Letters from London (30 page)

Seduction and betrayal. The first approach comes when you are most relaxed: on the golf course, in your bath after Wimbledon, around the dinner table. “The entertaining is prodigious,” Fernanda Herford confirmed. Clive Francis, a former Royal Air Force squadron leader, told me, “I was hooked by flattery and greed.” I talked to one woman who had joined because her marriage was on the rocks and a banker friend suggested that membership would give her financial security. (She is now “bust four or five times,” a deficit millionairess twice over.) The atavistic appeal of Lloyd’s was just as big, if not bigger, for new money as for old money. Buster Mottram describes himself as being “mesmerized by the Lloyd’s myth.” The daughter of a trade unionist, herself a woman of manifest common sense, told me, “I grew up on a council estate, and there is a sense of achievement in becoming part of an establishment.” This normal human vanity was played upon with brutal success in the eighties.

The moment of unprotected financial intercourse with Lloyd’s occurs at their place, not yours. First, the agent talks the prospective member through the terms on which he or she is joining. Memories of the agent’s counseling vary directly with the Name’s subsequent experience at Lloyd’s. Those I talked to who had traded well—or, at least, not disastrously—remembered things being explained with due gravity; those who had gone down most heavily remember only a jollity that in retrospect seems insulting. Fernanda Herford said, “Certainly I understood [the concept of unlimited liability], but there was a great deal of ho-ho-ho.” Buster Mottram was told that unlimited liability was theoretical, “like a meteor hitting London—an act of God, nothing more serious than that.” A successful musician was told, “If you have twenty thousand pounds in the bank, you’ll never need
more than that. And if you’re a person who can’t sleep at night, take out a stop-loss policy.” (She and her husband took out twenty-nine stop-loss policies over the years and are down four million between the two of them.) The West Country Widow recalls the softening up she received in the offices of the agent Anthony Gooda: “They said, ‘You realize you will be warned about unlimited liability?’ and I said should I back out, and they roared with laughter and said, ‘Absolute nonsense, it’s never happened and it never will. We took a shaker on Hurricane Betsy, but we soon made up for that.’”

Thus prepared, the Name is then brought before the Rota Committee of Lloyd’s, where matters are explained again. The Rota Committee consists of two senior members of the market and a protocol secretary—or, if you prefer the words of the West Country Widow, three “bumbling shaking old fools.” Sir Peter Miller, chairman of Lloyd’s from 1984 to 1987, recalled in 1991 the way he used to induct new members: “I think the example I usually used was that you were absolutely liable for your last penny farthing, right down to the cuff links in your shirt, and if it was a lady, I usually said, well, down to the earrings in your ear, my dear.” That phrase “down to your last cuff link” is a famous Lloyd’s tag, part of the mystique, part of the sexiness of theoretical loss set against the much greater sexiness of almost certain gain. Most Names I talked to remembered those words, or something similar. No one suggested that the concept of unlimited liability was in any way concealed from them by the Rota Committee. On the other hand, few remember the occasion as being more than merely ceremonial. The businesswoman in her thirties, who had been inducted at twenty-five in honored solitariness, recalled, “That stupid thing in front of the table. You sit outside with your agent, having been given a good lunch. It’s built up as a great thing and an honor, but then you go up there and everyone’s dressed up to the nines and it’s over in seconds.” Other Names were dubbed in groups of anything from two or three up to a score and more. Clive Francis, the ex-squadron leader, remembered the moment when the sacred words
unlimited liability
were used. He remembered it because his agent nudged him and whispered, “They have to say that.” They do indeed. Fifteen years on, he owes over
£2
million.

What few of those Names signed up in the eighties realized was that their recruiter was often paid a fee. Surely the chap who drank at your table and admired your pictures and murmured, “I could get you into Lloyd’s, old boy,” wasn’t in it for a kickback? After all, you were being asked to join an honorable club in which members were all on the same side, weren’t you? But Francis later found out that the dinner acquaintance who sweet-talked him got a thank-you check for three thousand pounds. Other commission touts might receive an annual bounty: say, five hundred pounds for each year the Name stayed with the members’ agent for whom he had been snaffled. And fees are, of course, negotiable: I heard of a recruiter who would go to the agent and say, “I’ve got a prospective member—what terms?”

As for who was on whose side, this was the key question for Names joining Lloyd’s over the last fifteen years or so, and one they did not normally think of posing until it was far too late. The deal, as proposed, seemed magical, unmissable. “You send no money, we just send you a check every year” is how it was characterized to Francis. “I mean,” he went on reflectively, “looking back, what a tit!” Lloyd’s and its agents had a good way of talking money and yet not talking money. For instance, as long as you got your check you probably didn’t look too closely at the way your winnings were computed. You might think it fine that your agent, who was responsible for placing you on the best underwriting syndicates he was able to, would take 20 percent of your profits. (This “agent” might be split into two—a members’ agent, who dealt directly with you, and a managing agent, who dealt with the underwriters—in which case the former might take 8 percent and the latter 12 percent.) Twenty percent of profits, however, worked like this: Assume you were placed on fifteen syndicates, ten of which made money and five of which didn’t. The former made, say, ten thousand pounds and the latter lost five thousand pounds. Balance in your favor, five thousand pounds. But the agent took his 20 percent on your ten thousand pounds of raw profit, leaving you with a net profit of three thousand.

The Lloyd’s market is divided into working and external members, in a traditional ratio of about 20 percent to 80 percent. (As of August 4, 1993, there were 3,593 working members and 15,853 external
members.) The working members underwrite insurance, just as you do; and they, too, want to be on the best syndicates, just as you do. But if you were an underwriter putting together a syndicate, whom would you rather have on it: a Widow from the West Country or an influential broker who, if he did well out of your syndicate, might repay the favor by bringing you some of his best business? That the market was heavily weighted toward insiders and against outsiders seems with hindsight obvious, logical, and consistent with human nature; that it didn’t seem so at the time is a tribute partly to Lloyd’s effective mystique and also to its effective secrecy. The figures simply weren’t available. In the last year or so, however, computer analysis has been used to prove what many suspected: that external Names tended to be dumped on duff, high-risk syndicates, while working Names creamed off the best business. A breakdown on all the Gooda Walker members for the years 1983 to 1989 (when the dangers of the LMX spiral were being run) shows that only 10 percent were insider Names—half what you might expect if the market dealt fairly between the two segments of its membership. On Syndicate 387, a key location of financial horror, only 3 percent of the Names were insiders. Analysis was also made of the most profitable syndicates in all the four main insurance categories for 1991–1992. Twenty Names appeared on three of those four syndicates and were therefore likely to be the highest earners in the market; of those twenty, eleven were insiders, and, of those eleven, four are or have been on the Council of Lloyd’s. Finally, there was a particularly nice computer breakdown on the correlation between geographical distance from No. 1 Lime Street and chances of being put on the better syndicates. This confirmed that Australia was a very bad place to live if you were a Lloyd’s Name.

When I asked Peter Middleton, the chief executive of Lloyd’s, about the weighting of the market, he replied, “In any activity, the professionals will know more than the others.” He offered car maintenance as an analogy: you would not expect the mechanic at your local garage to lavish as much care on your vehicle as he did on his own; rather, you would expect him to do a good job on your car in
return for a proper fee. This is all true, of course, though what happened to many external Names who sent their car to the Lloyd’s Servicing Center in the 1980s was that they got it back with four bald tires and somebody else’s radio, while the only gear that would engage was reverse.

T
HE FIRST QUOTATION
in the Oxford English Dictionary for the word
Lloyd’s
has a prophetic aptness. Here is Maria Edgeworth writing to her mother on March 4, 1819:

Much of Lloyd’s in the 1980s is here: the value of raw intelligence, the gambling aspect, the tickle of fraud. When a famous institution is making money, the occasional tweak of criminality can usually be covered up (and Lloyd’s has always been a successfully closed society: the first photograph of the Committee, for instance, did not appear until 1960). Just a case of one rotten apple in the barrel, bung it out, mum’s the word, more profits next year, punters happy. This was the theme song, and through most of the eighties it charmed the ear. What had to be kept quiet, or talked down, or minimized, was a tangy succession of upsets, rogueries, and scandals. Or, as Peter Middleton, referring to those times, put it—and, yes, we are back on motoring again—“what we had in Lloyd’s was a speed limit of seventy miles per hour on the motorway and no patrol cars, so some people were doing a hundred and thirty miles per hour and most about ninety-five.”

Chief among the motorway violations were the following: the Sasse affair of the late 1970s, in which syndicate members for the first
time refused en masse to pay their bills, were sued by Lloyd’s, and sued Lloyd’s in return; the Howden scandal, in which the American insurance brokers Alexander & Alexander bought a firm of Lloyd’s brokers for $300 million and discovered on subsequent auditing a financial hole of anything up to $55 million; the Cameron-Webb affair, the biggest fraud in Lloyd’s history, whose two chief villains were allowed to slip unprosecuted into foreign retirement; the flourishing of “baby syndicates,” devoted to skimming off the best business for Lloyd’s insiders; the case of Sir Peter Green, the very chairman of Lloyd’s, who was found guilty of “discreditable conduct,” fined £33,000, and kicked out of Lloyd’s after channeling his Names’ money into a Cayman Islands company he’d forgotten to tell them about; and the Outhwaite affair, in which counsel for Outhwaite Names suing their agent recently told the court that “it is probably the case that never in the commercial history of the City of London has so much of other people’s money been lost by the single-handed negligence of one man.” Ian Posgate, one of the chief underwriting barons of the time (who was himself banned from being a working Name), spoke of that period as the insider: “If you are making a good living, if you have self-regulation, if you are outside exchange control, it’s human nature to get greedier and greedier and greedier.” Ian Hay Davison, the chief executive of Lloyd’s from 1983 to 1986, spoke as the motorway patrolman: he thought it was a question of sorting out a few rotten apples but discovered that “the barrel itself… was in some danger of being tainted.” Christopher Hird, a financial journalist, spoke as the outside observer: Lloyd’s in the 1980s “resembled a garden in which the rabbits were in charge of the lettuce.”

As long as the “rotten apple” theory could be maintained, as long as the extent of insider weighting was kept largely secret (and as long as profits continued), investors gave their trust as well as their money. What has happened in the last few years is that the element of trust has very largely broken down. By April of this year, there were thirty-three groups of Names and ex-Names organized for defensive and offensive purposes, and by June the number of such members suing their professional advisers had reached the astonishing figure of
17,000. Seventeen thousand out of a membership of 34,000: deduct 20 percent for working Names, and you get something over 60 percent. Imagine a school in which 60 percent of parents were suing the teachers for badly educating their children. Imagine a restaurant in which 60 percent of customers were suing the management over food poisoning. Such a school, such a restaurant would not survive for long, however impressive the number of people it might have educated or fed in the past. Nor is such legal action going to be speedily concluded. According to the Lloyd’s Names Associations Working Party, a body made up of the leaders of individual action groups, “the scene is set fair for five to ten years of litigation which will involve Members’ Agents, Managing Agents, Directors of Agencies, individual underwriters, auditors, brokers, errors and omissions underwriters and the Corporation of Lloyd’s itself

Out there, the revolt of the shires is in earnest. The Names have witnessed negligence, fraud, complacency, and sardonic uncaringness; they have discovered the realities of money, how it works, and how those who live off it work. But they have also experienced something beyond this, something that at first sounds decidedly quaint: the offense against honor. What they were sold when they joined Lloyd’s was the concept of an honorable society, operating on trust, on shared values, on everyone being “one of us.” Instead, they have discovered that honor is a one-way street. Lloyd’s called on them the first year, and they paid; it called on them the second year, and they paid, while being promised that things would be better in the third year; the third year came, and it was much, much worse, while forecasts for the next year were bad too. Even the Mafia supposedly looks after the little boot mender who falls on stony times; Lloyd’s sent in Dr. Archer and The Hardship. The Names felt mocked and abandoned, used and abused. Fernanda Herford quoted to me a dictum from the portable philosophy of Lloyd’s: “See a mug, use a mug.” Hence the members who decline to pay with a strained cheerfulness born of desperation. Hence the frequently heard comment that if it weren’t for this, or if it weren’t for that, the Name would hide what money remained, or give it away, or go abroad and let Lloyd’s get
stuffed. I heard of elderly relatives being asked to change their wills to avoid leaving money to a beloved burnt Name, because otherwise Lloyd’s would purloin it: leave it to the spouse, the child, the non-Name instead. I heard of ingenious money-distancing schemes. I heard of a couple planning to divorce under Scottish law, then have the wife go bankrupt, then marry again, all in order to obtain some obscure benefit and somehow tinily defeat Lloyd’s. As one Name put it to me in a winky, nose-tapping way, “We’ve got far more time to think about it than the Hardship Committee.”