In the City
The City observed
Nicholas Davenport
Let us face it. Clever Jim Slater and the whiz-kids who imitated his unethical takeover and share dealing techniques were the greatest disaster the City has suffered since the Wall Street crash of 1929. Since that time, which was when I came into the City, a long period of work as a mutual life assurance director brought me into close touch with the capital market and over these years I never failed to be impressed by the skill and diligence with which the Stock Exchange Council took care to secure the freedom and fairness of public dealings. But like any other institution — for example the health service — the capital market can be taken for a ride by those who are more clever and acquisitive than socially conscientious. Nevertheless it performs the function essential to a free enterprise system — the open market where the savings of the people can be converted into investment for the good, that is, for the employment and welfare of the people. I have always argued that it could be much better planned and that occasionally it gets out of hand through over-excitement or overdepression, but at least it saves us from Government dictation. It is therefore distressing when the machinery of the capital market is exploited for private rather than public gain. It puts the whole City in bad odour.
I have little doubt that Jim Slater and the whiz-kids exploited the capital market for their private gain first and for the public gain second, the public gain being dependent upon more efficient new managers taking over their acquisitions, which was rarely, if ever, the case. It is impossible not to be convinced by the painstaking researches of Charles Raw that Jim Slater was never a true creative industrialist, although he was well qualified for the job, and that the whole Slater Walker enterprise — to quote Charles Raw — was 'really about one thing, the manipulation of share prices'. Slater's own apologia is alas pathetic. He has learned virtually nothing. The title of his book Return to Go is frightening without the addition of the word 'Elsewhere'. In China he would be rudely told to go into the country and grow vegetables. It is he and his like who have helped to push the Labour Party into its present revolutionary demand for the nationalisation of the City's financial institutions.
The best book on these disasters has been written by Robert Heller, the editor of Management Today, who collaborated with Norris Willatt in compiling a critical history of the extraordinary series of bank failures in the late 'sixties and early 'seventies. They put the Slater Walker episode in its proper perspective. In giving their serious and important book a flippant title Can You Trust Your Bank? (Weidenfeld & Nicolson £5.50) they may suggest that it is all about crooks, but it is a reasoned criticism of the financial system at a specially unattractive stage in its history. In all the advanced capitalist societies the acquisitive moneymakers seem to get bored from time to time with respectability and sober growth and like to go on a mad get-rich-quick rampage when they get the chance. It is part of the human psyche. The chance came in Britain with an explosion in the money supply. To quote: 'Between mid-1970 and early 1974 M3 (currency, current and deposit accounts) rose by the previously unthinkable amount of 270 per cent'. The Tories will never be allowed to forget it.
The most fascinating part of this book for me is the section they call 'The British Horror Show' or 'The Greatest Story Never Told'. This gives the history of the rise and fall of the fringe banks in London. The starting point was the crash of a fringe bank called London and County Securities in November 1973 and the end was the collapse of Slater Walker in October 1975 when the Bank of England secretly put up £110 million to rescue the rump of it. In between these dates, they say, fringe bank after fringe bank either disappeared completely or was kept tenuously alive in a semi-embalmed condition. The amount of money pumped in to pay off secured creditors and keep the least bad of the fringe managements going was around £2000 million. It was called the Life Boat operation.
The hilarious part of this tragedy was that the Bank of England chose the First National Finance Corporation as its partner in rescuing the London and County. Apparently the Bank did not know that the FNFC itself was in dire trouble. It had started in consumer credit and had expanded into property loans so recklessly that its profit of £9.8 millions in 1973 had been turned into a loss of £8.3 million in 1974 and a staggering loss of £82 million in 1975 when £91 million had to be written off the value of its (mainly property) loans.
The authors have a devastating chapter on the 'Lax Old Lady'. Until the fringe bank crisis had erupted the Bank of England had no established department responsible for the regulation of City banks. A subordinate of the Chief Cashier was in charge in a section called 'Principal of the Discount Office'. After the crisis this section was split in two one looking after the discount market, the other after 'bank regulation'. As the number of banks in the City had doubled to three hundred in the previous seven years it was about time that the Bank woke up. The authors comment: 'It has sometimes showed an apparently woeful lack of knowledge about what's going on'.
As they have said, none of these scandalous 'banks' could have operated unless there had been an explosion of the money supply for which the Bank of England and the Tory government were responsible. The explosion goes back to the Bank's green paper Competition and Credit Control, which allowed the commercial and secondary banks to expand and compete with one another. I think I was the only financial writer at the time who described this paper as a backward step, having been brought up by Keynes to regard freedom for moneylenders as dangerous. Unfortunately the CCC revolution coincided with the Heath government's dash for expansion. As our conventional industries were not ready to make use of this extra credit in new investment the money got into the hands of the reckless and unscrupulous 'bankers' who nearly brought down the whole financial edifice in the City. I once said in this column that raising Bank rate to 15 per cent in October last year was an act of madness. I can now understand why. The Governor went made with fright — and I don't really blame him.
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