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Thursday 4 December 2008

Time to start putting clients first again

Simon Nixon says trust in the City is at rock-bottom but he sees a glimmer of hope in the rise of boutique banks

The decline of the old City really picked up pace in the 1980s. The Big Bang reforms in 1986 ushered in a wave of foreign take-overs of British banks. The result was a huge inflation of City salaries, swiftly followed by savage redundancies when boom turned to bust. That coarsened the City and undermined traditional loyalties to firms and colleagues. At the same time, American banks introduced to the stuffy world of British merchant banking a hard-nosed, transaction-driven culture that turned respected advisers into glorified estate agents. By the 1990s, standards had sunk so far that banks were cheerfully pumping out research advising clients to buy shares in dotcom companies that their analysts readily admitted in private were rubbish.

Yet there was worse to come in the current decade. By now, a wave of mergers had turned the focused Wall Street brokerage firms into giant financial supermarkets that offered everything from credit cards to derivatives. That brought new temptations. Having prostituted their research divisions during the internet boom, banks now started to prostitute their balance-sheets, dangling the prospect of ultra-cheap financing to anyone who might pay a fee: private-equity groups, hedge funds and — most glaringly — subprime mortgage borrowers. The result was a vast housing and credit bubble. At the same time, these banking giants were riddled with conflicts of interest, not least because hedge funds and private equity firms paid better fees than traditional clients. When Sainsbury’s chairman Sir Philip Hampton asked Goldman Sachs for help fending off an unwanted bid, Hampton was stunned by the US bank’s response: Goldman offered to buy Sainsbury’s itself.

The inevitable consequences of this flawed model are now fully on display in the credit crunch. Everywhere in the City you hear howls of anguish as longstanding relationships are cast aside. Hedge funds suddenly find their margin requirements are adjusted without warning, forcing them to liquidate positions to raise cash. Private-equity firms complain of banks that fell over themselves to proffer generous loans during the boom only to invoke obscure clauses demanding higher interest payments or reducing the sums available once the market seized up. The banks no longer even trust each other, as is attested by the persistent spread of Libor (the rate at which banks lend to one another) over official interest rates.

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