In the City
The changing scene
Tony Rudd
Once upon a time there was a chemist's shop in Threadneedle Street more or less opposite the entrance to the Stock Exchange which was more like an apothecary's shop than a branch of Boots. It was run by a man who could have been Jeeves's younger brother, so urbane and like a gentleman's gentleman was his manner. When the gentlemen of the market had on the previous evening had too much champagne or vintage port or whatever, they would repair to this chemist for the necessary restorative. He would judge his client's state, by their colour, the bloodshot look in their eye and their general mien. Assessing the damage, he would deftly make up the required potion in a very long glass which he then filled with half a tumbler of warm water. The mixture invariably rose in the glass like a miniature Vesuvius, spitting and bubbling up the sides, in an effervescence which exceeded anything even claimed by Andrew's Liver Salts. It was at this point of course that the medicine had to be taken, in a full draught, no gulping, right down in one go, foam and bubbles and all. At that point the patient invariably did a Bob Hope double-take, pausing for a second or so as though pole-axed, then if young just grasping the counter in front, if older sinking into a conveniently placed chair; a few moments later, the victim would walk slightly unsteadily but filled with bubbles back to the market. This first aid dressing station for the drinker is of course no longer in existence. Nor indeed is Birch's, which used to be about 25 yards down the street on the corner of Copthall Court. With one of the prettiest Regency shop fronts and bars in London, it dispensed hot sausages and other excellent items with drink that varied from draught beer to vintage champagne for over 200 on the spot. All gone now.
But all traditions in the City have not changed. One of those which appears to be absolutely unbroken, judging by the current enormous rights issue by British Petroleum, is the way that huge amounts of capital can be raised in almost any circumstances by top-class blue chip companies. It s the way that the underwriting market itself operates which makes this possible. The mechanism doesn't seem to have altered at all since the apothecary was making up his potions. There was a story about the most famous underwriter, the senior partner of his prestigious firm, that may have been apocryphal but is probably true. In the middle Fifties, arranging some massive underwriting, this legendary figure with his huge bushi eyebrows put his head around the door of an investment manager's office and said, 'Smith, I've put you down for £1 million'. Pause. Smith half-rises from his chair and says deferentially, 'Thank you very much, sir'. A further pause. A nod, and the distinguished head and its bushy eyebrows disappeared from view and the door was shut. Smith leans across to his assistant and says, 'Ring up their office, Jones, and find out what he has given us a million pounds of and when we are on risk'. In other words, such was the old boy's power that he could have underwritten the sale of Buckingham Palace Gardens or the purchase of Tower Bridge. Nobody would have wanted to complain, because to have done so would have been to drop off the best and most important underwriting list in the square mile.
And so it operates today. Raising over £600 million for BP at a time when practically every City analyst knows that the outlook for the oil industry is pretty dull at best and profitless stagnation at worst, could seem to be a remarkable feat of bad timing. Only a year ago every investor took the view (apparently) that the bestperforming sector of the market and of his portfolio was the oil industry and the market just couldn't have enough new paper. Now all that interest and glamour has gone, BP shares have slipped from being the most highly regarded to, in many cases, the least regarded, so far as the prospect of making money is concerned for the next year. And yet the issue has been quietly and professionally underwritten by three excellent broking firms and the whole think has been got away quietly and efficient ly. Another example of the City's ability to raise capital and another refutation of the left-wing view that industry starves becauge of the City's lack of ability to put up money.
Of course it could be argued that in purely economic terms this remarkable mechanism is counter-productive. It's all very well for a company like BP to be able to raise hundreds of millions of pounds just because the underwriting mechanism is so well oiled, but should it really be doing so? Apparently there's nothing to stop it in this free market of ours. Even if it's a case of a huge oil giant going out to raise money in order to diversify out of oil, which appears to be largely the case here, nobody can interfere. Once upon a time in the bad old days just after the war there was a body called the Capital Issues Committee, staffed by civil servants and representatives of the Bank of England who would sit in judgment on all applications to raise money before they were allowed through into the market. This system didn't seem to work very well either. But we all know that in Japan, for instance, a very large fundraising such as that just carried out by BP would have been vetted by certain quiet and very powerful officials in government who would have made the decision as to whether raising this kind of money was really compatible with the industrial plan being followed by the country. The trouble is of course we don't follow any industrial plan. And despite the fact that Japan's economic record is one of amazing success and our own one of amazing failure, it would take wild horses to drag British businessmen into participating in a Japanese-type system for the allocation of scarce resources. Yet the more that one looks at the BP issue, the huge size of the sum involved, the question of timing, the needs of the oil industry and of our economy generally, the more one feels that perhaps these things could do with a bit of overall coordination.
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