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.
The creation of the eurobond market was Warburg’s most significant achievement, but the original source of his rise to fame was the introduction of the hostile takeover bid. In 1958, a business world in which no company ever bought another without the consent of its management was rudely shattered by the ‘Aluminium War’. British Aluminium was a successful but flagging company that badly needed an injection of capital. Rival suitors appeared: the one favoured by the company itself offered few advantages to shareholders but preserved the jobs of existing management; the other offered a high price to shareholders in exchange for replacing the entire board of directors. Warburg ensured the success of the hostile bid by surreptitiously buying a significant stake in the company prior to launching a tender offer. It was not considered fair play at the time, and as the then prime minister Harold Macmillan suggested, the contest was ‘rather a “Gentlemen v. Players” affair’ – in which the professionals, as so often, won.
The deal brought Warburg into the public eye for the first time, and although he was condemned by the bigwigs of the British Aluminium board and their merchant banking advisers, most of the press supported him for taking on an entrenched management in the interests of shareholders. The Aluminium War was a turning point in British business life: it dealt a ‘decisive blow … to the unhurried “gentlemanly” style of business’, as Edmund de Rothschild put it. Warburg himself later claimed that he disliked the whole episode and would have preferred a friendly deal. But there can be no doubt that the rapid increase of the bank’s business dated from the moment he showed he was able to take on the establishment and win.
Does this track record make Warburg an architect of the overblown, profit-hungry, risk-taking financial world that brought on the meltdown of 2008? Ferguson argues strongly that it does not. The advent of the hostile takeover bid may have presaged a more aggressive style of capitalism, but the eurobond market was in many ways financially conservative – turning hot money into a stable source of long-term capital. Ferguson’s main point, however, is that Warburg was a strong advocate of ‘relationship’ as opposed to ‘transaction’ banking. Under his leadership, Warburgs’ business was almost entirely advisory. The bank took few risks with its own balance sheet, and Warburg would certainly have inveighed against the ever increasing leverage and focus on trading profits that have characterised the banking business in recent years.
Ferguson has, perhaps understandably, emphasised this aspect of Warburg’s life, but there is more to the portrait that emerges of the man and his family than their business record. At the peak of their fame and success in the early decades of the 20th century, the Warburgs played important roles in the history of two countries: Germany and the United States. M. M. Warburg & Co in Hamburg was one of those private banking firms with influence out of all proportion to their size, rather like Rothschilds and Barings in Britain and J. P. Morgan in America. Max Warburg, who ran the bank, was an adviser to successive German governments, both imperial and republican, and represented Germany at Versailles in 1919. His brother Paul had moved to America in 1902 and was instrumental in setting up the Federal Reserve System. Two further brothers achieved eminence: Aby was a leading art historian who set up the Warburg Library (later moved to London to escape the Nazis); Felix was a philanthropist whose Fifth Avenue mansion is now the Jewish Museum.
Siegmund Warburg, however, was born outside this charmed circle. His grandfather, although the driving force of the bank in the late 19th century, failed to produce an array of brilliant sons to match those of his urbane and indolent brother. Siegmund’s father, in particular, was considered so hopeless that he was sent to live on a country estate in southern Germany. By family convention, one son from each branch of the family was meant to run the bank, but in practice it was Max, from the other side of the family, who dominated it. It was natural for Max to offer the young Siegmund, who showed a precocious intellect, a career at the firm to restore the intra-family balance. But Siegmund’s initial appreciation of Uncle Max’s support soured, turning first into resentment at Max’s favouritism towards his charming but less gifted son Eric, and then disdain as Max led the bank to disaster in the 1930s.
The crunch came in 1931, when the bank was threatened with insolvency during the financial crisis that engulfed Europe following the collapse of Creditanstalt in Vienna. Max had failed to heed the warnings of his brother Paul, who publicly predicted the crash early in 1929. The bank was so deeply in the red that it would not have survived had it not been for the affection that bound the American Warburgs to their brother. As it was, Paul and Felix put in the majority of their fortunes to prop up the family firm, and then had to sit by and see their efforts wasted as Max refused to sell up and leave the country while he still could. In the end the bank was forcibly ‘aryanised’ for a derisory sum in 1938. The family were able to escape with their lives, but as a banking dynasty they appeared to be finished.
The crisis of the early 1930s left an indelible mark on Siegmund: an ingrained pessimism about the world outlook most obviously, and a lifelong aversion to exposing his business to the threat of another collapse. This, as much as anything else, is why he always focused on ‘relationship’ rather than ‘transaction’ banking. A more immediate consequence was his decision to leave Germany in 1934 and set up on his own. This led to a lifelong struggle around the family name that reveals much about Siegmund’s complex character.
If Hitler had not intervened, Siegmund and his cousin Eric would have been fated to run the family firm together, whatever their differences in temperament and personality. After the war they both tried to restore the Warburg name in the banking world, sometimes in co-operation against the loyal (or, as it turned out, not so loyal) ‘friends’ of the family who had come into possession of the Hamburg bank in the aryanisation process, but more often in competition, coloured by Siegmund’s disparagement of his cousin and his feeling that he was the rightful heir to the Warburg tradition. How else to explain Siegmund’s bizarre conviction that he had the right to set up a company using his own name and initials, but that Eric had no right to do the same? After Eric, with Siegmund’s help, finally managed to force through the restoration of the Warburg name to the Hamburg bank in 1970, the cousins came tantalisingly close to merging their interests. But successive attempts always foundered, not least because of a suspicion that the only terms acceptable to Siegmund would include his controlling the business. For all his brilliance, in the end his dynastic dreams were frustrated. His son George showed little aptitude for finance and left the bank in 1963 to escape his overbearing father. Eric, by contrast, had a son with banking in his veins who now runs the restored M. M. Warburg & Co in Hamburg, while S. G. Warburg & Co, once such a famous name in the world of finance, has disappeared.
It seems likely that Siegmund’s resentment at the accident of birth that forced him to fight for what he took to be his rightful position in the family explains his lifelong tendency to see himself as an anti-establishment rebel. His instinctive attraction to radical solutions is most strikingly shown by his astonishing flirtation with Nazism before the scales fell from his eyes in 1933. Ferguson quotes from a diary entry, in which he laments the ‘degeneration … of the German bourgeoisie … The middle … is lacking in radical will … How well the middle ground and fascism could complement one another, and yet how much they block one another’s way!’ In the 1960s Warburg found a less unsuitable focus for his attention in Harold Wilson, having been attracted by the sweep-away-the-cobwebs tone of Wilson’s ‘white heat of technology’ speech.
Anti-semitism, inevitably, was another reason Warburg felt himself to be an outsider. During his early years he lived through the terrible descent of Germany from a country in which Jews were accepted as assimilated patriots to one in which they became persecuted outcasts. As one of the negotiators of the Treaty of Versailles, Max Warburg was especially vulnerable to anti-semitic propaganda and received regular death threats. When Siegmund left Germany in 1934, he took refuge in the kindlier world of merely casual anti-semitism in Britain. In 1953, a Bank of England memorandum described him sniffily as ‘an international Jew to whom no bounds of country or circumstance are known … He can be ruthless with his employees but never falls foul of those of his own “persuasion” who have helped him.’ Warburg was certainly not without his allies in the City establishment, but it is striking that when he received a knighthood in 1966, Lord Cromer, the governor of the Bank, opposed the honour on the specious grounds that while Warburg might have been ‘very successful in his own affairs’, he had not made ‘any outstanding contribution to the common weal of the City’. In his last decade anti-semitism continued to haunt him, but from a new quarter. In 1974, the Arab oil producers, now in possession of a seemingly unlimited supply of petrodollars, attempted to exclude Warburgs and other Jewish firms from all eurobond placements in which they planned to participate – and this in spite of Warburg’s increasingly vocal criticisms of Israeli policy and his support for a Palestinian state. Even in America the family was not immune from this poison. Paul Warburg is still reviled by conspiracy theorists there as the architect of a Jewish plot to control the US banking system through the Federal Reserve.
But if his Jewish background was important to Warburg’s character, so too was the combination of idealism, self-criticism and ‘south German puritanism’ that were instilled into him by his devoted but severe mother and by his strict Protestant education. These influences help explain why he remained in many ways an atypical banker. He had hoped for a career in German politics until Hitler put paid to such dreams. He showed little interest in wealth and believed strongly in the virtues of asceticism. When he arrived in England he looked forward to throwing ‘material comfort overboard’, anticipating that the hardships of the Depression would lead to ‘a new development of the spirit in a new religious community … to a new simplicity and inwardness’. In the 1970s, he welcomed the energy crisis as a ‘long overdue purge’ heralding a return to ‘more sober attitudes’. While he lived very comfortably, his tastes were, as Ferguson puts it, ‘more those of a don than a banker’. He disdained the trappings of the jet set and owned no country estate. His most treasured asset was his library. The way to success in an interview at the bank was to display knowledge of the great European authors, especially Thomas Mann. (The other requirement was to submit a sample of handwriting for analysis by Warburg’s intimate friend, the graphologist Theodora Dreifuss. Ferguson is understandably sceptical about this unusual interest of Warburg’s but is partially converted by the very blunt analysis of his own personality made from the handwriting sample that he was obliged to submit in order to be accepted as a biographer.)
Warburg’s success as a banker owed nothing to his ability to spot a good investment. His own assets were so cautiously invested that he had not accumulated any enormous wealth by the time of his death. Nor was he interested in the technicalities of banking. His skill lay in his ability to identify and seize new sources of business, in his insistence on meticulous organisation, and above all in his ability to attract clients. For a man who disliked social events, who was prone to bursts of ill temper, and who took a dim view of many of his fellow humans, Warburg had a remarkable ability to charm his business guests. In the words of his successor, David Scholey, he was an ‘old actor-manager’ who could turn on a performance as required. He understood that human contact was at the centre of investment banking and took delight in the psychological intricacy of the process.
Ferguson provides a fascinating portrait of a man described by one of his oldest and wisest friends as a ‘19th-century German trapped in 20th-century England’ who had been forced by circumstances to make business his life. Warburg died renowned, but in many ways frustrated by his failure to secure the future of his creation. Ever the pessimist, he saw that the tide was turning against the kind of intimate service bank he had created and that the future lay with the big global banks. He suspected that in an attempt to break into the top league of international banking, his successors would abandon his emphasis on caution and client relations. He would have been saddened, but probably not surprised, by the acquisition of the bank by UBS and the subsequent disappearance of his name in a corporate rebranding exercise. He need not have been too upset, however: the vast majority of famous banking names have disappeared since his death, not just in London but also in New York. The Warburg name is at least flourishing again in Hamburg – though old family rivalries might have made that a bitter-sweet consolation at best.