Last 5 posts

Archive

27 November 2019

Of Partners, Champagne and Corkscrews - Part Two



This article was written by John Wolff. All views and opinions expressed are strictly his own. The first part was published last week, and can be found in the sidebar.


The seismic shift was caused by the termination of the right to convertibility of dollars into gold at $35 per ounce in 1971, and the consequent final breakdown of the Bretton Woods agreement in 1973.

The quantity of gold held in Fort Knox in relation to the huge increase in dollars in global circulation made convertibility at $35 untenable.

The capital flows now sloshing around the world had grown too large for the central banks any longer to control currency exchange rates within the parameters prescribed by the Bretton Woods Agreement.

There had always been fluctuations in commodities and currencies, but up until this point international business always knew that in the background, they could exchange their currency for dollars, and those dollars could be exchanged for gold at $35 per ounce. Furthermore, major currencies could only fluctuate against each other by a limited amount, as Central Banks had the resources to keep these currency exchange rates within a range agreed at Bretton Woods.

With these backstops removed, gold and currencies were now freely floating. The dismantling of the harbour walls introduced new volatility, as global business had to be traded in one freely floating currency or another. Everything was now in play in a way it had not been before.

Major changes in the financial world were unleashed with trading opportunities in entirely new products for a wider clientele. No longer the preserve of banks and bullion dealers, anyone could now trade gold or currencies. Within short order, Financial Futures Exchanges were set up in Chicago and London allowing professionals and the public to trade in interest rates, stock indices, eurodollars, and precious metals. The IPE was established in London to trade oil futures,

Big bang in London removed the restrictive practices of the Stock Exchange, abolishing the old jobber and broker roles and fixed commissions, and permitting overseas ownership of members. 

The option pricing formula with delta hedging devised by Fischer Black and Myron Scholes gave legitimacy to option trading, further expanding trading in these new financial instruments. Improvements in computers meant that all this new activity could now be monitored daily.

Larger and larger corporate entities were needed to cope with this new activity. Nearly all the old specialist companies across the City, including the old merchant banks, were absorbed by larger multinational institutions and banks, particularly from the USA.

In came government regulation, vast trading rooms, whole new career possibilities in compliance and IT, human resource managers, hedge funds, and chartists. Out went self regulation, small, specialist companies, and the shorthand typist became a quaint historical job title. 

This article seeks to describe these changes rather than say whether they were good or bad.They were both, and to an extent inevitable. One can’t help wondering however, if the scale of the losses caused by dramas like Long Term Capital Management, the dotcom boom and bust, and the banking crisis itself would have been so large if the participants had been playing with their own money as in the old days of partnerships.

A nice example of the old ways having to move to the new happened  when Noranda Mines took over Rudolf Wolff in 1971. Philip Jevons, partner and senior dealer, complained because Noranda insisted on us producing monthly accounts. (Computers could not yet produce daily accounts).

“Why do we have to pay accountants to produce monthly accounts? The money is either in our bank or it isn’t.” At first glance this seems a rather amateur and risky attitude. But actually it wasn’t. As senior dealer, Philip was well aware if we were having a good or bad month and didn’t need accountants to tell him. What was in the bank was the only confirmation he needed.

A happy memory of partnership times for me was when Horace Goodall, the senior partner of Charles Davis, came over and said hello to me shortly after I went on the floor as a clerk. Horace, short of stature and ample of girth, had joined Charles Davis aged 14 in 1899.

”I love to see sons following fathers. My son Jack works with me, so I am inviting your father and you to lunch with Jack and me at Simpsons.”

As we neared Simpsons, Horace said: “My boy, I am going to divert a little here to show you something about human nature.”

He took me by the arm and waddled down Change Alley to the edge of Cornhill.

Looking up, he said: "What is that building my boy?”

"A church sir,” I replied. 

 “Quite correct,” he said, “and look at the step.”

The  threshold of the top step was a beautifully flat piece of limestone - almost unmarked, as if never crossed. 

He then waddled back up the alley and pointing to the Jamaica said: “And what is that building my boy?”

“A wine bar affectionately know as the Jampot,” I replied.

 “Quite correct,” he said “and look at the step.”

Here the stone was worn away to a depth approaching six inches, testimony to the entry of many thousands......

And so on into Simpsons, and an introduction to stewed cheese, selecting one’s own steak at the grill, tipping the chef, and much banter with the waitresses.

Two of Horace’s sayings stay with me. The first reflects old partnership wisdom: “Buy champagne in a good year, and keep some  available to drink in a bad year.”

The second is a rather graphic description of a dishonest client: “He was so crooked that if he swallowed some steel wire he would pass a corkscrew!”

 

 

 

 

comments powered by Disqus