The People’s Banker


"For me the greatest interest and enjoyment were human relations," Siegmund Warburg observed in later life to the academic George Steiner. "It was the human side, in practice the negotiating side, which attracted me to banking." For most of the postwar period, from the foundation of SG Warburg & Co in 1946 until his death in 1982, Warburg was the most dynamic figure in the City of London. If anyone embodied the era of relationship banking, it was Warburg.

It is not difficult to imagine what he would make of today's City, where transactions banking long ago triumphed over relationships - to say nothing of Wall Street, where the trend towards commoditised finance had already started even before the 1980s. He would certainly be disgusted. But, savouring the Schadenfreude, he would also be able to say, in the distinctive accent of Swabia, the somnolent south German region where he grew up in the early 1900s: "I told you so."

There is a compelling argument that the global financial crisis, which began in 2007, had its true origins in the decline of relationship banking. The investment bankers at Goldman Sachs no longer spoke of "clients"; they only recognised "counterparties". Far from eschewing conflicts of interest, they boasted of embracing them. Meanwhile, the buying and selling of equities - in Warburg's day the preserve of specialised brokers and jobbers, dealing in a highly regulated stock exchange - shifted into a murky electronic underworld of "dark pools" and "flash trading".

While regulators struggle to restore the old American distinction between commercial and investment banking - the utility and the casino - new problems are already manifesting themselves. Relationships between mere human beings seem almost inconsequential when daily turnover on global foreign exchange markets is roughly six times Eurozone official reserves, and when the average holding period for a US stock has fallen from eight years in 1960 to less than one.

The distinction between transactions banking and relationship banking was already well understood in the 1960s. Warburg defined the former as "channelling big sums of money from certain quarters which had a surplus to certain other quarters where there was a scarcity of funds ... trading in money and of moving funds". Relationship banking, by contrast, meant knowing the client in deep psychological detail. It was not about piling the securities high and selling them dear, it was about advising owners and managers.

The striking thing about this formulation is that Warburg regarded transactions banking as a thing of the past. From his perspective, looking back to his early career in Hamburg, New York and Berlin in the 1920s, transactions banking - the preference for quantity over quality - had been one of the root causes of the Wall Street Crash and the Great Depression. The lesson of history, in his eyes, was that bankers should engage in advising firms they got to know intimately, rather than in speculation.

"Personally," he wrote, "I am not interested in the waves of despondency and enthusiasm. These are appropriate for people who look upon matters purely from a stock exchange point of view ... However, if we want to succeed, we must make up our mind to follow a policy of establishing new values and new procedures rather than to act mainly as traders and sellers of securities which we find relatively easy to dispose of. In other words, we must be aware that we are primarily bankers and only secondarily stock exchange traders." Thus - in terms that now seem almost quaint - did he define the mission of the bank that bore his own name.

. . .

The name Warburg was, needless to say, a famous one in banking, even if the rise of Hitler had forced Siegmund Warburg to start from scratch in London. It might be thought that, as a scion of one of the great German-Jewish banking dynasties, he had a natural talent for relationships. He had, after all, a very large number of well-connected relations.

Interestingly, however, Warburg was never wholly at ease in the company of other members of the Warburg clan. As he put it to Jacob Rothschild, another product of a German-Jewish banking dynasty, in 1980: "I, who had grown up in a very closely knit family circle, have gradually and increasingly come to the conclusion that the desirable relationships are what Goethe called Wahlverwandtschaften, ie selected relationships in contradiction to blood relationships. This, of course, does not exclude the possibility - though a very rare one - that a selected relationship may coincide with a blood relationship."

The relationships that mattered most to Siegmund Warburg were probably those within his firm. He never ceased to be interested in the recruitment and development of young talent, identifying potential stars by means of literary quizzes ("And what are you reading for pleasure these days?" he would ask, to which the correct answer was one of the novels of Thomas Mann) and graphological analysis. But what Warburg was looking for was, above all, the ability to manage relations with corporate clients. Although asset management became a highly profitable part of the Warburg operation, ultimately spawning Mercury Asset Management in 1987, and although Warburg was also one of the architects of the Eurobond market, corporate finance was his first love. "One fee which we earn from giving good service to one of our large industrial clients can be far in excess of what we earn in a whole year in connection with Eurobond issues," he noted in 1967.

Beginning with his triumph in the hostile takeover of British Aluminium in 1958-1959, Warburg was renowned for his skill in boardroom battles, the key to which was his keen psychological understanding of both his own clients and the other side. Yet the basis for all that Warburg did was a set of five haute banque (elite banking) principles that he referred to in a 1953 memorandum directed at the US investment bank Kuhn, Loeb & Co (which he believed was deficient in all five). He wrote that "the important elements of a first-class private banking business" were:

1. Moral standing

2. Reputation for efficiency and high quality brain work

3. Connections

4. Capital funds

5. Personnel and organisation

These are principles that today's bankers, who now stand lower in public esteem than even journalists, would do well to revive.

Though no paragon - he was prone to theatrical rages - Warburg was a saint by the standards of today's financial markets. "Success from the financial and from the prestige point of view, important and self-understood as it is, is not enough," he wrote in 1959. "What matters even more is constructive achievement and adherence to high moral and aesthetic standards in the way in which we do our work." It is hard to imagine any modern bank chief executive coming out with a line like that.

And Warburg meant it. As well as following industry-wide rules, the really important "unyielding principles" were home-grown: "If in doubt, ask someone else ... and never do anything that would bring Warburgs into disrepute." When in 1971 the veteran Warburgs director Frank Smith was publicly castigated for telling an "untruth" to Lord Shawcross, the chairman of the City Takeover Panel (Shawcross could not resist the pun that "Mr Smith had been less than frank"), Smith had to resign as a matter of course.

A perfectionist across the spectrum of banking activity, Warburg was unforgiving of lapses not just in ethical standards but even in grammar and syntax. A typical telephone call was one between Warburg and Peter Stormonth Darling, one of his many Wykehamist prot'g's, when the latter was at his home:

Warburg: "I do hope I'm not disturbing you."

Darling: "Oh no, Mr Warburg, not at all."

Warburg: "Well, it's about your note dated 22 December on the American stock market. Do you have a copy in front of you?"

Darling: "Er, no, I'm afraid my copy is in the office."

Warburg: "Well, let me remind you of your second sentence in the fifth paragraph ... I think there should be a comma after the word 'development'"

This was on Christmas day. It was precisely this combination of workaholism and pedantry that established the Warburg reputation for "efficiency and high quality brain work".

Relationships were not just with clients. There were also "connections" to be cultivated. "Most of the substantial transactions which have been done by us are the result of the cultivation of contacts over very many years," Warburg reminded his fellow directors in a typically admonitory memorandum from 1964. "It is, of course, important that the technical details of a transaction are dealt with in the most thorough and painstaking manner possible, but this should not make us forget that ... this would be fruitless without human contact with the client in question ... In our kind of business, the continuity of valuable connections overrides in importance the conclusion of any specific transactions." It would be hard to find a better expression of the theory of relationship banking.

. . .

Relationships, then, were at the core of the haute banque style. "Our ambition should not be ... to do quantity-wise as much or even more business than our chief competitors," wrote Warburg in 1968. "On the contrary, our emphasis should be on making SGW & Co an elite house, excelling in the service it gives to its industrial clients rather than on doing business on a mass-production basis."

But what exactly did "service to clients" involve? Clearly, it was an art, not a science. "Let the client talk," he explained to one of his prot'g's. "Don't try to sell him what you've got to sell. Get him to tell you what his problem is and that will give you time to think about it. Try and give him the answer to his problem in his own words. He'll think, 'How remarkably clever this man is, he's telling me exactly what I always intended to do anyway.' Then you've got to impress him that you're the person who can implement the idea."

In the words of Eric Roll, who became Warburgs chairman in 1974, Warburg would sometimes use self-deprecation to disarm a potential candidate. "When a new client came along, he would say two things to him. He would say, 'Look, we may not always be as competent as we would like to be, but we are tremendously discreet.' He would always say that first. And then he would say a little bit later, after the client had talked about his problem, he would say, 'Look, when it comes to what products your company should produce, I'm no use to you. You know how your company makes sausages or motorcars. I can help you in explaining the surrounding circumstances and particularly the financial situation, financial aspects of what you have to do and what you may want to do.' And then he would say, 'Supposing you could have it entirely your own way, what would be your ideal solution, before I give you my advice?'"

As Peter Stormonth Darling recalled, Warburg "wasn't a technical genius, but he was a genius at bringing people into the bank. So what makes a banker? That was banking ... to bring clients, or potential clients, in."

The Warburg system was not without its imperfections, to be sure. Through superficially a democracy in which all directors were equal regardless of age, in practice it was a Renaissance principality in which Siegmund - no matter how often he declared his intention to retire - remained the sovereign. And often the sovereign's prudence could seem like excessive caution.

The firm remained by modern standards remarkably small up until Warburg's death. The parent company Mercury Securities' balance sheet was a mere o765m in 1978. The amounts of money it made were respectable - and certainly better than the other merchant banks, which fared especially badly in the inflationary 1970s - but they were not spectacular and Warburg did not die an especially rich man, compared, for example, with his Croesus-like contemporary Andr' Meyer at Lazards in New York. SG Warburg became a much larger and more profitable firm after its founder's departure - though it did so by abandoning many of his precepts. It was ultimately acquired rather cheaply by UBS in 1995 having lost heavily at the high-stakes game of transactions banking.

Yet, for Warburg, money was not the point. People were the point. "Human matters", he wrote in 1957, "are much more important than business affairs." This was a principle to which he remained true all his life. It is a principle today's bankers, with their insatiable appetite for transactions and casual cynicism about clients, would do well to revive.

'High Financier: The Lives and Time of Siegmund Warburg' by Niall Ferguson (Penguin Press, o30) is published on July 8. Ferguson, an FT contributing editor, is lecturing at St Paul's Cathedral on 'Men, Money and Morality' on July 6 at 7pm. Entry is free


A typical '25-hour day' working at Warburgs

One of Siegmund Warburg's haute banque principles was streamlined and efficient organisation. In many ways Warburg was a managerial pioneer, introducing a range of innovations that set his firm apart from established merchant banks. While the atmosphere in some older City firms resembled a gentleman's club more than a financial institution - complete with oak-panelled rooms, leisurely hours and long, bibulous lunches - SG Warburg & Co had charmless offices and long hours.

From the 9.15 morning meeting (nicknamed "Morning Prayers") to the Sunday constitutional with Uncle Siegmund, younger directors grew accustomed to a frenetic pace of work. But Warburg insisted they should keep meticulous written records of all meetings.

Nor was any individual allowed a free rein. For many years there was a "rule of four [whereby] in each important transaction four people must represent SG Warburg - one director and his deputy, and one chief executive and his deputy".

Life could be tough inside the "hideous, box-shaped building" at 30 Gresham Street, opposite the church of St Lawrence Jewry. St Lawrence was martyred by being roasted on a gridiron and junior Warburg employees were known to compare their early months at Warburgs with the saint's painful incineration.

Yet work at Warburgs could also be fun. Geoffrey Elliott, a fomer vice-chairman said: "It was not work, more a life experience, a daily rerun of The Persecution and Assassination of Jean-Paul Marat as Performed by the Inmates of the Asylum at Charenton mixed with [the wartime radio comedy show] ITMA ."

Which other merchant bank had its own in-house satirist? In one of the many light-hearted sketches that he wrote for internal consumption, Charles Sharp poked fun at the Warburg work ethic. "Mr Warburg himself spent, every day, at least eight hours in meetings, four hours with visitors, three hours at three different lunches, three hours in entertaining colleagues and business friends over dinner, two hours dictating letters, one hour reading letters, four hours in one aeroplane or another, altogether 25 hours on a conservative basis."

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