13 DECEMBER 1975, Page 28

Skinflint's City Diary

The City makes a nice large easy target for abuse and humour (especially of the defensive resentment type which labels denizens of the square mile with superficial tags like upperclass-twit-of-the-month). Both the scorn and amusement are richly deserved but often .misdirected, missing the fundamental confusion and archaism underlying the layer of self-confident modernity.

Well, there have been symptoms that all was not as efficient as could be but it is not so much the bankruptcies and last-minute salvage operations that cause concern as the curious antics the survivors get up to. The financial institutions, in particular the investing bodies, have been going through strange contortions. That normally sane organisation the Bank of England has been behind several of them. First it started ,pushing the unit trusts, pension funds, and insurance companies into taking a more 'responsible' attitude to the companies in which they invested.

This put the large shareholders into the invidious position of appearing to move from the attitude of financial analysts which is what they are experts in (or should be), into meddling with the management policies of manufacturing industry, which they cannot possibly know very much about. And do not want to; and have no time for. It also involves them in divided loyalties since their first duty is to unitholders, pensioners insurers and their own shareholders and tnis may conflict with their duties as good citizens to the companies they have invested in. As a result the Institutional Shareholders Committee is not markedly active. But undeterred. the Bank of England is now trying to persuade the same institutions to put money into companies that apparently everyone else has shunned.

The so called Equity Bank is intended to funnel money into companies which cannot raise the money elsewhere. For a start this is by implication a pretty fierce indictment of the City since it assumes there are healthy and potentially profitable corporations which cannot raise money through the Stock Exchange or from merchant banks. If that is so, then the repeated accusations of financial myopia and persistent chasing of ephemeral fashions are justified, and the City is peopled by suave incompetents. This is not a new view and there have been documented studies that indicate the truth of this case, but there has not before been an indication that the Bank of England felt the traditional sources of investment capital were incapable of coping with twentieth-century industrial requirements.

The idea is the brainchild of Sir Henry Benson, who as senior partner of Coopers, the chartered accountancy firm, was Whitehall's favourite accountant until his recent retirement, when he became industrial adviser at the Bank of England. For his scheme to work one must not only assume the City does not now know a good thing when it sees it, and that the numerous venture capital outfits are not geared to cope, but that companies are found.ering or failing to grow for lack of finance.

One of the presumed aims of the new set-up is to look after ducks before they go irreparably lame, and Foden is the example most recently cited. That lorry-maker was kept out of the clutches of the National Enterprise Board when earlier this year it was rescued from grave financial trouble by direct action from the institutions. Which raises another interesting question. Presumably the new 'bank' will only support temporarily ailing but fundamentally sound companies (after all, pensioners' money is not to be trifled with); but Lord Ryder has said the NEB will only take on corporations capable of profitable survival. So are the two to be in competition with each other as well as with the City?

The problem is that the institutions have no commonly agreed criteria for investing even in unquestionably profitable concerns, much less for putting money into doubtful ones. There is also a possibility the City is not completely inept and may be ready to put up cash for companies which look as if they will produce an adequate return on capital. Which means that the Benson bank may be landed with the rescue jobs that no sane banker would touch with the thick end of someone else's sterilised bargepole. All of which does not look too happy for the small investor.

He is becoming less of a mythical being since the recent upsurge in savings confounded economists. The Stock Exchange is not really much of a place for the small man — the costs are high, the risks are great and the return nugatory. But if unit trusts and insurance companies are not providing a safe home for his money either, it leaves only the building societies. This may begin to sound like a Catch 22 of investment; either it is sound, in which case existing sources of finance will be forthcoming, or it is dubious which means savings will be dissipated. And certainly, even assuming that the City is less marvellous than it thinks it is, the new organisation will not fill any notably large gaps, quite apart from the likely prospect of its being manned by City men. If the City is lacking, it is not at this respectable £50 million end, it is at the more forward-looking new-venture end, and nobody is talking about that gap.