There was a lot to deplore in the City before Big Bang, the reforms of Britain’s stock exchange that took place 25 years ago this week. The old exchange was an oligopoly that kept prices high and competition out. The City was sexist, snobbish and not very hard working. Certain partners disappeared for lunch at 11.45 and reappeared three hours later. Staff spent a lot of time playing the stock market with their own money. Women had little choice but to accept derogatory nicknames if they wished to progress. The only black face I came across in the City before Big Bang was in a West Indian steel band at a Cazenove garden party.
Yet there was also a lot to admire. The ethical code was strong. The rules were clear and most people stuck to them. Those that didn’t were sidelined from the mainstream by word of mouth. Conflict of interest was minimised as a result of the strict separation of functions in equity markets. Dealing firms could not advise investors. Broking firms dealt for clients as agents and were not allowed to trade as principals. Corporate advice was the preserve of the merchant banks, which in turn were prevented from dealing or trading on their own account. Everyone knew where everyone else stood and there was little question of talking your own book.
All of this, the good and the bad, changed in the run up to Big Bang on 27 October 1986. The turning point was the decision to allow the Wall Street model of integrated investment banks. The US firms swept into town bringing new technology, techniques and a harder work ethic. The City became more professional. The first train of the day in 1986, the 0715, left Haslemere in stockbroker belt Surrey at about the time the next generation of commuters would be starting work. British Rail arranged an extra train, the 0644; nowadays it leaves at 0521.
But behaviour changed in more sinister ways. Opening the market to competition slashed the cost of dealing and stock exchange turnover soared as investors saw opportunities to make a quick buck on the back of the lower charges. The new model gave investment banks an advantage in information that eventually led to bigger profits, higher pay and a completely different culture.
In this new world fast finance replaced patient accumulation. Long-term business relationships between banker and client, employer and employee, shareholder and management gave way to brief affairs. The permissive rules made it difficult to maintain any acceptable ethical standards. It was all very well to say the client came first but which client if you are acting for buyer and seller and putting the firm’s capital at risk? Brokers learned that their in-house book not their external clients were the top priority and that the ethical code was for public relations, not for real.
The rewards for practitioners became so great that greed wars broke out as individuals saw the chance to make life-changing sums from a year’s pay. There developed a tacit assumption that it was every man and woman for himself or herself and these values rippled out across society, changing behaviour and attitudes in unexpected ways.
None of this would have mattered if the City had remained what it was before Big Bang, namely an inward looking cottage industry with little wider significance. Instead it became an industrial-scale money machine with global reach and the potential to bring down governments and make or break economies. This occurred because the UK’s Big Bang came at a tipping point for the world’s financial services industry. Prior to Big Bang clients and sovereign jurisdictions could choose between the integrated US model and the discrete British agency version; after it, one-stop shopping investment banking carried the day.
The power of this model allied to the winds of free market economics and financial liberalisation made monsters of its institutions. Certain of their power and motivated by asymmetric rewards, they became highly leveraged and dangerously adventurous. Big Bang was not the only cause of this but it set them along the road. It helped to create a structure and a mindset that encouraged bankers to take reckless turnings at nearly every opportunity and persuaded many stakeholders to look away.
Is capitalism in crisis and was Big Bang to blame? Probably not but on its 25th anniversary it is appropriate that the question is now being asked where it all started, in the shadow of St Paul’s Cathedral on the edge of the Square Mile.
The writer was a stockbroker at the time of Big Bang. His books include ‘The Death of Gentlemanly Capitalism’