The Big Bang Made London. Brexit Could Undo It
(Bloomberg Businessweek) -- If you know anything about financial history, you know about the Big Bang deregulation of London’s financial markets. On Oct. 27, 1986, Prime Minister Margaret Thatcher blew apart the inert blob that was the stagnant postwar U.K. economy and its ailing banking system. That explosion helped make London synonymous with international finance, ignited a cultural and economic transformation in the U.K., and even helped bring down Soviet communism.
Now, two years after Britons voted to exit the European Union, 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 a powerful expression of faith in the power of globalization to improve lives—a faith that’s been shaken in the era of Brexit and Donald Trump.
I remember what banking used to look like in the U.K. 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.
The parochialism that prevailed back then meant workdays were short and slow. Profit was a consideration, not a priority. Friendship or nepotism, not ability, usually determined who got a job. Arcane customs ensured that the sons of venerable firms such as Cazenove, Panmure Gordon, and Rowe & Pitman would have livelihoods just like their founding fathers.
Nothing symbolized the lack of ambition better than the institution of the banker’s lunch, hosted either in the oak-paneled offices of more than a dozen 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 several 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 years old 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 expanse of the EU.
“I still pretend the Berlin Wall was taken down by the opening of finance all over the world,” Rudloff told me last December in London, where he still lives. He now works for the Zurich-based wealth management firm he co-founded, Marcuard Heritage AG. “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 U.S. dollars after World War II by Sir Sigmund Warburg, a scion of the German-American 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 celebrated club in Mayfair.
As the Big Bang approached, it was Rudloff who recognized an opportunity largely invisible to the rest of the London financial world when, in September 1986, the Bank of England announced its intent to borrow $3 billion to fortify Britain’s global trade. From Rudloff’s perspective, low interest rates and an unrecognized global demand for high-quality government securities afforded an even more ambitious approach than that initially proposed by the BOE. Britain had never ranged far to raise money for its foreign-currency reserves, yet not since before World War I had there been such an enormous global appetite for U.K. debt. Through stealth lobbying efforts, Rudloff eventually persuaded the English central bankers to increase the original offering by a third, to $4 billion.
Eurobonds were the perfect vehicle to harness the Big Bang, and Rudloff made use of them before the month was out to prove that London was the center of international capital markets. He wasn’t alone, though. Roy Campbell Smith, who at the time 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.” (For perspective, the U.K.’s average annual growth was 1.5 percentage points slower than that of France—yes, France—during the preceding three decades.)
Goldman was only beginning to embrace global business opportunities, and Smith, a U.S. 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 during his time as national security adviser and secretary of state. He was the media’s darling and its chief expert on his subject, the unquestioned authority.”
That may have raised the stakes for Oct. 27, 1986. “In one morning, we traded more British stocks than any other British brokerage firm had done in two weeks,” says Smith, 80, who’s now emeritus professor of management practice at New York University’s Leonard N. Stern School of Business. “Big Bang essentially blew away all the British rules.”
In the process, Britain changed almost beyond recognition. Thatcher was empowered to complete her privatization program, transforming British Airways, British Steel, British Telecom, and other state-owned corporations into publicly traded companies. What’s more, her political backing of the privately financed Channel Tunnel linking Britain and France helped make the U.K. a major tourism and migration destination, deepening the cultural, political, and social changes the Big Bang unleashed. Class-conscious rules and traditions were swept away by entrepreneurs in every industry from cuisine to real estate.
The Big Bang had global repercussions as well. Imitated in cities on the Continent as well as in Hong Kong and New York, it spearheaded the 24-hour market. “Both the financial market reforms and the privatization efforts spread worldwide because they were achieved in Britain,” Smith says.
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 U.K.; more of it than ever before came 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 U.K.
Once a backwater, British finance grew into an industry that would transform the country from the slowest-growing major economy in Europe to its top performer as the 20th century ended. Soon the continent’s tallest skyscrapers began to rise from the derelict eight-and-a-half square miles that had been the London Docklands. Dozens of foreign companies erected their 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, the ancient square mile dating to Roman times—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 London today, 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 behind the rest of Europe for the first time since the 1980s.
Economists surveyed by Bloomberg after the referendum have reduced their estimates of the U.K.’s gross domestic product to an average below that of the EU. That slippage comes as Europe is emerging from its economic doldrums. Last year it led the developed world in growth, productivity, and job creation after the euro gained 14.2 percent—its strongest appreciation since 2003 and the best performance among 16 major currencies.
The pound’s 13 percent depreciation against the euro since the referendum highlights the benefit of belonging to the EU and the peril of leaving it. The pound remains among the worst-performing currencies while the euro has strengthened 1.3 percent against the U.S. dollar. Meanwhile, the pound’s implied volatility relative to the euro, a measure of investor uncertainty, touched a record high in 2016.
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, reducing the premium that acquirers pay for U.K. assets to 15 percent from a high of 31 percent in 2009. The comparable measure for non-U.K. Western European countries was 18 percent, according to data compiled by Bloomberg. “There’s been a real cutback in capital investment in the U.K., because people aren’t sure what will happen to the capital they invest, particularly in commercial enterprises,” Smith says.
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 U.S. propelled President Trump to power.
“I think the U.K. 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 U.K. 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.”
For his part, Rudloff looks back on his long career and rues the diminishing role of the U.K. in fostering the freedom and hospitality he enjoyed as a young banker in London almost 40 years ago. “It’s going,” he says. “It’s gone.”
Winkler, a Bloomberg Opinion columnist, is the editor-in-chief emeritus of Bloomberg News.
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