Directors of the investment bank are expected to attend a meeting today to discuss how to tackle plunging staff morale, following the high-profile defections of the two joint heads of equity capital markets operations and six of their colleagues to Morgan Grenfell last week.
While more employees are understood to be looking for jobs elsewhere in the City, others are discussing setting up their own financial boutiques in preference to staying on at Warburg.
"Morale is very poor and the bank is drifting," said one former employee. Many staff do not believe the bank can achieve Lord Cairns's aim of becoming a global investment house, but do not know whether the management has alternative plans.
A senior executive at one of Warburg's large institutional shareholders said: "I suppose his position must be under threat. It's a pity, but it doesn't seem to have worked out."
He said the old Warburg management had done a better job and that he would like to see Sir David Scholey stay on as chairman, rather than moving on to become president in June.
When Sir David becomes president, a largely honorary position, Lord Cairns is due to become executive chairman. The bank said it had no need for a new chief executive, although some observers believe it may be forced to look for one to handle day-to-day operations.
Warburg's shares fell 24p to 727p on Friday, following the news that more people were leaving. The stock market was awash with rumours that further high-level departures were imminent. It was claimed that Lord Cairns had been given an ultimatum by senior managers to leave, or they would walk out.
Lord Cairns is regarded in the City as increasingly isolated. He was closely associated with the failed attempt to merge with Morgan Stanley, the US investment bank, at the end of last year. That debacle, which many believe was disastrously handled, threw a question mark over the bank's future and precipitated the present crisis.
"The old guard with Scholey at their head would have liked Warburg to have carried on as it was," said one banking analyst. "Cairns wanted change and it hasn't worked." Another said: "Warburg had the best chance of any UK bank to become an integrated investment house, and that is now ruined."
The group has suffered a series of other setbacks in recent months. Its advisory role in Enterprise Oil's failed bid for Lasmo came in for serious criticism. Shortly after, it was forced to issue a profits warning because of losses in proprietary trading.
Employees are further unsettled by the likelihood of major job losses later this year as Warburg struggles to cut its soaring costs. The number of employees has risen to more than 3,000 in recent years, but the bank also pays the highest salaries of any UK investment house. Staff costs were £470m in the year to March 1994, representing an average salary of £105,000 per person. Analysts have slashed up to £20m off their profit forecasts before Warburg's 1994/95 year-end next month. BZW now expects a pre-tax profit of £148m from the group, with only £30m coming from the merchant bank and the rest from Mercury Asset Management, the investment management subsidiary.
Some Warburg insiders are still hoping that a bidder will emerge to take them over, with JP Morgan, the US bank, viewed as the favourite candidate. Bankers elsewhere in the City, however, believe a takeover is unlikely for the foreseeable future. There would be difficulties in merging two different bank cultures and in getting the agreement of the independent MAM shareholders, who own 25 per cent of the fund management company. Both of these problems helped to scupper the Morgan Stanley merger plans.