27 September 2016

How the world conquered the City


‘Crash Bang Wallop: The Inside Story of London’s Big Bang and a Financial Revolution that Changed the World’ by Iain Martin (Sceptre)

In 1986, at the height of the greatest deal-making frenzy the City of London had ever seen, the US brokerage giant Salomon Brothers was in advance negotiations to buy the venerable British firm of Wedd Durlacher. There was just one problem: one of the senior figures on the British side couldn’t fly out to meet face to face. It turned out he didn’t have a passport. He’d never needed one.

The story Iain Martin tells in his new book Crash Bang Wallop is ostensibly that of the Big Bang, the Thatcher-era reform that saw the City transform itself from a cosy, insular boys’ club into a cutthroat, computer-powered hub of global finance.

Yet really, Martin’s story is one of mobility – mobility of people, of ideas and above all of capital. And his subject is not just the breakneck changes brought about by the Big Bang, but the history and nature of the City itself.

At this point, I have to declare an interest. Martin is not just my predecessor as editor of CapX, but a friend and former Telegraph colleague. I’m also a huge admirer of his previous book, Making It Happen – a relentlessly readable study of the rise and fall of RBS.

As with that book, Crash Bang Wallop is expertly pitched: Martin not only has a keen eye for the telling quote or intriguing deail, but instinctively understands how to bridge the gap in understanding between financial professionals and the lay reader.

The story starts with Thomas Gresham, who persuaded Queen Elizabeth to lend her royal imprimatur to his new exchange in 1571. It then gallops through the centuries to show how the City’s fortunes waxed and waned – with as much of the latter as the former.

Throughout, familiar questions were asked again and again. Was there any moral worth to what was being done in the City, beyond the piling up of vast fortunes? (Yes, Adam Smith would answer, as long as those fortunes were spent on goods and services.) Was the prosperity the brokers brought in good times – the grease they applied to the wheels of finance – worth the pain caused by the bubbles and crashes and frauds? And when things did go wrong, as they so often did, was it a case of a few bad apples, or a rotten system?

Lighting the fuse

Today, London’s status as a great financial capital is a fact of life: in 2013, London had 78 per cent of all Europe’s foreign exchange trading, 85 per cent of hedge fund assets, 50 per cent of fund management and 74 per cent of derivatives trading.

Yet Martin is fascinating on how what now looks inevitable was in fact haphazard and contingent.

After a lacklustre 20th century, in which the City was hammered by war, debt, insularity and nationalisation (which left fewer productive businesses to invest in) its salvation came not from Big Bang but from Siegmund Warburg’s invention in the 1970s of the Eurobond, a device which allowed American firms to use their overseas profits to invest in European prosperity (and thereby, as Martin is too polite to spell out, dodge large amounts of tax).

As for Big Bang itself, it only came about because the City was facing the scrutiny of the restrictive practices court – and rightly so, given the kind of place it was. It wasn’t just that it was a closed shop: it was the kind of place that took legal advice when a woman made it on to the floor of the Dublin exchange, to make sure the same ghastly spectacle couldn’t be repeated in Bishopsgate.

The shape of reforms that were needed was broadly clear. The introduction of trading by computers. An elimination of the division between brokers (who dealt with clients) and jobbers (those who actually placed the trades). And an infusion of much-needed capital, largely from American firms who bought up the traditional British firms such as Wedd Durlacher (whose partners generally decamped into early retirement with unseemly haste, clutching their million-pound cheques).

Yet the exact shape that the process of change would take was unpredictable and haphazard. Thatcher herself wasn’t much interested: she liked businessmen, but was suspicious of financiers, and they of her. It was the enthusiasts beneath her who pushed the thing forward, in fits and starts: Cecil Parkinson, Nigel Lawson, John Redwood, Michael Howard and in particular Arthur Cockfield, scorned by Thatcher as a “wet” but largely responsible for not only Big Bang but also, as a European Commissioner, the Single Market.

Then there was the construction of Canary Wharf, which not only cemented London’s position as the factory of global finance but pushed the City into modernising its own office space (a third of it was replaced in just five years). It only came about because of a chance encounter between Michael von Clemm, who was looking for a large space for a new Credit Suisse First Boston trading floor, and Gooch Ware Travelstead, a magnificently named US entrepreneur who saw gold in the bombed-out slums of Docklands. And even then the odds on the project succeeding were slim at best.

Big Bang explodes

What is amazing, looking back, is that so many things somehow went right – and not just with the overnight switch, in October 1986, to computerised trading rather than “open outcry”, in which specialist staff shouted at each other in a room. At times, the whole Thatcherite reform process seemed to ride on the City’s shoulders. Without Big Bang, there would have been no way of selling off the shares in the nationalised industries – but even then, if the initial sale price of BT shares had not been so well-judged, the whole programme could have been thrown into doubt. Too high a price, and no one would buy; too low, and the public would feel ripped off.

As it was, the shares not only sold well, but a class of popular capitalists were created – small investors targeted by adverts like “Tell Sid” (for British Gas), who gave Thatcherism a vital shot in the arm. Pretty soon, the rest of the world was following Britain’s lead, as airlines and carmakers and utilities found themselves being owned and run by shareholders rather than the state.

In other words, the transformation of the City from “a rigid little society, formal and exclusive” into a greed-is-good temple to coloured shirts and ostentatious consumption, relied on factors far beyond the Square Mile – and had consequences far beyond it.

Ultimately, Britain got historically lucky. The logical consequence of the collapse of the Bretton Woods system and the abandonment of capital controls was that a tidal wave of money would sweep across the world. In 1965, total US holdings of foreign corporate entities stood at just $5bn. In 1985, they were at $44.4bn. By 1995 it was $790.6bn – and by 2014, almost $7 trillion. As Martin outlines, the City found itself in just the right position, and made just the right decisions, to position itself to ride that wave – and then, when the single market and the euro welded together the financial markets of Europe, to dominate those as well.

Sifting through the embers

“Did the changes to how the City worked license an explosion of greed, selfishness and bonus-driven excess in the Square Mile and beyond?” asks Martin at the start of this book. “Or was the financial revolution a creditworthy development essential to maintaining London as a leading financial centre?”

The answer, he suggests, is both. Big Bang was sorely needed, and generally made us more prosperous – but it did stoke greed and fraud, and shift the City towards a more legalistic framework in which the right thing to do was whatever you could technically get away with.

And what of the future? The fact is that the City’s position has never been more pre-eminent – or more perilous.

Yes, the Square Mile has had golden ages before – financing the wars against the French, cornering the world’s trade, funding the construction of Western infrastructure in colonies and client states. But it was never the sole fulcrum of British might. The Industrial Revolution which transformed the world received, says Martin, precious little seed money from the City, which (as the Economist complained) seemed to care more about the gains to be made in Mexico than the Midlands.

Yet even as the City stands unequalled as a generator of wealth, the challenges facing it are many. There is Brexit, which many on the continent are only too eager to see as a means of cutting the City down to size. There is the technological revolution, which has the disruptive potential to cut incumbent giants down to size in startlingly short order. And there is the domestic political situation, with many resenting not just the City’s role in causing the financial crisis, but its overweening and seemingly puncture-proof prosperity.

Crash Bang Wallop is not quite as gripping as Making It Happen – partly because telling the kaleidoscopic story of the City at large necessarily makes for a looser focus, but largely because few writers have ever had a subject as extravagantly compelling as the the outsize hubris and nemesis of Fred Goodwin and chums. But it is still a fine, even-handed and engrossing book.

And if it has a single recommendation, it is about the virtues of being open to the world. This isn’t a narrow point about Brexit – Martin was in fact a full-blooded supporter of Leave, not least because he wanted Britain to be able to control its own borders.

But as he says, the City has always been at its best, and become most prosperous, when it is most engaged with the rest of the world.

Over the centuries, many within it have tried to keep it a closed shop. But foreign influences and innovations kept creeping in – from the Huguenots and Dutchmen who taught Britain their tricks, to the outward-looking free traders of the 19th century, to Warburg and Travelstead and all the others who made the modern City.

It is thanks to such figures, rather than our passport-free friend from Wedd Durlacher, that Britain now finds itself as the favoured middleman in global finance – and the emblem both of its glories and its flaws.

Robert Colvile is the Editor of CapX.