London overhauling its financial bastion with mergers, plans for world trading hub
Behind Stephen Raven is a view out over the old Roman-walled City of London, a square mile of modest-height white and blue-gray buildings roughly centered on St. Paul's Cathedral. This calm, clubby area -- known simply as ``the City'' -- is London's financial district. It's a neighborhood where ``My word is my bond'' is the stock exchange motto, where one still sees the occasional bowler hat, and where financial deals have traditionally been concluded with a handshake after a ruminative lunch.
But big changes are afoot here, changes that London's usually understated financiers and bankers are calling a ``revolution.''
In the past two years there have been more than 50 big mergers involving London financial houses. Salaries for brokers and computer specialists are skyrocketing. Big foreign banks and brokerages (Citicorp, Merrill Lynch, Nomura, for example) are beefing up their staffs, opening new offices, buying into British financial firms -- or buying them outright.
The physical landscape is changing, too, with City activities expanding into Greater London, office towers rising in London's nearby Docklands section, and computerized trading floors appearing in almost every financial house in the United Kingdom. Awaiting the `big bang'
Mr. Raven serves as chairman of the International Markets Committee of the London Stock Exchange. His own company has been involved in a complex merger linking the merchant bank S. G. Warburg; the brokerages Rowe & Pitman, Mercury Securities, and Mullens; and stock jobber Akroyd & Smithers. All are now under the umbrella of Mercury International, a financial services conglomerate.
Raven is confident. ``We've done enough work to have control of the situation,'' he says. But neither he nor anyone else really knows what will happen next fall, when the much-discussed ``big bang'' occurs.
On Oct. 27, new laws take effect ending minimum fixed commissions for stockbrokers and doing away with ``single capacity,'' that distinctly British separation of brokers, who deal with customers, and jobbers, who execute trades.
The old system guaranteed profitability for both businesses. But it also violated antitrust laws (``restrictive trade practices''). ``It was jolly difficult to defend some things'' the London Stock Exchange did to remain restricted, Raven concedes.
In mid-1983, the exchange and the Thatcher government agreed to revolutionary change. Next October the system switches to ``dual capacity,'' with no minimum commissions. Jobber-brokers will resemble floor brokers at exchanges in the United States. Competition for business will be intense.
To attract big institutional clients, commission cutting is likely. That will eat into profits. The money will have to be made up with higher volumes of trading. Like the cosmic big bang, an expanding universe of business will be necessary to succeed.
Eventually, most City-watchers expect, there will be a shakeout, layoffs, and closure of less successful firms.
The primary aim of the big bang is to open the City to greater competition. But it is also to ensure London's place along with New York and Tokyo as one of the hubs in the emerging global stock market. A history of trade
Since the Middle Ages, in one architectural configuration or another, London's City has been a center of international trade and finance.
For almost five centuries, the houses of Rothschild, Lloyds, Morgan, Baring -- and later, Midland, Barclays, and National Westminster banks -- have raised money to extend British mercantile (and political and military) power throughout the world.
The City financed Britain's Renaissance-era commerce with northern Europe. It handled the booming sugar, cotton, rubber, tin, and tobacco trades as the kingdom rose to empire in the 17th century. And it funded hundreds of plantations, railroads, shipyards, and other enterprises worldwide at the empire's zenith in the 19th century.
That lasted until World War II, when Nazi bombing not only sapped Britain's economy but physically devastated the square mile. Although eclipsed by New York money-center banks after the war, Britain's banks remained strong, and currency trading and Eurobond activities based in London became important.
``The U.K.'s brokers in foreign exchange have been a real success story,'' says Zannis Res, head of the City University School of Business, in an interview in his Barbican Center office. ``The insurance business is as large as in the US. U.K. stockbrokers, however, are tiny, compared with their international counterparts.''
``Since World War II, the securities business here has not been truly international,'' says Raven.
The stakes internationally are enormous.
At a conference at Oxford University late last year, Merrill Lynch chairman William A. Schreyer pointed out that international trade -- the movement of goods -- amounted to some $2 trillion in 1984. International financial transactions -- the movement of money -- totaled at least $30 trillion, he said.
Along with New York and Tokyo, London is already home to multinational financial powers that float and trade stocks and bonds around the globe 24 hours a day. Mostly, however, London has been active in Eurobond funding and currency trading. Missing the boat
The equities side of things has lagged for a number of reasons: exchange controls and high taxes imposed in the postwar years by a series of Labour governments; suspicion of the stock market by many Britons; and an inherently more difficult task of assessing risk and reward for equities.
But the main reason is that British financial houses have been operating under a system of fees and labor division that has held back the kind of roaring competition US brokerages have enjoyed for 11 years now.
In the US, ``May Day'' 1975 accomplished much the same thing as the big bang, ushering in an era of brokerage takeovers and consolidations (Prudential-Bache, Shearson-Lehman-American Express, Sears-Dean Witter, etc.) and of cost-cutting features such as discount brokerages.
The past decade's rapid ``institutionalization'' of stock ownership has bypassed many British brokers. International block-trading of equities by pension funds, mutual funds, and other big investors has migrated to the places with the lowest commissions.
But even before next October, Britain's door has been opened to foreign banks and brokerages (mostly American and Japanese) to compete on an equal footing with their British counterparts. The lucrative market in British ``gilts'' -- government bonds -- which make up three-fourths of the activity on the London Stock Exchange and had been controlled by a cartel of dealers, is also being opened.
Still, in a tradition-bound society, change causes concern.
American financial houses have capital many times greater than their British competitiors. There is fear that in no-holds-barred competition the US firms could swamp the British. Already American spending has sparked the merger wave, the building boom, and the run-up in salaries.
At a time of falling oil prices and high unemployment, however, whatever brings in money is welcomed.
``The invisible earnings capacity of the City continually props up the balance of payments,'' a Treasury official says. ``We're only too happy for it to be a thriving financial center.'' Caveat emptor
Besides the obvious quality-of-life advantages, there are time-zone and other reasons American firms are rushing into London. One important factor: Britain does not have an equivalent of the US Glass-Steagall Act, which prevents banks from engaging in bond and stock underwriting. US banks can come to Britain and engage in investment banking, floating shares worldwide, including back home in the US.
Speaking discreetly on background, officials of the Treasury and the Bank of England, both instrumental in supervising the banking and securities businesses, concede there are glitches still to be fixed. Most involve the international aspect of the business.
For example, if US firms are doing more and more public offerings in Britain, will a British prospectus be good enough? How about the immensely detailed annual reports required by the US Securities and Exchange Commission? How about time lags in clearing transactions? Insider trading?
The ruling Conservative Party prefers that this newly competitive City have ``self-regulation within a statutory framework'' -- much as the US National Association of Security Dealers is self-regulating. The theory is that government could scarcely keep up with the flurry of activity, that it is in the interest of the financial services industry to do business aboveboard, and that the buyer must always beware.
``Market forces provide the best means of ensuring that an industry meets the needs of its customers,'' says a government white paper on financial services.
New banking supervision and financial services bills are making their way through Parliament, and bilateral negotiations are going on with US and Japanese stock exchanges and banking and securities regulators to work these matters out.
Politically, the big bang appears irreversible.
Although they differ with the Tory government on financial policy matters such as privatization, taxation, and exchange controls -- which affect the City in various ways -- even opposition Labour and Social Democratic Parties agree on opening up the City.
The main difference is that the opposition tends to favor stricter regulation, more along the lines of the American Securities and Exchange Commission. At the center
One of London's biggest advantages is that it sits astride the prime meridian.
During some portion of daylight hours in London, every other major financial center is open for business: Tokyo, Hong Kong, and Singapore in the early hours. Then Western European bourses. Then New York, Chicago, San Francisco.
``London will be the non-American headquarters'' of the global stock market, says Mr. Raven. ``Because of the time zones, there's already heavy activity here in international and American securities.''
But there is much more to what goes on in the City that just synchronizing timepieces. It is already the world center of currency trading and is one of the biggest players in the Eurobond market. Come October, London will be positioned to play a leading role in the world equity business.