Andreas Whittam Smith: Lessons from a high financier

Siegmund Warburg was a man who created what might be termed a 'post-crash' business - a firm that takes advantage of the chaotic state of the market
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The Independent Online

Niall Ferguson's excellent biography of Sir Siegmund Warburg, who was the outstanding merchant banker of the 1960s and 1970s, treats the perennial question of learning from disaster. Warburg, born in 1902, saw the German hyperinflation of 1923 ruin his parents. They were "gentleman" farmers in the south. He was also working at the family banking business in Hamburg through the Great Crash of 1929 to 1932 that nearly brought down the family firm. The older generation will turn to the book with enthusiasm. Myths and legends surrounded Warburg and one wants to discover how many were true. However, I urge those whose memories do not stretch back so far to read it.

That he was a Jew he would have thought of interest to other people, but not of huge significance – until, that is, the coming to power of Hitler. He was a patriotic German. Fortunately Warburg decided to leave Germany in 1934, very soon after Hitler's arrival, and he came to London. Many patriotic German Jews stayed on, believing that their persecution could not last.

Warburg had been working for 10 years at the family firm, M M Warburg, when the run on the bank took place. The circumstances, save for the precise details, were exactly the same as those that bankrupted Northern Rock nearly 80 years later. German banks had grown over-reliant on foreign deposits. In 1930 some particularly disturbing political news spooked the international markets and foreign deposit holders wanted out. M M Warburg lost 80 per cent of its foreign deposits and 50 per cent of its domestic deposits. As with Northern Rock, it would have gone under had not the Government stepped in with a loan.

Many years later in London, Warburg described two of the lessons he had learnt from the near failure of M M Warburg. "When disaster strikes, it always strikes from the most unexpected quarter" was the first. This is what I call the unexamined assumption problem. Something you unthinkingly thought would be the case suddenly turns out not to be so. Northern Rock never contemplated that the market in inter-bank lending would freeze over – it hadn't done so since 1914. But in 2008 that is what happened. Warburg's second lesson was that each generation believed that new banking crashes had been made impossible by a better understanding of their causes, but each generation has to learn from the beginning. In the 1970s, when Warburg was saying these things, in years as old as the century, his younger colleagues must have thought him to be quite out of touch if he thought that such a calamity could ever befall the City's famous names. Indeed, for a further 30 years, they were safe.

Warburg's ruminations, however, are not such powerful testimony as his actions. How did he construct his London bank, S G Warburg & Co, to be proof against the disasters through which he had lived? He began by creating what might be called a "post-crash" business, in other words a firm that could take advantage of the chaotic state of markets. This was the New Trading Company, founded in 1934. To begin with, it was a financial consultancy. It provided expertise and advice for established companies struggling to go about their traditional business. Warburg called it "highly qualified mediation activity". As New Trading grew in experience, it became more like a merchant bank as it arranged credits for the firms it advised, raised capital for them and sometimes took investments itself.

Then Warburg introduced some new rules for the firm that, to the degree that they have a contemporary feel, were extremely unconventional when first promulgated. At an early meeting each morning, all the firm's mail would be read by the key directors and executives. Today we would call that "knowledge management": everybody who matters should know what is going on. A second rule was that nothing new could be done, however slight, that hadn't already been explained in a memorandum. Today we call that establishing an "audit trail" so that how decisions are taken can be tracked. A rival merchant banker once remarked in disgust that from what he had heard people at Warburg's could go from one to another and anyone could see everybody. This was the opposite of the traditional "chain of command" way of doing things, 21st century rather than 20th.

Soon after the war ended, New Trading changed its name and became S G Warburg, a merchant bank, or what Warburg himself liked to describe as an haute banque, a phrase borrowed from the Paris market where it referred to Jewish and Protestant houses of German or Swiss origin. Five characteristics, he believed, defined such banks. They had moral standing, efficiency, connections, capital and high quality personnel.

Of course, you do not create a great business, as Warburg did, on the basis of ethical rules alone. He was responsible for two innovations in financial markets, one in late 1950 and the other in the early 1960s, which are of such importance that it is hard now to believe that somebody had to invent them. The first was the take-over battle in the sense of buying a controlling position in a public company by the purchase of shares on the stock market in the teeth of opposition by the company's board. The very first example of this technique was the battle for British Aluminium led by Warburg in 1958. He took on the City establishment and won. The firm gained an enormous amount of business as a result. The second was more technical in nature. Warburg invented what is known as the Eurobond market, in which companies raise funds by issuing bonds denominated in currencies other than their own. It was a major step towards re-creating international financial markets that had been closed since the 1930s.

Warburg died in 1982. He was a naturalised British subject but never became the least bit British. An old friend said he was a very 19th-century German "plus a strong dose of Nietzsche, and then Hitler came and made him homeless for ever. I was always surprised how utterly un-English he remained... and so his business became his only home". Perhaps his English colleagues never really understood him, even as they revered him. By the mid-1990s, they had pumped up S G Warburg to an enormous size and then sold it at a poor price to a Swiss bank. Its name has now disappeared. Warburg and the business he built were one-offs.