SG Warburg: a template for better banking

It is 15 years since the investment bank SG Warburg, a pioneer of finance in Britain, lost its independence. But fascination with the firm founded by emigré Siegmund George Warburg - scion of the prominent German-Jewish banking family - remains as strong today as ever.

A new biography of Siegmund by the historian Niall Ferguson (High Financier: The Lives and Time of Siegmund Warburg, Allen Lane, £30) contrasts the caution of SG Warburg's founders Warburg and Henry Grunfeld with the casino bankers who wrecked the global economy during the 'Great Panic'.

Ferguson's work, which includes new material based on 10,000 pages of unpublished letters, reveals that Warburg was deeply conflicted. He was a German-Jew in exile who had originally seen Germany's national revolution as an opportunity. But he later came to see the bankers and those left behind as "foolish and complacent".

The bank that Warburg founded was a pioneer in Britain's tradition of hostile takeovers, winning its spurs in the 1958-89 takeover battle by Tube Investments for British Aluminium. It made Warburg the house of choice for businesses seeking to win deals or defend themselves against them. When, in 1986, Mrs Thatcher swept away the old rigidities governing the City with the 'big bang', Warburg was among those houses to take advantage, entering all kinds of new areas from stock broking to City trading.

It was a signal moment and among the old magic circle of UK merchant banks, SG Warburg looked the house most likely to survive. But it now found itself competing against American houses, like Merrill Lynch, with far bigger balance sheets and more sophisticated trading skills. As it ran short of capital in 1995, the Warburg sought to sell itself off to American rival Morgan Stanley which, after an internal wrangle, pulled out of the deal.

The way was now open for it to be bought by Swiss Banking Corporation and the London investment bank's name was switched to SBC Warburg. When Union Bank of Switzerland (UBS) bought SBC, it also inherited the remains of Warburg. But instead of preserving its valued names and traditions, all the offshoots were united under the UBS name and much of the culture was destroyed.

Among the remnants of the old Warburg was the late (Lord) Eric Roll, an Austrian-born emigré who worked in government before joining Warburg in 1966, where he held the honorific title of president, and chief economist George Magnus, who is still as active and thoughtful as ever.

When the crunch came the reality was that despite the Warburg traditions of prudence, UBS had become hooked on toxic debt and is still struggling to retrieve its reputation.

Nevertheless, the Warburg tradition of risk averse banking still lives on through some prominent alumni. Top of the list at present is Lord (James) Sassoon, a former vice-president of SG Warburg, who is now Commercial Secretary to the Treasury having advised the opposition Tories on City reform.

Another prominent member of this group is Robin Budenberg who, while working for UBS (the ultimate owner of Warburg), helped to advise Labour on the re-capitalisation of the banks in the Autumn of 2008 after the collapse of Lehman Brothers in the US.

Now Budenberg is the person running UK Financial Investments, the firm set up by former Chancellor Alistair Darling, as the guardian of the taxpayer shares in the semi-nationalised banks. He is responsible for the taxpayers' 84 per cent holding in the Royal Bank of Scotland, the 41 per cent share in Lloyds Banking Group and the £50 billion stake in the wholly owned rump of Bradford & Bingley and Northern Rock.

Despite reports to the contrary, Budenberg argues that there is no rush to sell down the stakes in RBS and Lloyds until their fortunes have recovered.

Sassoon, a member of the distinguished Sephardi family, has been on a strange political odyssey since leaving UBS. In 2002 he joined Gordon Brown's Treasury team as managing director of finance regulation and industry before becoming the chancellor's ambassador to the City.

But in 2008 he switched sides and became an adviser to the current Chancellor, George Osborne, drawing up a blueprint for City reform called the "Tripartite Review".

In the wake of the election and the Coalition agreement, it looked as if Sassoon's radical plans, as adopted by Osborne, would die a death. But it has not been the case at all. Sassoon's blueprint for City reform - which transfers macro and micro-prudential of the City back to the Bank of England - is to be implemented in full with the Financial Services Authority swept into the sea. All that will remain is a new consumer protection agency.

When Osborne decided to go the whole hog and implement the plan, Sassoon could barely conceal his glee. As the Treasury Minister in the Lords he can expect to play a key role in steering the new legislation, based on his blueprint, through the upper-Chamber.

The great and principled founders of SG Warburg, Siegmund himself, Grunwald and Roll may have passed on to another place like the bank they founded. But they would be gratified to know that the prudent strain of banking which they fostered still lingers on in the shape of the alumni.

Alex Brummer is City Editor of the Daily Mail

    Last updated: 10:16am, July 8 2010