13th July 2012

If you need a friend, get a dog

It was the great Gordon Gekko who said, “Moral hazard is when they take your money and then are not responsible for what they do with it.”

With these words of wisdom, I felt it might be time to reflect upon the fact that nearly 26 years ago, on 27 October 1986, the closeted clubby world of the City was subject to a positive tsunami of changes that today, for those of us old enough to remember it, was called the “Big Bang”.

I was working in the City at the time and the financial services world as we knew it changed forever from that date. The late starts, long lunches, early finishes were no longer fashionable, everybody started dressing like Gordon Gekko, mobile phones were hand borne not hand held, the colourful LIFFE boys would strut around the Royal Exchange between trades and generally life seemed to have a very particular and agreeable buzz.

Over the past 26 years what was once a rather staid gentleman’s club of friends and relatives had morphed into a US-stylisation of business practices. With it came the skyscrapers of Canary Wharf and the City all linked with the considerable diversity introduced by foreign banks as plus points, but, the downside was that it came with a certain killer instinct that would mean even your friends and colleagues were not guaranteed a particular benefit without a cost attaching.

‘Bolly’ for me please?

But in the post big bang world, as Gekko would say, “if you need a friend, get a dog”.

Regulation and financial services have not always been easy bedfellows yet upon reflection the world did seem a nicer, gentler place in many ways in the years building up to that 1986 Big Bang.

But what led to Big Bang was that the London Stock Exchange was coming close to, if not actually being found out. It was really a cartel, fixing commissions and linking this with admission complexities that would do the Royal & Ancient some credit.

It was a posh, gentlemen’s club version of the markets, like Smithfield or Billingsgate but with manners. We saw a closed shop for the benefit of brokers and stock-jobbers all safely contained in their pin striped, bowler hatted bunker which in the coming brave new world of class and professional barrier deconstruction would not be seen as acceptable any more.

Margaret Thatcher had been in power for some 7 years and the Thatcher vision of wealth creation for all was heading down the “pike”. We saw the de-nationalisation of utilities, we “Told Sid” and the nation rode a gravy train of expectation with flotations of once staid mutual institutions like the Halifax and Abbey National building societies- yes, remember them?

The merchant banks were in gorge mode on these flotations. SG Warburg, Schroders, NM Rothschild, Samuel Montagu, Hill Samuel and Morgan Grenfell were there doing it “large”.

US investment banks like Goldman Sachs and Salomon Brothers (remember them too?) were also keen on some action but leading up to Big Bang it was not too easy for them to get into the club.

But change was on its way, the days of fixed commissions and closed shops were being replaced by the need to be competitive. The City was no longer a place for “Gentlemen and Players.” It was becoming a world of young and thrusting market traders who had switched venue, or who had been recruited from, the perceived ‘low rent’ market environs of Petticoat Lane, Billingsgate and Covent Garden. And those guys brought their trading skills and “Loadsamoney” culture to the previously hallowed ground of the City and the Stock Exchange. But instead worked in trading ‘Pits” or sat staring at banks of screens waiting for that big deal, bonus moment.

The big success story of Big Bang was Warburg’s swallowing up of Ackroyd and Smithers, Rowe & Pitman and Mullens & Co who in turn were swallowed whole by UBS, then UBS/Phillips & Drew/Swiss Bank empire.

In the feeding frenzy Barclays paid very big money indeed for Wedd, Durlacher and de Zoete and Bevan, Deutsche Bank ate up Morgan Grenfell, Midland Bank (who are they) bought W Greenwell and this got digested by HSBC, Kleinwort Benson bought Grieveson Grant, and NM Rothschild, Smith Brothers.

And what of the “Gentlemen and Players”? Well they all retired to their stockbroker belt houses having “trousered” some very serious money.

With this sea change we saw the disappearance of those traditional and cautious values, my word is my bond, trust, nods, winks and tips were all to be replaced by what is now seen in many quarters as a reckless abandon, using somebody else’s money to trade on your own account for the benefit of the Banks who employed you. If it all went wrong, the bank carried the losses until, as we saw with the spectacular banking collapse, the taxpayer did.

So when the indigestion disappeared from this bout of Mr Creosote like fiscal gluttony, was Big Bang a success, was big beautiful?

Gekko I think has proved to be the master philosopher as the banks post big bang did take our money and were not responsible for what they did with it.

The recent Barclays LIBOR affair has shown only too clearly that

“there is a very big difference between rehabilitation and repentance” and as far as casino banking and regulation is concerned, there is some way to go on both counts. 

Panacea Comment, Investments