The First Hostile Takeover
- High Financier: The Life and Time of Siegmund Warburg by Niall Ferguson
Allen Lane, 548 pp, £30.00, July 2010, ISBN 978 0 7139 9871 9
The rise of S.G. Warburg & Co was the most striking feature of the postwar City. Founded by Jewish refugees from Nazi Germany in the 1940s, the bank was an awkward upstart in the closed shop of London merchant banking. Through a combination of hard work, professionalism and sheer boldness, it became one of the biggest of the merchant banks, and certainly the most dynamic. It was for a time the only British merchant bank that was close to achieving a global position to rival the larger New York investment banks. Siegmund Warburg himself died in 1982, but his creation continued to flourish after his death. In 1946, it had had a capital of £1.4 million. In 1995, when it was taken over by the Swiss Bank Corporation (now part of UBS), it was valued at £860 million; and two years later, its sister company, Mercury Asset Management, was sold to Merrill Lynch for a further £2.3 billion. Any patient investor who had recognised the abilities of Siegmund Warburg early on would have been handsomely rewarded.
Setting up a business that grows into one of the largest in the country is a feat in itself. However, Warburg’s true achievement went deeper. The pre-eminence of London as a financial capital before the First World War was based on two things: the worldwide economic clout of the British Empire, and the role of sterling as the dominant reserve currency. After the Second World War both of these advantages were lost. One by one the jewels fell from the imperial crown; and the dollar displaced sterling as the international reserve currency. To make matters worse, strict capital controls meant that sterling was not freely exchangeable. In such circumstances London’s prospects as an international financial centre were dim. Its place had been taken by New York, and the City could look forward only to a twilight existence providing funds for a shrunken domestic economy.
Ironically, it was restrictions on capital flows imposed by the United States that offered the City a get out of jail free card. In postwar Europe there were considerable holdings of dollars as a result of American wartime aid to Russia and later Marshall Aid to Europe. The Russians and their allies had little desire to deposit their dollars in America for fear of what would happen if the Cold War hotted up. Others disliked the very low interest rates which were all that US banks were permitted to offer on deposits by the regulations enacted in the wake of the 1930s banking collapse. As a result, ‘eurodollars’, as they came to be called, circulated in search of a home. Most governments, seeing eurodollars as hot money that might flow out as quickly as it flowed in, were wary of letting their banks accept them. However, some canny minds in the City spotted an opportunity: here was a currency that could replace sterling as a vehicle for international finance.
In 1963, Warburgs created the first international bond denominated in eurodollars. It was carefully crafted so as to ensure that investors from any country could participate without incurring local withholding taxes. The issue was an immediate success, and was soon followed by others. By 1970, 129 foreign banks in London were participating in this new market. As Niall Ferguson notes, eurobonds now comprise around 90 per cent of international bond issues; and 70 per cent of the business takes place in London. It is arguable that the development of this market, even more than the Big Bang of 1986, was the vital step that transformed London’s fortunes after the war.
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