HOW THE BANKERS KILLED MARCONI

Simon Nixon on the unscrupulous

merchant bankers who destroyed a great company

IT is one of the oldest scams in the book. An elderly couple are befriended by an apparently well-intentioned neighbour. He offers to help out with odd jobs. They take him into their confidence. Soon they rely on him for a lot more than simply changing the odd light bulb. Then one day they return home to find their house stripped bare, their money gone and vast debts outstanding on their credit cards. But, even though all the evidence is there, they refuse to believe that their neighbour had anything to do with it.

This seems to be more or less the position that employees and shareholders of Marconi find themselves in now. Five years ago they had a stake in GEC, one of the last remaining giants of British industry, the 25th largest company in Britain, a broadly based defence, electronics and telecommunications group with a history stretching back 100 years. But last week they returned home to discover Marconi — as GEC had been renamed — stripped of its assets, its share price down 97 per cent from its peak, its workforce slashed by 10,000, its balance sheet destroyed and its very survival in doubt.

It is a corporate disaster almost without precedent in postwar Britain. But, so far, the finger of blame has been pointed at almost everyone except the people responsible. The chairman, Sir Roger Hurn, the chief executive, Lord Simpson of Dunkeld, and the finance director, John Mayo, have all lost their jobs and their reputations. But what about those charming smoothies with the public-school accents, Oxbridge manners and tailor-made suits that were always hanging around Marconi offering to help out? They're sitting behind their desks in the City acting as if they had nothing to do with it.

Make no mistake, the City has its fingerprints all over this one. Marconi is simply the most high-profile victim yet of the immense power that investment banks have been allowed to accumulate since the 1980s. For more than a decade, Marconi has been caught in the middle of a trial of strength between the City and what remains of British industry. If any good is to come of this scandal, policymakers should reflect on the changes that have taken place in the City over the past 20 years without which this catastrophe might never have happened.

Blaming the collapse of Marconi on Simpson is a bit like blaming the centre-forward of the Dog & Duck Sunday-league side for not scoring more goals for England. You need to ask yourself who was responsible for selecting such mediocrity in the first place. For all their legendaryarrogance and highhanded bluster, Simpson and Mayo were no more than poodles of the City, constantly craving affection. They were recruited to do what Lord Weinstock — the extremely highprofile managing director of GEC who built

up the company during 36 years at the helm — had refused to do: to spend the £3 billion pile of cash that was sitting in GEC's balance sheet. Weinstock's obstinacy infuriated the City, which fought a long war of attrition against him, until he finally agreed to retire in 1996.

The appointment of Simpson was greeted with scenes of wild-eyed excitement in offices all over the City, as I remember only too well. When the news broke, I celebrated all night — preparing a detailed presentation of my bank's initial thoughts as to how Simpson might care to spend Weinstock's booty. Every banker in the City wanted to be first in front of Simpson to peddle him their pet schemes.

There was never the slightest doubt in the banking community that Simpson could be relied on to splash the stuff around. After all, this was a man whose passport from the obscurity of the Scottish gas industry and British Leyland was to sell both his previous employers — Rover and car-parts group Lucas — to foreign buyers, much to the City's delight. Moreover, as a Blair crony and Labour working peer, it was abundantly clear that Simpson was vain, desperate for recognition beyond the world of car parts. Such a man never stood a chance in the City, where even the secretaries are experts in applying the old oil. From the moment Simpson took the reins at GEC, the City's most accomplished snake-oil salesmen were deployed to encourage him to do what was expected of him.

Not surprisingly, it did not take long for the deals to flow. First the defence businesses — the jewel in Weinstock's crown — were flogged off to British Aerospace; the heavy engineering businesses followed soon after. Next he tried to sell GEC's telecoms businesses. When that failed, he made a fatal strategic error. Egged on by City bankers in the grip of Internet mania, he decided to buy telecoms businesses instead. Within four years Wein

stock's legacy was blown on a bunch of technology companies at the very height of the bubble.

But what makes the fate of Marconi so scandalous is that the bankers advising Simpson and Mayo on their deals knew full well that the pair were being extraordinarily reckless. Marconi's advisers will have had to develop detailed forecasts to justify the price paid for each acquisition. They will have been well aware that these forecasts were fanciful in the extreme. But bankers today do not acknowledge any responsibility to anybody other than themselves. The days when merchant banks saw it as their duty to restrain ambitious managements, to protect shareholders from executive folly, are long gone. The upheavals in the structure and ownership of the City of the last 20 years have undermined traditional relationships between banks and their corporate clients, replacing them with short-term commission targets and a culture of caveat emptor.

The modern investment bank is a highly focused deal machine, unencumbered by any sense of fiduciary duty towards conserving the nation's assets. City banks today employ entire divisions whose sole purpose is to dream up deal ideas to sell to industry. In turn, industry has been obliged to create entire departments simply to listen to these ideas. As a result, a whole new cadre has emerged both in the City and industry that needs a steady stream of deals to justify its existence. And the more deals that get done, the more the City expects. with stockbrokers acting as cynical cheerleaders for the deals of their corporate-finance paymasters. Only the strongest chief executives feel confident enough to resist the pressure. Even then, bosses who refuse to play the game — such as Weinstock — are likely to be forced out.

If Britain is to protect itself against future Marconis, it is essential that steps are taken to curb the power of investment banks. For a start, the government could do worse than implement the proposals raised in the Myners report to the Treasury, obliging fund managers to pay for stockbrokers' research out of profits. This would encourage genuinely independent research. A second step should be to reestablish the legal separation of banks, corporate finance and research functions, thereby removing the outrageous conflict of interest that allows banks to advise both sides of the same deal.

But none of this will do much to help Marconi. which now looks set to become the third employer of Lord Simpson to find itself sold to a foreign buyer. That would mean one last fee bonanza for the City. It would be tempting to think that the banks involved in the sale could he persuaded to donate their fees to a university science department in a gesture of atonement for the damage they have wrought. Fat chance. Instead the fees will end up in the same place as all the rest of the booty pillaged from Marconi: parked in the street outside fancy houses in Belgravia and hanging on the walls of Notting Hill maisonettes.