Martin Vander Weyer
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We might begin by observing that there is one domestic factor in common between 1974 and 2003: the presence of a socialist-at-heart exercising wrong-headed policies in No. 11 Downing Street. The present Chancellor will never admit it, but he shares the blame for the pensions crisis because he has pinched £5 billion a year out of our savings by removing dividend tax credits from pension funds. When he introduced this measure in his 1998 Budget, it was so stealthy that few commentators spotted its true significance: like Brown himself, most of them thought that in a roaring bull market it would cause little pain. But the effect was to make it harder for all pension providers to meet their obligations, and in the bear market it has made matters worse in every aspect of the pensions crisis, including the rush to close down corporate final-salary pension schemes.
The Chancellor’s baleful influence extends much further. Whereas President Bush’s government is cutting taxes (and actually abolishing them on dividends) to stimulate growth and bolster market confidence, Brown is doing precisely the opposite. Not only is there no chance that he will restore the dividend tax-grab, but also he is about to impose another stinging tax increase through higher National Insurance contributions. And few experts believe he can stay within his own forecasts for public borrowing without taxing us even more over the next three years. All these factors are contributing to the stock-market gloom.
And the longer the market stays gloomy, the worse it will be for pension policy-holders. These respectable, middle-class folk, of prudent habits and moderate means, are the unequivocal victims of this story. Few of us are equipped to understand the actuarial small print of such policies; most have relied simply on the blue-chip reputation of the provider. That was particularly so with Equitable Life, which has so far proved the worst performer, teetering on the brink of insolvency. But every other supposedly rock-solid name in the market, including Prudential as well as Standard Life, has had to cut its payouts. In the simplest terms, these firms put too much money into shares and kept it there too long, while paying out too much to policy-holders when the going was good.
Why did they do that? Partly to make their performance look better than their peers’ in a fiercely competitive savings market, and partly because they swallowed the hype that overwhelmed the equity market in 1998 and 1999, driving any share with the word ‘dotcom’ or ‘telecom’ attached to it to absurd and unsustainable highs. That hype was emanating from investment banks in New York and London – American-, Swiss- and German-owned – which employed the financiers who cooked up the share issues and the takeover deals that fed the market’s appetite, and from the so-called star analysts who recommended the very same shares to the fund managers in the pensions companies. In New York, these self-serving practices have led to billions of dollars worth of fines on leading Wall Street firms, and lawsuits against individual analysts, such as Jack Grubman of Salomon Smith Barney. Only this week, ‘star dotcom banker’ Frank Quattrone of Credit Suisse First Boston was dispatched on leave by his firm while investigations into his conduct continued.
And among those financiers, analysts and salesmen are the buyers of the biggest yachts at the London Boat Show, as well as many of those, like Alex of Megabank, who have been taken out in this winter’s savage cull of the sector. Conceivably, some may have fallen in both categories, having lost their jobs after a decade-long run of massive bonuses which has left them with enough cash in the bank to go cruising, cigar in one hand and mobile phone in the other, until the market finally turns upwards again. But for those still at work, staring at screens covered in red digits signalling falling prices, ‘the perception of crisis and the predisposition to pessimism is deepened by a feeling of guilt and embarrassment’, my fund-manager friend says. ‘A staggering amount of incompetence has come to the surface, and no one likes being found out.’
Therein lie more differences from 1974. In those days the City was a cosy, collegiate world: there were no massive bonuses but few lost their jobs either, even when market turnover dwindled almost to nothing. Some retired, some drifted away, but the majority just battened down the hatches and sat it out until January 1975 when – share prices having bottomed 73 per cent below their 1972 peak – the Queen Mother announced at a Sandr ingham shooting party that she had prayed for an improvement, and the upturn duly began.
We have yet to see any sign of a sustained upturn this time, despite a 130-point rally on Monday: if the FTSE 100 index does see 4,000 again soon, experts say, cash-strapped life assurers will sell into the rally and knock it back down. And meanwhile City firms, rather than waiting quietly for the dawn, will continue quietly tearing themselves apart. The concept of loyalty between employer and employee has been abolished in favour of scientific management and ‘the self-managed career’. The former means a strict relationship between revenue and compensation: put simply, large numbers of people have to be made redundant so that large bonuses can still be paid to those who actually generate profit. The latter means that no one expects to stay more than a couple of years with any given employer anyway.
All this makes for a working atmosphere so uncongenial that only those with multiple school fees to pay, or a shrunken Equitable Life pension plan, feel any incentive to trawl the City for another job if they have lost the previous one. The rest will choose new, less stressful careers – becoming chefs and chiropodists, perhaps, or, as in my case, when I lost my City job in the 1992 recession, turning to journalism. Others will simply rest easy on their piles of loot: for many investment bankers the most upsetting business story this week was not the cancellation of the Cazenove float, or the rumour of more problems at Britannic Assurance, but the takeover by downmarket Ryanair of Buzz, the flying cocktail party which carries City types from Stansted to their weekend manoirs in France.
So don’t feel sorry for the City: it has not been wiped out like a coal-mining village in the 1980s. The financial community consists of a large number of perfectly decent people and a small number of charlatans, but as a group they have been over-rewarded outrageously for the past 15 years, and some have now got what was coming to them. But one way or another they will shrug it off, and few will suffer too badly – unlike those of an older age-group whose retirement expectations were built entirely on faith in the blue-chip status of Equitable Life.
And the City, some argue, will be more efficient than ever after this clear-out. The damaging ‘star’ culture which encouraged so much nonsensical or cynical puffery of dotcom stocks has gone, to be replaced by a new emphasis on plain information and slick execution of the client’s orders, and a new regime of regulation. ‘If we’re not at the bottom now, we can’t be very far away from it,’ the managing director of one investment bank told me. ‘There must be better times ahead.’ ‘I definitely don’t buy this stuff about the death of the City,’ said the vice-chairman of another. ‘We’ve reacted rationally and cut our cloth accordingly. Now we’re re-inventing ourselves, as the City always does.’
But as what, this time round? Philip Augar, in The Death of Gentlemanly Capitalism, argued that mismanagement and greed during the 1990s had reduced the City to ‘a branch office of New York with no control over its own destiny’. The three-year slump has markedly diluted the argument that you have to be big in London to be big in the financial world. The British banker is no longer the upright, admired figure he once was (like Lord Limerick of Kleinwort Benson, who died the other day) but a slightly seedy second-rater, too rich for his own good.
The Americans are still here, and some of them are still making money, but they will cut to the bone if times get any harder. Many European owners of expensive City businesses have already begun to pull back their activities to Frankfurt and Zurich. The damage done is not a matter of Alex losing his job, but of the City itself beginning to lose its standing and significance in the financial world. As Augar wrote, ‘Its position …can only get worse. The only issue for debate is the extent of the decline.’
Martin Vander Weyer is an associate editor of The Spectator.
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