Ten years after Big Bang, little has changed

Very recently I bumped into an old schoolfriend of mine who, it turned out, is now retired and living in some splendour in Hampshire. Struggling with my astonishment, for he is still a comparatively young man, I asked him how he had achieved this enviable state of affairs. Surely he must have come into money, though there was no evidence that he would when I knew him at school, or perhaps he was one of the new generation of get-rich-quick entrepreneurs - you know the sort of thing - set up a crumby little chain of theme restaurants or pubs, float it on the stock market, then as the idea begins to pale and lose its appeal, sell to the highest bidder.

"None of those things," he said. "Mine was a much easier route. I went to work on Wall Street." Then I remembered. He'd been what was then part of a very rare breed, a bright, young British graduate who actually wanted to go into investment banking, making his business the trading of complex financial instruments and securities. To do so, he emigrated to the United States. His explanation - to make money, of course, for what other purpose does anyone work on Wall Street? - seemed by the standards and social morality of the late 1970s a shockingly blunt and materialistic thing for a young man to say.

He was clearly ahead of his time, for these days such a remark wouldn't be thought of as anything out of the ordinary. The brightest and best of their generation are queueing to go into the City. Their motive is not the greater glory of Britain or society, but to make money.

Things have changed in another important respect too. These days you do not need to go to Wall Street to succeed on merit in the jungle of financial services. In a large number of respects, the City has overtaken New York as a financial centre. For both these things we can thank (if that is the right word) the reforms of the 1980s. For the City, the critical turning point was 27 October 1986, exactly 10 years ago this weekend, or Big Bang day.

The Big Bang reforms were actually confined to a comparatively small, though disproportionately powerful, part of the City - the Stock Exchange. Minimum commissions were abolished and the rigid division between market- makers (jobbers) and brokers was dismantled. The effect was a much wider and more liberating one, though, allowing the consolidation of old partnerships into more broadly based securities firms and investment banks. Perhaps more significantly, another effect was to let the foreigner into what had been a largely closed shop of stuffed shirts. The City's present success is built as much on inward investment as its old traditions and ways, and its culture is as much American as it is British.

Success for the City has been matched by continued relative decline elsewhere, so that the Square Mile has come to account for a very considerable proportion of the British economy as a whole. Financial and business services are now anything up to a fifth of GDP, probably rather more right now given the buoyancy of markets. Even Labour has managed to suppress its traditional distrust of the City, regarding it instead as a British success story which should be encouraged and left largely untouched.

In other key respects, however, the City has changed very little since Big Bang. The effect of deregulation has been to enhance its baser, instinctive ways. As a community of short-termist, money-making self-interest, the City is now worse than it ever was, if only because it is so much bigger and more powerful. Moreover, because it is increasingly dominated by foreign capital with no particular loyalty or allegiance to Britain, and operates in markets which are global rather than domestic, its detachment from the real economy of this country grows more pronounced, not less.

The City seems to operate as part of what Peter York, the social commentator, has called a "virtual economy", under its own dynamic and laws. It has drifted so far offshore, has become so shrouded in mist and illusion, that it is hard to think of it as part of Britain at all any longer.

Markets are now so complex, vast, and international, the one piggy-backing off the other until all sight of the underlying reality is lost, that you have to question whether those managing these operations understand fully any longer the nature of the transactions they are entering into. Make no mistake, deficiency in this department is not restricted to the old guard at Barings. Some senior banking executives cannot even describe the nature of the risk control systems they use. If even they have a problem grasping these concepts, what hope for the rest of us?

Pay has become the most obvious outward manifestation of the City's divorce from reality. For a select but not insubstantial minority, earnings are now so far out of kilter with the rest of Britain that they might have been beamed down from another planet. It is a curious thing about City salaries, but even those who rail against the excesses of the boardroom seem to think that if it has been earned on the dealing floor, or in the smoke-filled rooms of corporate finance, then somehow it's all right. These people live by the law of the jungle, the argument goes, it's a rags to riches and back again, hire-and-fire environment. Top traders are like pop and sports stars. They are entrepreneurs, earning their fortunes from their wits and hard work.

Sounds sort of convincing, doesn't it? But actually it is so much tosh. Without the capital, good name, IT and management systems of the organisations they work for, many of these people wouldn't make a dime. In that respect they are no different from any other company man. It is the organisation that makes them. Furthermore, it is not just the star traders who are earning big bucks. High rates of pay go right through these organisations down to secretarial level and beyond. The reality is that these very high, bonus-enhanced rates of pay are part of the international culture of investment banking, and now it is there, as sure as hell no one is going to give it up.

Pay is also where the City meets the real economy, for this is not money, as might reasonably be supposed, magicked out of thin air. It is reflected in very high charges to industry and commerce, and it is reflective of a much wider trend in society - the way in which created wealth is increasingly being concentrated in the hands of the few.

So as the City looks forward to another 10 years like the last, there are some worrying clouds on the horizon. Such has been the growth of capital markets that the level of risk inherent in the financial system is now higher than it has ever been. Furthermore, the City is very much at the forefront of some deeply divisive social trends. Success breeds its own dangers, it would seem. As for my friend? "I've always been ahead of the wave," he smiles. "I'm well out of it."