Britain’s high street banks have never been very good at the finer arts of investment banking. Indeed, financial history is littered with the carcasses of merchant banking deals that went wrong.
NatWest’s effort to buy its way into the glamorous world of mergers and acquisitions and the exotic world of derivatives trading in the late 1990s led to its fall from grace. It was saved only by Sir Fred “the Shred” Goodwin of Royal Bank of Scotland. Barclays’s investment banking offshoot BZW came unstuck in 1998 when the rouble crumbled and it was caught up in a New York hedge fund collapse. Lloyds TSB and Midland, which was swallowed by HSBC in 1992, were also victims of the different merchant banking culture.
Yet here we go again. The Dutch Supreme Court has just cleared the way for Barclays and a consortium of mainland European banks, led by RBS, to start a bidding war, beginning at an astonishing £55bn, to buy the Dutch bank ABN Amro, which has operations stretching from Latin America to Asia. The diamond in the centre of this tiara is ABN Amro’s “wholesale” or investment bank, which includes the blue-blooded broking house of Hoare Govett in London and a partnership with NM Rothschild, Europe’s oldest merchant bank.
One cannot complain too loudly about the bold ambition of John Varley, the patrician Barclays boss, or his opposite number at RBS, the ruthless cost-cutter Goodwin. In recent years corporate Britain has stood idly by while overseas companies have plundered the stock market to the point that they control 50 per cent of the nation’s enterprises. It makes a change to see the empire striking back.
But it would be even better were there any confidence that either would-be owner of ABN Amro had the right set of skills. The nature of retail/business clearing banks is wholly different from that of the wheeler-dealing investment banks. It is the latter institutions that have helped to turn the City of London into a Mecca of financial innovation, attracting to these shores the biggest names in European and New York trading, including new-wave private equity firms and hedge funds.
Remarkably few of the investment banks that now dominate the City and Canary Wharf skylines are British-owned or British-run. Most of the private equity firms, including the original “barbarians at the gate”, Kohlberg Kravis Roberts, which recently bought the chemist Alliance Boots, are also foreign-owned.
When at the end of each year the financial pages begin the hunt for the multimillion bonus earners it is hard to find genuine British names, as opposed to imports such as the philanthropist John Studzinski. Even the London Stock Exchange, which is at the heart of the infrastructure of the Square Mile, is run by a Canadian-born Dutchwoman, Clara Furse.
How did this come about? Down the decades London has welcomed overseas bankers with new ideas. The euromarkets and syndicated loan markets were dreamt up in the 1970s by a fresh-faced group arriving from far-flung parts of the world. Merchant banking, as it used to be called, has always been dominated by German dynasties such as the Rothschilds, Warburgs and Schroders.
It was Margaret Thatcher’s financial revolution of the 1980s that was to change the character of the Square Mile, as she swept away exchange controls and allowed Britain to become a centre for foreign exchange dealing. Then in 1986 came “Big Bang”, which eliminated the archaic rules governing share dealing. The new laissez-faire regime prepared the City for globalisation of markets. Most of the family houses fell to overseas predators.
This was the beginning of the revolution that made London a magnet for bankers and traders. Deutsche Bank now employs more people in London than Frankfurt. The New York houses of Lehman, Goldman Sachs and Morgan Stanley have shifted ever more of their operations to London. The big Swiss banks UBS and Credit Suisse also shifted resources here.
No longer is the old school tie enough to earn you a job in the Square Mile. PhD mathematicians have been drawn from France and Greece, economists from Italy and bond dealers from Spain. Mergers and acquisitions skills came mainly from North America.
Barclays and RBS are now seeking to break back into the Premier League through ABN Amro. In the American Bob Diamond, the highest-paid executive of any UK public company, Barclays does have expertise in the debt markets, and so could rise to the challenge. RBS has a reputation for being able to implement mergers without destroying shareholder value.
At a time when financial markets look overvalued and the fractures are showing, the real winner in the ongoing battle for ABN Amro could be the British bank that comes in second.
Alex Brummer is City editor of the Daily Mail
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