advisory roles.

Rudolf Mueller, UBS's executive vice-president Europe, said: 'We want to be in the top three in the wholesale broking, but on corporate finance we are not where we want to be. That is the most difficult to break into, because of the long-term relationships built up over dozens of years. Firms like Warburg and Schroder are formidable competitors.'

'These firms are not willing to absorb risk at an economic price,' snorted Mr Keelan. 'SBC tried for decades to be a cosy junior partner to these people and got nowhere. We are either going to be inconsequential, or we are going to be an irritant.'

And while SBC's clients are understandably anxious not to offend their traditional advisers, most seem quietly pleased with Mr Keelan's efforts on their behalf.

He told the story of being invited to the opera by the chairman of a large public company, along with a partner of Cazenove. At a discreet moment their host reportedly turned to Mr Keelan and said, referring to the Cazenove man, 'I gather you have got up their fine, patrician noses - and I think I've got another client for you.' Despite the Morton outburst, Mr Bogni has no doubts about Mr Keelan - and he insists neither do Mr de Gier and Mr Ospel in Zurich.

'I am absolutely happy with Brian's activities,' he said. 'He has always been extremely innovative and does his best for our clients. We are really operating in extremely aggressive, competitive markets. But providing you keep the interests of your clients in mind, I believe your conscience is clear.'

As Mr Keelan put it: 'Rudi's been a great supporter. His attitude is to identify the moral high ground and take it.'

But the public school ethos that prevails in the City is not too bothered about such lofty ideals when its supremacy is challenged. Raising money for companies is one of the last industries where Britain is still a world leader. Its defenders are not going to give up their prized status without a fight that could become a lot dirtier yet.

(Photograph omitted)