Time to start putting clients first again

On the face of it, I picked a bad week to volunteer to write about the rebirth of gentlemanly capitalism. My thesis was that the credit crunch would lead to a profound shift in the way the City goes about its business, heralding a return -- if not to bowler hats and brollies, liquid lunches and civilised working hours -- then at least to an environment where longstanding relationships once again took precedence over the quick buck. After two decades in which the City appeared to have adopted Caveat Emptor as its new motto, I reckoned this financial crisis would bring about the restoration of its old one, Dictum Meum Pactum: 'My word is my bond.' But last week, bowler hats did make a comeback in a way that no one had expected. Bradford & Bingley, famous for adopting this symbol of old-world City respectability in its advertising, was forced to renegotiate a £300 million rights issue that had been fully underwritten by two top banks. Did UBS and Citigroup walk away -- or threaten to walk away -- from their commitment, thereby breaking perhaps the most sacred contract in the financial world? Both banks deny they did any such thing. But that is almost beside the point. The reality is that many people don't believe them.

That alone gives an indication of how far trust has broken down in the Square Mile.

But it is hard to underestimate what a disaster it is for the City should the suggestion that banks can refuse to honour an underwriting commitment take hold. 'No one is going to believe anything we say again, ' says a top executive of a rival bank. 'When we underwrote last year's rights issue by Fortis [the Belgian bank] to enable it to buy a piece of ABN Amro [as part of Royal Bank of Scotland's consortium], we had to look Belgian, Dutch and EU regulators in the eye and convince them Fortis would definitely have the money. Would they accept our word for it now? How could they?' If the Bradford & Bingley debacle marks a new low in the descent of gentlemanly capitalism, it has been a long time coming. In his masterly chronicle of the postwar City, A Club No More, the historian David Kynaston dates the decline of the old City to the arrival of a talented and ambitious group of outsiders such as Siegmund Warburg, Charles Clore and Jim Slater, who tore up the old, unwritten City rule book and pioneered aggressive new practices such as hostile bids -- putting takeover offers direct to shareholders over the heads of company boards -- that were considered ungentlemanly conduct at the time.

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 takeovers 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: privateequity 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.

So why do I still stick by my view that we could be on the threshold of a new model of investment banking, in which relationships once again come first? Partly because the process is already underway. Even at the height of the boom, there was a steady exodus of top bankers away from the big banks into smaller specialist boutiques. Hedge funds and private equity were one manifestation of this desire to escape the ferocious politics of the big banks. Meanwhile, independent advisory firms such as Lazard, Greenhill, Evercore and Perella Weinberg have prospered, winning lucrative mandates on major deals by stressing their independence and client focus.