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04 March 2024

After the fall


By William Cash

Back in October, before the world had even heard of Bernard Madoff, and just as the financial hurricane that felled banks such as Lehman Brothers, Bear Stearns, RBS and HBOS was still blowing through the finance centres of the world, wiping out, or mortally wounding, once-so-cocky and untouchable hedge funds by the week, I had lunch at George in Mayfair with a top fund manager. He explained that he wasn't in the best of moods because his firm's clients were redeeming (that is, pulling out their money) faster than the day Northern Rock nearly went under, and the company's quoted share price had recently dropped by over 80 per cent, meaning that his shares – which he had put aside in his head as his unofficial pension pot – were increasingly worthless.

"London is going to be a bleak place to live," my friend said. "When it comes to bonuses this year, the conversations at many banks and hedge funds are going to go like this: 'Charlie, you're lucky to have a job at all, you're lucky to have a salary to pay the mortgage – but your bonus is going to be minimal'." When I called up an investment banker friend, still with a job at Merrill Lynch, he confirmed that people were resigned to token bonuses that until last year would have been such a slap in the face that bankers would have resigned on the spot.

"Despite not being given a bonus large enough to pay for their February break, these financiers will walk away from the room grateful," added my banker friend. Even the once-almighty 400 partners of Goldman Sachs have been seriously humbled by the credit crunch.

This year many of the bank's elite executive troops are seeing their total pay packets slashed to less than $1 million (Dh3.67m). Bonuses across the company averaged £142,600 (Dh757,500) each, a reduction of about 45 per cent from last year, when the average compensation for the partners was between $5m and $20m. In 2006, one man netted £50m. The cutbacks have reduced the bank's salary outgoings by some $500m.

At other banks the news is much worse, with compensation being slashed by up to 75 per cent. Such reversal of fortune for the banking classes means much more than simply cancelling their holidays.

In short, there is a growing sense of social panic on the wealthy streets of London's Notting Hill and Chelsea. The collapse of Lehman saw 2,500 job losses in the UK alone. Each week the number of bankers being sacked rises, and it is not just the junior bankers who are being let go. Culls are being made all the way up to the top. Citigroup has announced it is laying off over 10,000 bankers worldwide – including many in London – and one in ten of those employed by Goldman Sachs in London are going to be out of a job this month, probably before they get their bonus. Richard Snook of the Centre for Economics and Business Research, which monitors City jobs, predicts that as many as 28,000 financial services jobs will go in London over the next year. "Goldman and Citigroup's announcements are just the tip of the iceberg," he said.

Looking back

To grasp the tectonic social significance of these figures we need to go back for a minute to the eighties, in order to understand just how and why London became the new financial capital of the world – a title that it is unlikely to keep for much longer, partly as a result of the governments reckless Russian roulette game with the economy.

London's rise as a global financial centre began with the Big Bang in the Eighties when the British economy had its back to the wall and the only way forward for the dinosaur Old City was to think internationally. The Big Bang was the first step in the Swissification of London, leading to an influx of foreign banks, law firms, asset management firms and unregulated hedge funds. Only London, with its genuine liquidity (until the crisis froze the credit markets) and a time zone set between the Asian and US financial markets had a real global platform, being the gateway between Europe and world markets. It was upon this stage that my generation (I am 42) of wannabe masters of the universe strutted their egos, collecting vast rewards and bonuses for their efforts at self-enrichment. For a decade, New York, Zurich and Geneva seemed almost insular or provincial by comparison to London, which seized the heavyweight title of the world, also being HQ to the booming new super-rich private client world.

After years of ruling the world by Empire and sword, it was only to be expected that the public school boys would reinvent themselves as financial butlers to the real rich (one reason why London has seen a boom in offices that manage family's fortunes.)

Their public school backgrounds may not have taught them anything about economics or the financial markets, but they were brought up with an ethos of global and imperial service – perfect training for an Etonian employed by an American bank like Goldman Sachs – as well as being well versed in the art of social grovelling.

Property panic

One major result of this boom in London's financial services is that London property went through the roof. And with so many of London's financial waiters now surplus to requirement – and heading off back to Paris (where they can claim state benefit), or Geneva, or Dubai or Singapore (where UBS has actually set up a private banking academy where you can learn to be a private banker like you used to be able to go to butler school) – the London property market is where the real pain and panic lies.

As one 40-year-old hedge fund manager, who lives in a five-storey house in Chelsea, put it to me: "Last year, you might have been sitting pretty in a house in Brompton Square that an estate agent might have valued at £6 m. People say that prices are down 25 per cent – but there is no real "price discovery", as American financiers like to say. There's no trade going on. Very little is selling.

If you had to sell before the end of January, you are probably looking at a 50 per cent discount. That's really scary to a banker who probably has much of his net worth tied up in his house, who might be about to lose his job. Moreover, as property expert Ross Clark points out, there is a major myth that is now being exposed about the London super- prime property market – namely that the owners of houses in the £5m to £20m bracket are cash-rich buyers who are largely immune to recession. Not true, says Clark, who adds that the recent example of Scoot founder Robert Bonnier, who was forced out of his £11m Holland Park house when the bank repossessed it, is not an isolated case.

Suddenly, everything is negotiable – whether you are buying a new Porsche from the Berkeley Square dealership or a Graff necklace. One private equity fund boss friend told me that his wife wanted him to buy a new Range Rover for £79,000.

"It wasn't the top model, it was the second top model. My wife came home and told me that they wouldn't even give her ten per cent off – or throw in some decent alloy wheels. So I went down to the dealership myself, and I did a deal for £41000. That's some discount." But few can afford such luxuries today.

The end of luxury

But life has to go on. Since September, a new social order has arisen from the financial dust that has settled on Mayfair and the City. In short, luxury is dead.

London's financial classes are keeping a low profile and are in survival mode. It's a Darwinian thing. Sandra Davis, head of family law at Mishcon de Reya, has even gone so far as to commission a special report that confirms that the credit crunch, which began last year, has resulted in an increased number of wives issuing divorce proceedings before their once-wealthy husband's resources dry up. The Mishcon survey found that one in five financiers knew at least one person served with divorce papers since the start of the credit crunch, while one in ten was worried their own spouse might be secretly seeking legal advice. According to Sandra Davis, as the credit crisis deepens, so does the marital casualty rate.

"For anybody running money as a fund manager or who has a top position in investment banking, being served with divorce papers during the credit crunch is like being served with execution papers," says the head of a family office who invests around $1 billion in London hedge funds each year.

"It's well known that the moment you hear that a fund manager is getting divorced, clients immediately use the divorce as an excuse to redeem their money – it's a cruel and vicious circle."

The future's bleak

For those who lose their jobs in their mid thirties and forties, the future is unusually bleak as they are almost unemployable. The domestic maths is terrifying in terms of what is at stake in lifestyle downsizing.

Oddly enough, many of the top people working for Lehman Brothers in the UK have escaped such a predicament as the bank was bought by Nomura, the Japanese bank. There are few genuine sob stories as Nomura is guaranteeing their bonuses for two years. Still, many have been wiped out financially as much of their wealth existed through Lehman stock, which is now worthless. Your average Lehman banker, who might have been worth £15m last year, is probably now down to a few million.

An ex-Lehman banker explained how the maths went for your average banker in his early forties. For the last five to eight years, he has been collecting 50 per cent of his annual bonus in shares and thinking of that money as his pension pot.

That's all gone. The other thing is that it's not a simple matter to go from being a testosterone-fuelled banker to working in a normal job for normal pay. Lehman as a company was so aggressive in its dealings and so desperate to be at the high dealing table with Goldman Sachs that it turned people into monsters and most are wholly unsuited to working in any other field than the ego-driven, morale-crushing casino of finance.

They don't make anything, they play with other people's money to enrich themselves and they spend most of the day staring at their Bloomberg screens or clubbing together to get market-sensitive information they can use to their advantage. It is hardly edifying or useful. There is nothing personally satisfying about their jobs – or their lives most of the time. Yet because these bankers and fund managers work so hard and earn so much, they think that in order to make their life bearable they need to reward themselves with all the toys – the new Porsche, the dinners at Cipriani, the membership to Mayfair's super-luxurious Bath & Racquets Club – in order to keep up with the Joneses. So they very often don't have that much hidden away for a rainy day.

It's rare that the French can be seen to have the upper hand in financial circles; Paris ceased to be a financial capital of note in the 18th century.

However, at least the French bankers in London who have lost their jobs can take the Eurostar back home where they can go on the dole and claim 57.4 per cent of base pay up to a maximum of £5,506 a month. English bankers by contrast can only hope for a state hand-out of £60.50 per week – not even enough to cover a single helping of truffle pasta.