Philip Augar

There was a lot to deplore in the City before Big Bang, the reforms of Britain’s stock exchange that took place 25 years ago this week. The old exchange was an oligopoly that kept prices high and competition out. The City was sexist, snobbish and not very hard working. Certain partners disappeared for lunch at 11.45 and reappeared three hours later. Staff spent a lot of time playing the stock market with their own money. Women had little choice but to accept derogatory nicknames if they wished to progress. The only black face I came across in the City before Big Bang was in a West Indian steel band at a Cazenove garden party.

Yet there was also a lot to admire. The ethical code was strong. The rules were clear and most people stuck to them. Those that didn’t were sidelined from the mainstream by word of mouth. Conflict of interest was minimised as a result of the strict separation of functions in equity markets. Dealing firms could not advise investors. Broking firms dealt for clients as agents and were not allowed to trade as principals. Corporate advice was the preserve of the merchant banks, which in turn were prevented from dealing or trading on their own account. Everyone knew where everyone else stood and there was little question of talking your own book.

All of this, the good and the bad, changed in the run up to Big Bang on 27 October 1986. The turning point was the decision to allow the Wall Street model of integrated investment banks. The US firms swept into town bringing new technology, techniques and a harder work ethic. The City became more professional. The first train of the day in 1986, the 0715, left Haslemere in stockbroker belt Surrey at about the time the next generation of commuters would be starting work. British Rail arranged an extra train, the 0644; nowadays it leaves at 0521.

But behaviour changed in more sinister ways. Opening the market to competition slashed the cost of dealing and stock exchange turnover soared as investors saw opportunities to make a quick buck on the back of the lower charges. The new model gave investment banks an advantage in information that eventually led to bigger profits, higher pay and a completely different culture.

In this new world fast finance replaced patient accumulation. Long-term business relationships between banker and client, employer and employee, shareholder and management gave way to brief affairs. The permissive rules made it difficult to maintain any acceptable ethical standards. It was all very well to say the client came first but which client if you are acting for buyer and seller and putting the firm’s capital at risk? Brokers learned that their in-house book not their external clients were the top priority and that the ethical code was for public relations, not for real.

The rewards for practitioners became so great that greed wars broke out as individuals saw the chance to make life-changing sums from a year’s pay. There developed a tacit assumption that it was every man and woman for himself or herself and these values rippled out across society, changing behaviour and attitudes in unexpected ways.

None of this would have mattered if the City had remained what it was before Big Bang, namely an inward looking cottage industry with little wider significance. Instead it became an industrial-scale money machine with global reach and the potential to bring down governments and make or break economies. This occurred because the UK’s Big Bang came at a tipping point for the world’s financial services industry. Prior to Big Bang clients and sovereign jurisdictions could choose between the integrated US model and the discrete British agency version; after it, one-stop shopping investment banking carried the day.

The power of this model allied to the winds of free market economics and financial liberalisation made monsters of its institutions. Certain of their power and motivated by asymmetric rewards, they became highly leveraged and dangerously adventurous. Big Bang was not the only cause of this but it set them along the road. It helped to create a structure and a mindset that encouraged bankers to take reckless turnings at nearly every opportunity and persuaded many stakeholders to look away.

Is capitalism in crisis and was Big Bang to blame? Probably not but on its 25th anniversary it is appropriate that the question is now being asked where it all started, in the shadow of St Paul’s Cathedral on the edge of the Square Mile.

The writer was a stockbroker at the time of Big Bang. His books include ‘The Death of Gentlemanly Capitalism’

Poring over the minutiae of the British banking sector is not everyone’s idea of fun, but Sir John Vickers and his colleagues on the UK’s Independent Banking Commission have spent the past year doing just that. The work will have been intricate and those involved deserve some sympathy. For as things stand, next week’s report, despite presumably offering rigorous analysis and some imaginative proposals, looks like striking only a glancing blow for financial stability.

Did the eight days between Sunday September 14 and Sunday September 21, 2008 mark the death of the investment bank? Lehman Brothers went bust, Merrill Lynchgave up and Goldman Sachs and Morgan Stanley became regulated banks. It was part of the most catastrophic shift among investment banks since the event that created them, the Glass Steagall Act of 1933. In future, familiar terms such as the bulge bracket, the tag for elite US investment banks, will need to be redefined, end-of-year league tables will have a different look and clients and executives will need to adjust to new ground rules. But despite these changes and provided they survive the current crisis, it is likely that investment banks will exist as recognisable entities within their new organisations and investment banking as an industry will emerge with enhanced validity.

The grisly end of Bradford & Bingley casts a different light on the deregulation of Britain’s financial services industry in 1986. That was the year when the Big Bang ushered in the Americanisation of the City and the first Building Societies Act opened the door to friendly society demutualisations.

Nicolas Sarkozy arrived at the Group of 20 summit having said: “The all-powerful market that is always right is finished.” The French president left it proclaiming “a page has been turned” on the Anglo-Saxon financial model. Whether or not a page really has been turned depends on the construction of a practical successor to free-market economics, a process that entrenched interests in America and Britain would be well-advised to encourage if they wish to remain centre stage.

The consultation document authored by Sir David Walker, the former regulator and investment banker, on the governance of financial institutions follows other reports led by senior City figures, including Financial Services Authority chairman Adair Turner on banking regulation and Sir Win Bischoff, former Citigroup chairman, on London’s global competitiveness.

T he consultation document authored by Sir David Walker, the former regulator and investment banker, on the governance of financial institutions follows other reports led by senior City figures, including Financial Services Authority chairman Adair Turner on banking regulation and Sir Win Bischoff, former Citigroup chairman, on London’s global competitiveness.

Attacking bonuses addresses the symptom of the crisis, not the cause. It's time to break up the investment banks

'It is like taking bubble gum from a sweet shop. They make off with one packet at a time, then after a while the box is empty." The speaker was the chief executive of one of London's boutique investment banks and he was explaining how his bigger rivals made their money. It is a telling analogy.

In coming up with solutions that address the immediate crisis but fail to tackle dangerous systemic issues, the Group of 20’s emerging ideas on the banking industry bear a striking resemblance to the Americans’ response to the dotcom crash of 2001-02. Back then, the burst bubble exposed biased research and stock price manipulation on Wall Street and dubious accounting practices in US companies. Out came a new set of rules cleaning up the links between research analysts and investment bankers and laying a heavy hand on corporate chief executives.

As UK chancellor of the exchequer from 1997 to 2007, Gordon Brown’s approach was to shear the sheep, not kill them. Leftwing demands to raise the top rate of income tax and abolish tax concessions for foreign non-domiciled residents were ignored and capital gains tax was cut. The government went out of its way to help the City of London. The Financial Services Authority was encouraged to foster innovation and preserve London’s competitive position through light-touch regulation, and foreign banks and bankers flocked to London. Politicians praised the City as a beacon for the knowledge economy. Senior financiers applauded the government’s actions and were welcomed into Westminster and Whitehall.