Despite the recent history of the Stock Exchange’s rearguard fight to protect its members from corporate and foreign competition, after Big Bang the City acted without nostalgia or
patriotism when determining who owned which companies. The removal of the ancestral oil paintings only illustrated the truth that if the family that founded Courage had wanted to keep control of
their brewing business, then they should never have merged with rivals and sold equity. Being bought by a publicly listed conglomerate like Imperial, in which shares could be traded, meant they
could, in turn, be bought by Hanson and sold on to the Australian conglomerate Elders (which, in turn, sold Courage back to the British brewer Scottish & Newcastle). Companies that did not wish
to be treated like courtesans had the option of not putting themselves on the market. Having listed his airline and record business on the Stock Exchange in 1986, only to see its share price slide,
Richard Branson made his Virgin Group private again two years later by buying out the shareholders for £90 million – a deal from which he did particularly well. The downside of
remaining, or becoming, privately owned was the higher cost of bank lending. The banking sector, nevertheless, was becoming increasingly indiscriminate in its lending criteria in order to compete
with the sums that could be raised through share issues on the
stock market. Vastly expanded bank lending also financed a succession of highly leveraged buy-outs of listed
companies or their subsidiaries, often by their own management. The highest leveraged buy-outs took place in the United States where, in November 1988, the leading private equity firm of Kohlberg
Kravis Roberts astonished even those jaded by large numbers with its record $31.1 billion buy-out of the tobacco and biscuit concern RJR Nabisco. The following year, the City of London was gripped
by a similar contest when the corporate raider Sir James Goldsmith used a £13.4 billion war chest of borrowed money in an assault on BAT Industries. Backed by Jacob Rothschild and
supplemented by a high-yield (‘junk bond’) issue by the controversial Wall Street bank of Drexel Burnham Lambert, Goldsmith’s strategy – like that of Hanson with Imperial
– was to strip BAT of its peripheral and extraordinarily diverse holdings and return it to its core cigarette business, where the true asset base of the company resided. The buy-out, however,
would be funded wholly by debt. It fell through in 1990, leaving Goldsmith brooding upon the minor consolation that although BAT had escaped his grasp it proceeded to implement his strategy.
The sums that banks were making available were now without precedent. While British merchant banks dreamt of taking on Wall Street at its own investment banking game, the clearing banks also
grew more ambitious, increasing their range of services and the scale of their lending. The smallest of the ‘big four’ was the Midland Bank, which less than forty years earlier had been
the largest bank in the world. Its campaign to regain its former glory began in 1981 with the purchase of a major Californian bank. Unfortunately, the Crocker National Bank was a disastrous choice
which proceeded to lose Midland’s shareholders $1 billion. The sniff of blood brought the sharks circling: both Lord Hanson and the
Daily Mirror
’s owner, Robert Maxwell, started
buying shares in the bank. The formal approach that signalled normal attitudes to banking were really in suspension was made in September 1987, when Charles and Maurice Saatchi asked for a meeting
with the Midland. The ad men wanted to buy the bank. Midland acted promptly to quash talk of a deal which, it announced, lacked ‘commercial or strategic logic’;
42
but the fact that the world’s largest advertising firm imagined it had a realistic chance of taking over a bank with $77 billion of assets, despite a total lack
of banking experience, ought to have indicated that irrational exuberance was replacing the sensible assessment of risk and suitability. Unabashed by the rebuff, Saatchi & Saatchi looked into
buying a merchant bank instead and decided to make a pitch for Hill Samuel. The signs were there for those looking out for them.
Sir James Goldsmith anticipated the coming crash, but few other investors benefited from his sense of foreboding. Far from concluding the prolonged
bull market could be
hurtling towards the precipice, the mood in the City was buoyant in the autumn of 1987, with especially high expectations for the government’s latest sale of state assets – the
£7.2 billion share offer in BP, which was due in October. The news that prime (short-term) interest rates were to rise by 1 per cent in the United States caused a tremor on Wall Street, but
there was little activity going on in the City on the morning of Friday, 16 October. The Stock Exchange was shut and computer screens remained either blank or blinking ineffectually at almost
entirely deserted dealing rooms because so few employees had made it to their desks – an unexpected hurricane having ravaged southern England during the night, disrupting commuter lines and
destroying trees, roofs and much else besides. For metaphorical purposes, the destructive act of God was timed almost to perfection. The house of Mammon began trembling on the morning of Monday, 19
October – soon to be christened ‘Black Monday’ – as panic selling engulfed securities trading, wiping a record 249.6 points off the FTSE 100 index. Within forty-eight hours,
almost 25 per cent had been wiped off the value of the stock market. On Wall Street, the Dow Jones took a comparable hit. The next day, shares began to fall on the Far Eastern stock exchanges as it
became clear that global capitalism was succumbing to a convulsion. In London, the BP offer went ahead with none of the expected instant gains for the new generation of ‘Sids’. Although
the plunges of the first forty-eight hours were not repeated, the FTSE’s slide, occasionally interrupted by ephemeral rallies, continued until mid-November, by which time it was clear that
the City had taken a pasting.
Instant explanations were offered, not least by those seemingly not gifted with foresight. One theory latched on to the new computer technology because of the ease with which risk-highlighting
software enabled traders to dump stock. This could never have been more than a minor contributory factor. After all, yelling ‘Sell!’ into a telephone receiver was not so very different
from shouting it straight into someone’s face, and as the crash of 1929 had demonstrated, cutting-edge gadgetry was not needed to offload investments in minutes. Human nature provided a
better explanation of why a crash was long due. The FTSE index had been climbing year after year since 1974. Thus, only those with a City career dating back more than thirteen years had personal
experience of how quickly what seemed like a one-way bet could prove to be an imprudent purchase at the top of the market. As one bond trader summed it up: ‘You tend to get optimists working
in the City and they can’t cope in a crash because it’s outside their normal psychological boundaries.’
43
The exact timing of
the bubble’s bursting might not have been predictable, but it strained credulity to imagine that some sort of significant correction to ever higher valuations could not be on the way. Yet if
the prolonged good times numbed sensitivity to risk, then it was also true
that the sharpness of the 1987 crash provoked equally exaggerated claims from the City’s
critics that its fundamental failings had been irrevocably exposed. On a longer view, the remarkable feature of the crash was less its severity than its shortness. Once the shock had passed, the
sifting through the wreckage for newly undervalued stock began. Despite the turmoil of the previous autumn, equities turnover in 1988 was still twice as high as it had been before Big Bang, only
two years previously. As the heatwaves of 1989’s summer enveloped the country, recovery in the Square Mile was well under way. For all the City’s prominent casualties, there were still
more than 620,000 employed in financial services. And by then it was communism, not capitalism that was facing its endgame.
Relief and renewed optimism were understandable given that the widely assumed expectation –
pace
1929 – that a stock market crash would be followed by a severe economic
recession failed to materialize. Internationally, the lead was taken by Reagan’s new appointment as chairman of the Federal Reserve, Alan Greenspan, who immediately indicated his readiness to
pump liquidity into the US economy. Nigel Lawson announced the same intention. Judging the risk of inflation now secondary to that of a recession, he eased interest rates (albeit down to 8.38 per
cent base rate in December 1987, which was high by later standards and represented a smaller cut than the opposition parties demanded at the time). Stimulating growth was still Lawson’s
objective the following spring, when his budget unleashed a slew of tax-slashing measures, including the cutting of higher rate income tax from 60 to 40 per cent and the basic rate to 25 per cent.
As the Chancellor later put it: ‘The actuality and
expectation
of cuts in tax rates were part of an important cultural change, which fuelled business confidence and economic
growth’ (italics added).
44
Delivering these promises was made easier by the Treasury’s Gladstonian achievement at this time: a
balanced budget and the paying back, rather than further accretion, of public sector debt. Thus the Lawson stimulus bore scant comparison to the debt-accumulating tax-slashing of
‘Reaganomics’, or the spending-driven budget deficits later run up by Gordon Brown.
One hangover that the boom years did bequeath the City was the revelation that the word of some of its most seemingly successful practitioners was clearly not their bond. The Financial Services
Act 1986 retained the Bank of England’s oversight of the banks while creating a new broking regulator, the Securities and Futures Authority (SFA). A step had thus been taken away from the
gentleman’s code of self-regulation which had left the Stock Exchange to police its own members, but had not given the SFA the powers enjoyed by the Securities and Exchange Commission (SEC)
in the United States. In June 1987, it fell to the former joint head of securities at Morgan Grenfell to earn the dubious distinction of becoming the first person to be
convicted of insider-dealing (he received a suspended one-year sentence and a £25,000 fine for using confidential information to net a £15,000 profit). Whether his and
subsequent convictions revealed declining moral standards compared to the ethics of the ‘old City’ was a moot point. After all, prior to the Companies Act 1980, insider-dealing had not
even been a criminal offence. Meanwhile, petitioning by Lloyd’s of London successfully excluded it from the provisions of the Financial Services Act altogether. Evidence of malpractice in the
insurance market was used both by those arguing for outside regulation and by those who maintained that the revelations showed that the existing procedures were capable of unmasking wrongdoing. In
lobbying Parliament, it doubtless helped that one in eight Conservative MPs was a Lloyd’s name,
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many of whom were suspicious of outside
interference. During the early nineties, losses incurred by Lloyd’s syndicates exposed to natural disaster and asbestos claims, and legal action taken by financially ruined names, claiming
mis-selling, suggested that a bit more outside interference would have been preferable.
Other scandals demonstrated that incompetence, naivety and a willingness to take individuals at their own estimation were capable of trumping due diligence whatever investigative structures were
in place. The investment broker Peter Clowes, of Barlow Clowes, promised his fourteen thousand investors (many of them pensioners entrusting him with their lifesavings) a guaranteed return from
government-backed gilts, while actually spending their money on risky investments and personal embezzlement. His wheeze was undone by the 1987 crash, and when the Department of Trade and Industry
belatedly looked into his dealings they discovered a £110 million shortfall. This sort of fraud seemed almost amateurish compared with that of Robert Maxwell, who left a £2 billion
black hole in his transatlantic publishing and newspaper empire, representing ‘the biggest plunder of public and private assets in Britain’s history’.
45
In November 1988, with £3 million per day due in interest charges on the back of vast new borrowings, Maxwell had siphoned money from his public companies into
his private companies, in the process robbing £400 million from the pension fund of his employees at the
Daily Mirror
. The deceit was only exposed after the media tycoon fatally
tumbled over the side of his yacht in 1991. Auditing had not revealed his deceptions, nor had there been sufficient investigation of the suspicious complexity of his corporate structure or the fact
that he alone retained the power to sign sizeable cheques. Particularly depressing was the willingness of the City to take on trust the word of someone who had been deemed ‘unfit’ to
run a public company by the Department of Trade in 1971, and was
popularly known, thanks to
Private Eye
’s double-entendre referring to his girth and his origins,
as ‘the bouncing Czech’. Determined and supposedly ruthless capitalists had allowed themselves to be hoodwinked by a man who was, in the posthumous verdict of
The Times
, ‘a
monstrously improbable socialist’.
46
The City’s reputation was also besmirched by illegal share-support measures. The takeover by the
recruitment agency Blue Arrow of an American competitor, Manpower, in 1987 was supported by an £837 million rights issue. Only after the deal’s completion did it emerge that its success
had been secured on the back of the misleading impression about the take-up of the subscription created by the County NatWest investment bank. A trial in 1992 secured convictions which the Court of
Appeal later overturned. Similar share-support allegations were made following Guinness’s £2.7 billion takeover of Distillers. The company’s chief executive, Ernest Saunders, was
one of the ‘Guinness Four’ arrested in 1987 and sent to jail three years later.
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