Bangers and Crash
On its 25th anniversary, Big Bang, which set the City free to innovate and expand, has a lot to answer for — not least our current mess
NEVER LET BAD news get in the way of a good party. In late October, grandees will celebrate the 25th anniversary of Big Bang at Drapers Hall, one of those ancient City institutions which embodies life before 1986. Yet the mood will be tainted by recent developments which have given Big Bang’s legacy a decidedly double edge. How did it come about? And has it, in fact, got us into today’s dire straits?
In 1983 Cecil Parkinson, incoming boss at the Department for Trade and Industry, was confronted by a Stock Exchange ‘stultified’, he tells me, by an accusation that its rulebook was illegal. Showing the vision that marked him out as a potential prime minister, he interpreted this as an opportunity. Negotiating reforms with Nicholas Goodison, the chairman of the Stock Exchange, meant that he could get business moving in the short-term while fulfilling Margaret Thatcher’s long-term ambition of turning London into ‘one of the world’s great financial centres, a rival to New York’.
Parkinson had ‘a lot of motivation’ too having worked in the City. ‘I did not like it,’ he discloses. ‘It was the most autocratic and class-divided place possible.’ And he was right. The Stock Exchange was not fit for purpose amid the 1980s equity culture. It was staffed by 10,000 pin-striped public school boys stuck in a timewarp since 1945.
Daily schedules were medieval. David Rosier, then head of Warburg’s private client business, relays how his firm was regarded as ‘ungentlemanly’ for being the first to arrange 9am meetings. The brokers were much keener on a morning’s ticket-writing before a lunch celebrated with red meat and red wine in Bank-based restaurants like the Long Room. But there were exceptions: Art Trinder used to run the short end of the gilt market from Sandown Park.
Finance — then as now — was a culture quite alien from the rest of the country. Philip Augar sums it up in The Death of Gentlemanly Capitalism when telling of a banker, who, upon hearing his secretary lived on an estate in Romford, replied: ‘How splendid. Do you keep horses there?’
Cracking the club was near impossible as many firms hired ‘Firsts or family’. Such attitudes were possible because the City had been protected from competition since 1945 — necessary for a nation so exhausted from attacking German soldiers that it couldn’t defend itself against American businessmen, but not appropriate for the world’s next trading hub.
So in 1983 the newly re-elected Conservative government took on the Throgmorton Street central securities market. Saturated with Victorian-sounding firms like Hoare Govett and Akroyd & Smithers, it was so uncompetitive that thirteen houses accounted for half of all equity trades.
Parkinson describes it as ‘feeble… the equivalent of an old boys’ club: a self-perpetuating oligarchy, totally unaccountable to the public.’ Thus in a five-month overhaul he initiated legislation ‘to bring in lay members, rights of appeal and above all make it possible for the world’s big players to join’.
Details of the revolution spread fast, but not by traditional means — the FT was on strike. Instead, it was digested in hushed tones at St James’s Street lunch tables.
Reaction was immediate. So keen were the banks to improve their market knowledge and diversify from lending that Lord Camoys at Barclays, for one, commissioned a strategy paper while on holiday in Ibiza.
A flurry of mergers and acquisitions followed, with the best deals going to those who jumped first. Security Pacific bought 30 per cent of Hoare Govett, the top equity broker, in September 1983 at an implied value of £27 million. But when they purchased a further 60 per cent ten months later, the firm was worth £80 million.
By 1986, strategies had been chosen and implemented. Stockbrokers left their old premises, typically six-storey 1960s atrocities, and moved into glass skyscrapers. That meant that the dreaded day of change — 27 October — went surprisingly smoothly. Warwick Newbury, wearing a frock-coat at Coutts, reports that ‘very little happened’, apart from the Stock Exchange computer system blowing a fuse and crashing fifteen minutes in.
Yet this was key to the reform’s success. The end of open outcry meant that trade times shortened from ten minutes to ten seconds. Combined with the market opening two and half hours earlier and closing two hours later, that caused volumes to rocket 72 per cent in 1986 and 56 per cent in 1987.
Everyone hailed Big Bang, but attitudes changed when Black Monday cut 10 per cent off the FTSE 30. If the public had been indifferent to the City thus far, losing £50 billion in a day created outright suspicion and hostility.
Ironically, financiers also started to loathe Big Bang. First because competition was so stiff that many of their 1983-1986 shotgun marriages ended in divorce — small surprise considering 32 market makers now fought in a space that used to feed six. Second because their working environments changed beyond recognition — brokers found their new masters dull whereas bankers, in reverse, thought brokers ‘overpaid and inclined to leave as soon as their golden handcuffs came off’, to quote Luke Dugdale, then at Hoare Govett.
Illustration by Vince Fraser
THESE BAD MEMORIES evaporated as London became Europe’s financial headquarters. It took 2008 for financiers, previously happy in their orbits, to question whether the glittering universe of Parkinson’s reforms could support life in the long term. Can we trace back the credit crunch to Big Bang?
Regulation draws the first clear line between the two events. In 2008, it seemed like no-one was inspecting the banks either side of the Atlantic, meaning exposure to toxic bonds and over-reliance on short-term funding, for example, were not spotted.
The British regulators should have been alive to this and seen the contagion risks from abroad and the dangers at home. But they weren’t, not least, as Nigel Lawson pointed out on Radio 4, because ‘anyone clever in regulation is offered a job in investment banking, so banks always outsmart regulators.’ And the regulators we had were hardly qualified to understand the alphabet soup of structured products which ensued.
Separating markets from regulators was a Big Bang creation. Until 1983 the British system was a ‘latrinogram’, reliant on private conversations between principals (in the loo, legendarily) to curb market excess. The ultimate punishment for wrongdoers was a summons to tea at the Bank of England where the Governor’s raised eyebrows were infinitely more damning than today’s multi-million pound corporate fines, so personal was the City at that point.
Philip Booth at the Institute of Economic Affairs argues that this was highly effective. ‘What looks like a restrictive practice is often an effective mechanism of private policing. If someone did not behave, they got pushed out and that was important in a world where reputation and trust were the drivers of business. But the Thatcher government did not appreciate its subtleties,’ he adds, referring to the 1986 creation of the FSA’s forerunner, the Securities and Investments Board.
Eamonn Butler at the Adam Smith Institute wonders whether the old system might have protected Britain better in the credit crunch. ‘When regulation was done by the Bank of England, they knew the latest trends as bankers were going in and out of their doors, whereas the guys in Docklands never saw the practitioners and therefore assumed everything was fine. They were busy getting people to tick boxes for how quickly they pick up the phone while the entire system was falling to pieces around them.’
Regulation is one thing but responsibility is always better. Did the culture of recklessness underpinning the credit crunch originate in Big Bang? Prior to 1986, London was dominated by specialist partnerships. After it, full service firms took over.
This had disastrous consequences as listed firms were more focused on the short-term because their shareholders, keen for quick returns, made the next quarter’s profits paramount. Combined with the demise of unlimited liability and the rise of individualism under Thatcher, this created a culture of excessive risk. Moreover, killing partnerships forced City employees to prove their worth through pay packets, not job titles. This, and the bonus culture that followed (again turbo-driven by the clever products they could devise), fuelled many a trader to chase evanescent profits in 2008.
Big Bang also let firms grow — and grow — and grow. As they began to merge and adhere and agglomerate, they became what we would later know as ‘too big to fail’. Large merchant banks operated in the UK before, such as Warburg and Kleinwort Benson, but over time they and their peers became huge and international after 1986 allowed them to scale up and raise capital in ever increasing quantities. RBS illustrates the consequences of regulation not restricting scale.
But credit where credit is due. Big Bang may have played a key role in the scaling up of British banks but Parkinson himself did not advocate dual capacity. ‘Single capacity was a basic but effective way of protecting customers,’ he says. ‘If you asked your broker whether buying ICI was a good idea, you knew that he didn’t have a vested interest whereas subsequently the dual capacity firms have been caught slipping memos among staff saying, “We’ve got millions of these things, tip them!”’
Such attitudes are also a reflection of our digital age. How much easier is it to treat someone poorly when you see them as the ones and zeroes of a trade, not the flesh and blood holder of an account? For all the liquidity, transparency and risk control that computers allow, they have also created black box algorithms which can send the market reeling when the consequences are not considered.
When I ask Cecil Parkinson directly whether he thinks we can see the seeds of 2008 in 1986, he is unmoved. ‘To try to extend opening up the Stock Exchange to responsibility for those dud mortgages is a big stretch of the imagination.’ Similarly, John Redwood feels that Big Bang was ultimately beneficial to the UK: ‘It set the conditions for a massive expansion of financial business in London, widening it out to the Docklands from its narrow confines in the City, bringing in large amounts of new capital and talent, and giving a big boost to the UK economy.’
But there’s no denying that the Drapers Hall champagne will be bitter, or at least flat. We have not yet survived 2008, and although much of that can be blamed on Big Bang, perhaps we should be holding ourselves responsible, not the system that bore us?
Robert Skidelsky, Emeritus Professor of Political Economy at the University of Warwick: ‘Big Bang unleashed the power of finance to wreak havoc on economies. The repressed financial system of earlier years served the needs of the real economy much better than the liberated, de-regulated system which followed.’
Warwick Newbury, Chairman of SG Hambros: ‘I don’t think that what has happened since was expected. Yet despite where we are today, we are a better world for Big Bang.’
Cecil Parkinson, Trade Secretary 1983: ‘All the big players are in London and the central securities market is a very considerable national asset. As for things that have gone wrong subsequently, all I can say is that sometimes capitalists seem determined to destroy capitalism.’
Eamonn Butler, Director of Adam Smith Institute: ‘The sudden deregulation unleashed pent-up pressure that nobody could foresee. It left regulators on the back foot. More gradual deregulation would have been better.’
David Rosier, Chairman of Thurleigh Investment Managers: ‘The best thing was that it freed up London to become the world’s most important financial centre. The worst thing was that, with electronic trading, “my word is my bond” went out of the window.’
Philip Booth, Director of Institute of Economic Affairs: ‘Big Bang replaced the securities markets’ own tried and tested mechanisms of regulation with the forerunner of a bureaucracy that is accountable to nobody.’
Big Bang And You
Having been through the tortures of the damned since 2008, it’s debatable whether HNWs will be raising glasses on 27 October.
Some see positives. In ending fixed commissions and increasing the number of fund management firms in London, Big Bang improved wealth management. First, by favouring more academically-minded portfolio managers over dial-and-smile stockbrokers. Second, by bringing in technology which allowed the wealthy to capitalise on split-second trends. Third, by lowering dealing costs from 1.65 per cent.
But every bang brings smoke. The 1.65 per cent dealing charge may seem astronomic but it was transparent. In contrast, today’s wealth management fees are often hidden and north of 2 per cent. What’s more, when it comes to communicating the results of their work, today’s wealth managers are worse than their pre-Big Bang forefathers as, exposed to computer screens by day and TVs by night, they are not as used to verbal communication with clients.
Yet the debate may be missing the point. As seminal as Big Bang’s changes were, they were not a significant as Geoffrey Howe’s abolition of exchange controls. Parkinson himself calls this move ‘massive’ as it increased outward investment by 1,800 per cent from 1975-8 to 1980-83, making all manner of opportunities possible and, along with the worldwide liberalisation of trade, setting the scene for the rich becoming richer. That was the real bang — everything else was a whimper.