Thursday, February 07, 2008

The Merchant Bankers

The image “http://farm3.static.flickr.com/2068/2247938051_689915b7fa.jpg?v=0” cannot be displayed, because it contains errors. This book is an interesting artifact. The library at the Jones School was giving away a bunch of old books, and this is one that I picked up from them. Published in 1966, it gives chatty histories of a variety of merchant banks, mostly in London, but a few in Europe and Lehman Brothers in the U.S. A merchant bank is basically what we'd call an investment bank today, but then it was more distinct. Recall that in the U.S., banking functions were separated by the Glass-Steagall act during the Depression. This law was not fully repealed until 1999. (Which was followed almost instantly by a series of some of the biggest financial shenanigans on Wall Street in decades, but I'm sure that was just a coincidence.) So a merchant bank in London was basically an investment bank that also took deposits and lent money, but not on a retail level.

The best part of the book are the histories--most of these banks are ancient, and their forefathers were involved deeply in what we now think of as the history of the world. I was shocked to learn, for example, that individual U.S. states used to regularly take loans from Barings. Can states even take loans from banks now?

The state of the "current day" (i.e., 1966) banks was quite dull, however. There was no drama, and the heads of the banks were uniformly described in business boilerplate hagiography. These bankers were all intelligent and mindful of tradition; none of them suffered "yes men" (yeah, right you are, boss); they may be deeply involved in money, but they had their humanistic side--dabbling in [philosophy/literature/music] on the side; they were all patriots and philanthropists, blah blah blah. Much more interesting was swashbuckling stories of gold smuggled from France over the Pyrenees by James Rothschild to pay Wellington's army.

One thing interesting about the 1968-era banks is how much finance has changed. Only one bank, Lehman Brothers, mentions computers--specifically that they plan to computerize "next year." There is mention of foreign exchange futures (considered exotic and requiring imported Swiss traders to execute, since no Englishman can understand them). Eurodollars are likewise exotic. There are no interest rate futures (the trade in them was not invented until the late 70s), and exchange traded options only came into being in 1973.

Also interesting is to realize what has happened since 1968. Hambros, a bank I had never heard of, had problems in the 70s and 80s and was finally bought by Société Générale in 1998. S.G. Warburg was bought by Swiss Bank Corporation in 1995. And Barings' 200+ year history came to crashing halt in 1995 with the massive fraud Nick Leeson, and the utter lack of management controls at Barings that permitted him to do what he did.

One last note about The Merchant Bankers--I love the cover. I like the minimal, modern design combined with the aggressively old-fashioned banker. A great contrast. (If you are interested in book cover design, check out the Book Design Review.)

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