Big Bang made London the centre of global finance. Will Brexit bring it all down?
If you know anything about financial history, you know about the Big Bang deregulation of London's financial markets. On October 27, 1986, Prime Minister Margaret Thatcher's sudden deregulation of financial markets blew apart the inert blob that was the stagnant post-war UK economy and its ailing banking system. That explosion helped make London synonymous with international finance, ignited a cultural and economic transformation, and even helped bring down Soviet communism.
Now, two years after Britons voted to exit the EU, it's worth reflecting on not just how the Big Bang was detonated but also on the principles it represented.
This wasn't an immutable act of nature so much as a reversible act of financial engineering, and Brexit has become an agent of its undoing.
The financial revolution Thatcher kicked off was an expression of faith in the power of globaliation to improve lives - a faith that's been shaken in the era of Brexit and Donald Trump.
In 1982, when I began my London posting with the 'Wall Street Journal', bankers still came to work in bowler hats and repp ties (and never, ever brown shoes). To keep the dust down at the old London Stock Exchange at Capel Court, where jobbers traded equities face-to-face on a dirt floor, waiters sprinkled the ground with watering cans.
Parochialism meant workdays were short and slow. Profit was a consideration, not a priority. Friendship or nepotism, not ability, usually determined who got a job.
Nothing symbolised the lack of ambition better than the banker's lunch, hosted in oak-panelled offices of merchant banks or, on more rarefied occasions, at an establishment such as Bill Bentley's. Journalists like me chased precious scoops about domestic business over four-course meals that - beginning with oysters and Champagne, continuing with claret, and ending with port and cheese - could span hours. Unless you knew the correct position of fork, knife, and spoon on the plate, there was no chance of being taken seriously.
With the Big Bang, the lunches were over.
One banker who never particularly liked those lunches was Hans-Joerg Rudloff, then 45 and deputy chairman of London-based Credit Suisse First Boston. Born in Cologne, Rudloff was a man of Europe, capable of finding investors from any given corner of the continent to put a deal together. The Swiss-German was also the undisputed king of the eurobond market, the burgeoning business of trading bonds across borders within the lightly regulated EU expanse.
"I still pretend the Berlin Wall was taken down by the opening of finance all over the world," Rudloff told me last December. He lives in London but now works for the Zurich-based wealth management firm he co-founded, Marcuard Heritage. "When borders fall, they start falling everywhere. The communist bloc was totally isolated, falling behind economically and in every other respect. The free flow of ideas, merchandise, people, capital, innovation, and whatever else flows freely led to the collapse of the communist system, which imploded."
No financial instrument flowed as freely through Rudloff as eurodollar bonds, a type of eurobond bought and sold outside the domain of any country in the time zone most advantageous for the transaction. These had been created to recycle US dollars after World War II by Sigmund Warburg, a scion of the German-US family of bankers and a refugee from the Nazis.
While lunch wasn't Rudloff's scene, you could usually find him and his acolytes, as the clock approached midnight, celebrating yet another eurobond deal over Scotch and steak at Annabel's, the club in Mayfair.
Roy Campbell Smith, who back then ran the London office of Goldman Sachs, remembers the Big Bang as "the restructuring of a very out-of-date, almost ancient financial marketplace that had just about everything wrong with it in terms of being able to be as competitive as it could be."
Goldman was only beginning to embrace global business opportunities, and Smith, a US Navy veteran and graduate of Harvard Business School, used his London vantage to enlighten his New York colleagues that lucrative deals could be had abroad. His vehicle: eurobonds. His rival: Rudloff.
"Rudloff was on the phone constantly, sweet-talking the journalists and the bond brokers into understanding the grand conceptual design of this, the euromarket's greatest financing, its finest hour," Smith recalled in 'Global Bankers', his 1989 memoir about London's transformation. "Rudloff's magical way with the press and the market-makers was similar to Henry Kissinger's. He was the media's darling and its chief expert on his subject, the unquestioned authority." "Big Bang essentially blew away all the British rules," says Smith (80), who's now emeritus professor of management practice at New York University's Leonard N Stern School of Business.
Britain changed almost beyond recognition. Thatcher was empowered to complete her privatisation programme, transforming British Airways, British Steel, British Telecom, and other state-owned corporations into publicly traded companies.
Class-conscious rules and traditions were swept away by entrepreneurs in every industry from cuisine to real estate. The Big Bang had global repercussions. Imitated in cities on the Continent as well as in Hong Kong and New York, it spearheaded the 24-hour market.
The City of London was Ground Zero for these changes, especially in the early days after 1986. Walls that had separated banks, brokers, jobbers, and discount houses came down.
"London was for me the best host, because we came from an environment where we had been heavily restricted - and I'm not just saying by law, but by mentality," Rudloff says.
Deregulation and electronic trading, along with the creativity of a few Rudloffs and Smiths, opened the floodgates to huge flows of capital into the UK; from Asia, Europe, and North and South America. Banks anywhere that wanted to make loans, buy and sell securities, trade commodities, currencies, and their derivatives, and arrange acquisitions could now do so in London, as long as they put their money on the UK.
Once a backwater, British finance grew into an industry that would transform it from the slowest-growing major economy in Europe to its top performer as the 20th century ended.
Dozens of foreign companies erected European headquarters in the Canary Wharf development, creating more than 95,000 jobs in what became the capital's second financial district. The original financial district - the City - changed, too. Thanks to the Big Bang, it's no longer "a British thing", Smith says, but rather "a multinational thing".
About half of the 5,000 people working for Goldman Sachs in Londony, he says, are not British; moreover, they're wired into a global financial infrastructure spanning finance, accounting, law, and computer science.
This is exactly what Smith fears may be lost as the Brexit deadline of March 29, 2019, approaches. Since the referendum vote on June 23, 2016, growth in Britain has lagged Europe for the first time since the 1980s.
Brexit - which won't take full effect until after an as-yet-undetermined transition period of several years -has already taken a toll on British businesses.
In the market for corporate acquisitions, British companies in 2017 sold themselves at the lowest valuations in 12 years.
Whereas the Big Bang blasted open a fallow national economy and linked it to the rest of the world, Brexit is inspired by rising anti-globalism and xenophobia across Europe. The same forces in the US propelled President Trump to power.
"I think the UK has to be part of the EU to benefit from the deregulation that has taken place there and to be able to operate on a level playing field with everybody else," Smith says.
"Being isolated as they are will create a kind of little England mentality in the UK that is going to make the British role in the world economy even smaller than it is now. I don't see that as being good for the British at all. The clock is ticking. March of 2019 and all of sudden they're out. That's falling off a cliff."
Rudloff looks back on his career and rues the diminishing role of the UK in fostering the freedom and hospitality he enjoyed as a banker in London almost 40 years ago. "It's going," he says. "It's gone." (Bloomberg)