“REFLECTIONS OF ‘BIG BANG’ 30 YEARS AGO – THURSDAY 27th October 1986”
By David Buik – Panmure Gordon & Co
In August 1986, my colleagues and I at Godsell, a subsidiary of Exco International invited Cecil Parkinson, the then Secretary of State at the DTI to lunch with some clients, with a view to being briefed over the government’s official interpretation of ‘BIG BANG’ and what ministers hoped to achieve. I doubt that we could have had a more charming lunch guest. The DTI had a mandate to finally erase a cartel of fees and brokerage charges within the financial sector, which were bordering on illegal and in danger of damaging the City of London’s reputation. Also at that time market participants seemed to be cocooned within a fortress of protectionism. However, it was less than apparent that Cecil Parkinson had much of an inkling of how dramatic the sudden deregulation of financial markets would have on London as the global epicentre for financial services.
The deregulating included changing the role of stockjobbers and stockbrokers on the London Stock Exchange. Business through the LSE was be conducted through market makers or agency brokers. It was possible for one company to do both, provided ‘Chinese walls’ were erected. Market adopted a much more competitive approach with the demise open-outcry and the introduction of electronic, screen-based trading. ‘Big Bang was the result of an agreement in 1983 by the Thatcher government and the London Stock Exchange to settle a wide-ranging anti-trust case that had been initiated during the previous government by the Office of Fair Trading against the London Stock Exchange under the Restrictive Trade Practices Act 1956.
By 1986, London, as Europe’s leading financial centre, was already under a ‘wet sail’ for two major reasons. Firstly in the ‘70s London assumed the mantle of the home of the ‘off shore’ Euro Dollar market. By the end of that decade there were nearly 300 trading banks in London, with 26 Japanese banks easily the most prominent in terms of raising deposit and trading fixed interest assets. Markets exploded with activity! However the abolition of exchange control in 1980 was an even more influential act than ‘BIG BANG!’ PM Margaret Thatcher and Sir Geoffrey Howe, the Chancellor pulled the gun trigger that the UK was at last open for international business across the spectrum.
Global financial institutions were given plenty of notice as to the UK Government’s intentions over deregulation. So those banks with the deepest pockets were weighing up the ‘pros and cons’ as to who would make the ‘best fellows!’ It was fairly obvious that there were going to be far too many markets makers. However very few wanted to miss out. So out came the cheque books. At least 30 years ago the amount of money that found its way in to the partners or shareholders of many financial institutions that were purchased bore little resemblance to the amount of money that was made as a results of ‘Big Bang.’ The mushrooming of the derivative markets in the late eighties plus the gargantuan level of M&A activity, much of it centred around the IPOS of government owned services such as British Gas, British Airways and the privatisation of many building societies such as Halifax, Abbey National, Northern Rock and the like in the ensuing years helped the explosion of investment banking activity and market making.
The likes of Salomon Brothers, Goldman Sachs, Deutsche Bank, JP Morgan, ABN Amro, Lehman and Nomura Securities were attracted to London by the opening of LIFFE in 1982 under the canny chairmanship of Sir Brian Williamson to pit their wits against the existing establishment – Barclays, Midland, NatWest and Lloyds. LIFFE was pivotal in the expansion of fixed interest, equity and option markets. At that time HSBC was still a sleeping giant in London. Citibank, Chase Manhattan, Chemical Bank and Bankers Trust were prominent in money and fixed interest markets, but had yet to show their teeth in equities and M&A activity.
So the chase was on. Wedd Durlacher and Ackroyd & Smithers were key as the two man stockjobbers. Wedd fell comfortably in to the embrace of Barclays, who also bedded down with De Zoete & Bevan. Swiss Bank Corporation swept up Warburg, who had already agreed terms to buy Akroyd & Smithers, Mullens & Co and Rowe & Pitman. Soon after this group was acquired by UBS, who had added Phillips & Drew and Paine Webber into their portfolio. These two seemed initially to be the two strongest units and they referred to each other with disparaging affection as ‘BeezieWeezie’ & ‘WARMCRAP.’ However Deutsche was having none of it and Morgan Grenfell, Pinchin, Denny, Pember & Boyle and Bankers Trust were acquired under the leadership of Edson Mitchell. Citibank, not to be out-gunned, pooled resources with Salomon Brothers and part of Schroder. HSBC took its time ‘to get hold of the bit’, but galvanised themselves into action by buying James Capel, Chemical, Midland Bank, which had swept up Samuel Montagu and W Greenwell & Co. Chase Manhattan was less ambitious in buying Vickers Da Costa. NatWest settled unambitiously for Fielding Newson Smith. ABN found common ground with Hoare & Co and RBS found solace with Charterhouse Japhet. Lloyds Bank tried to grow organically without much success. Hill Samuel was slow out of the blocks but eventually a few years later found love with TSB, but brought nothing to the investment banking party. Lazard expressed no interest in competing; nor did Cazenove & Co – a good result for them and Schroders kept hold of their fund management operation.
It soon became obvious that there was nothing like enough business to go around, even though business was expanding. Never was it more obvious than the Gilt market. At the end of 1986 there were no less than 21 GEMMS (Gilt Edge Market Makers) and 4 Inter-dealer-brokers. The New York bond market was ten times bigger London’s Gilt market. They had the equivalent of 5 market makers. I once asked Nomura’s CEO Tonamura-San why he had not thrown his hat in to the Gilt ring, His retort was classic – “Ah, David-san – It is a professional market – Too small for Nomura to be a big player. I am good enough to play baseball with you in Regents Park, but not cricket at Lord’s!” Within a matter of a couple of years, the market was dominated by about five global players.
The whole culture of trading and customer relations during this embryonic time changed unrecognisably. Markets became very much more competitive. The big players quickly started to dominate. Official regulation made its presence felt with Chinese Walls being strictly observed. Brokers and market makers quickly learned that they were working for their employers, as it became more apparent that clients were becoming increasingly price and cost conscious. P&L and bonuses ruled OK! The bonus culture changed dramatically and became significantly more meaningful. Income tax was reduced from 83% to 60% in 1984 and to 40% in 1986. The fact that one was now taxed on spending ability rather than ability to earn contributed greatly to creation of wealth, despite the fact that CGT was introduced at the same time.
The one story that confirmed the change in business culture and procedure was the Guinness/Distillers saga. In 1986 Guinness, run by Ernest Saunders thwarted Jimmy Gulliver’s Argyll Foods from buying Distillers. Guinness, advised by Morgan Grenfell mounted a $4.1 billion bid for Distillers, using what was termed as unorthodox help to assist with the purchase of shares, resulting in 4 people – Saunders, Sir Jack Lyons Gerald Ronson and Anthony Parnes being given prison sentences – no more ‘wink and the nod’ and no more manipulation!