Merchant banks no longer rule the City but their influence hasn’t gone

 
David Lascelles
WHEN the First World War broke out, an interesting meeting took place in the City to assess its implications. It consisted of what were then known as accepting houses: the elite merchant banks who ruled the City with unquestioned command. Run by the sons of the gentry, they made their money by buying commercial IOUs and selling them at a fixed profit to the Bank of England, which in turn guaranteed that they would never fail. They were also privy to every scrap of inside information, giving them a useful sideline on the stock exchange.

As gravy trains go, it was roast beef with all the trimmings. But it couldn’t last. Of the 22 names at the meeting, barely half a dozen survive, most as brand names giving a touch of class to the private banking businesses of today’s banking giants. Who has heard of Frederick Huth & Co, Fruhling & Goschen or Luebeck & Co? Among the few I recognised were Barings, Brown Shipley, Kleinwort, Lazard Brothers and Morgan Grenfell, but few are independent banks today. Only a handful remain as living independent firms: Schroders (now an investment company), a now globally unified Lazards, NM Rothschild, and Arbuthnot Latham (and Kleinwort Benson has recently been refounded).

The reason for the meeting was that most had taken on a lot of German debt. To be precise, they had £70m of German and Austrian loans on their books, but only £20m of capital, which had them worried. Luckily, the Bank of England lived up to its promise to bail them out.

Of the handful still living, Arbuthnot Latham is the most interesting. It is the least chronicled, despite being the only truly British bank on the list, with a history closely interwoven with Britain’s fortunes as an imperial power. This year, it is celebrating its 180th birthday.

Arbuthnot Latham began life as Scottish merchants, trading in India and Ceylon. But like many merchants, they found they could make more money financing other people’s trade. By the mid-nineteenth century, they were running a bank, and making their way in the City. The curtain came down on their Indian business in 1907 when their man in Madras (Sir George Arbuthnot) was convicted of fraud. Fortunately, this received little coverage in the London press, and they got away unscathed.

But Germany was almost the death of them. They spent most of the inter-war period desperately trying to hold the business together. For a while, they were thrown out of the Accepting Houses Committee (AHC), the club of the top merchant banks. They struggled through the Second World War, a partnership whose members were family or close, and on the line for its liabilities. But the aftermath was good; economic recovery and a pick-up in trade provided a new flow of business. The Arbuthnots were readmitted to the AHC.

Merchant banks must have thought it was back to business as usual: privilege, Britain at the hub of trade, cartels keeping competition at bay, comfortable trade arrangements with the captive Commonwealth, gentlemanly hours. It was breathtakingly complacent, and only a matter of time before the real world caught up with them.

In Arbuthnot’s case it was in 1981. The bank was chaired by Sir John Prideaux, a City grandee whose mother had been an Arbuthnot. Other merchant banks had diversified into new businesses, like unit trusts and corporate finance. Eurobonds were also making an appearance. But Arbuthnot was too unambitious. It had also turned itself into a public company, which made it vulnerable to takeover.

That year, it was bought by Dow Scandia, a consortium majority-owned by Dow Chemical. Arbuthnot’s time as a ward of Dow was brief and unremarkable, except that Dow’s staff included a young Swiss banker, Henry Angest.

Angest had ambitions of his own and, when Dow tired of Arbuthnot, he bought a section called Secure Homes, a small bank in Birmingham. The rest of Arbuthnot went through a demoralising period, passing through the hands of four owners by 1990. No one wanted a pedigree City merchant bank. But that year Angest bought its fund management arm. More importantly, he bought the rights to the Arbuthnot name and boardroom accoutrements like family portraits. The last Arbuthnot soon left.

Angest created a new banking group, which he renamed Arbuthnot Banking Group. It offers a diversified range of services, with the Arbuthnot Latham arm providing private banking and wealth management services. Thus, Arbuthnot Latham survives. Directors in its boardroom meet under the gaze of Arbuthnots of yore, amid oil paintings depicting the clippers that once conveyed the bank’s fortunes to Britain. The heyday of City merchant banking may be long gone but, in select corners of the City, traces of it survive.

David Lascelles is co-author of a new history of Arbuthnot Latham: From merchant bank to private bank.