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Shock Waves Rock Financial Community : Bank's Near-Collapse May Put an End to Britain's Clubby Regulation

September 22, 1985|TYLER MARSHALL | Times Staff Writer

LONDON — With nearly two centuries of success behind it, the Johnson Matthey Group was the kind of company whose pedigree alone inspired confidence. Its presence added to the sense of reliability and permanence that helps set "the City," as London's financial district is called, apart from other world business centers.

That anything might be amiss with the group's banking and bullion-trading arm was, well, unthinkable.

So when the news broke last year that Johnson Matthey Bankers had piled up the equivalent of $345 million in bad debts and tottered on the brink of collapse, even the most cynical voices in the City found it hard to believe.

That the bank nearly went bust because of what British Treasury Secretary Nigel Lawson called an "appalling and bizarre record of incompetence and mismanagement" set off a series of shock waves that, nearly a year later, continue to reverberate through the City, spreading ill-will and adding strength to the winds of change sweeping through the world's most tradition-bound financial capital.

The near-collapse has brought a flurry of lawsuits involving Lawson, the Bank of England--Britain's equivalent of the U.S. Federal Reserve--and one of the City's big-name accounting companies, Arthur Young McClelland Moores & Co. It has dented the mystique of the Bank of England, an institution that has traditionally relied on its prestige rather than law to keep order in the City, triggered unprecedented calls for the resignation of its governor, Robin Leigh-Pemberton, and brought on a police investigation into possible fraud at Johnson Matthey Bankers.

May Become Watershed

Of far greater long-term significance, however, is that many of those who follow events in London's financial district now believe that the scandal may well turn out to be a watershed in the City's history. It may turn out to have helped bring about the eclipse of the old-fashioned business values that had survived here, in many cases serving as the primary, binding force in financial transactions.

"The changes it has set in motion may well mark the end of the gentlemanly codes by which the Bank of England and the City have abided for decades, founded on trust and frankness," the Financial Times commented this summer. "The tradition of mutual respect and confidence had never failed the bank (of England) before. But now it has."

The growing complexity of banking in recent years has gradually forced something of a regulatory structure on the City, including, six years ago, the first-ever banking legislation. The near-failure of Johnson Matthey Bankers is certain to accelerate change.

"The JMB affair is proof that the time for informal control of banking has passed," said Oonagh McDonald, a member of Parliament and spokeswoman on economic affairs for the opposition Labor Party. "We are living in a different era."

How such a prestigious institution as Johnson Matthey became embroiled in such a debacle and whether it was led there by criminal cunning or drifted there because of blind incompetence is something Scotland Yard's fraud squad is still trying to sort out.

Johnson Matthey established its banking subsidiary only in 1965, to assist with its gold and silver bullion business. The group's heavy engineering, chemicals and jewelry businesses also used the banking arm. However, as one of the select few institutions that help to set the price of gold on the London market each morning, Johnson Matthey Bankers was most involved in the field of precious metals.

Bank Branched Out

In 1981, with heavy industry slipping into recession and the precious metals markets quiet, the bank began looking elsewhere. It branched into soft commodities and insurance brokering, and expanded its non-bullion loan portfolio.

Growth in loans was particularly dramatic, to more than $420 million last year from $47 million four years before. Profits also jumped to $34 million in 1983 from $16.3 million in 1981.

"The diversification looked liked good business," recalled a stockbroker, who asked that he not be identified because of his indirect links with the company. "The stock was highly rated and popular."

To achieve such dramatic expansion in time of recession, Johnson Matthey Bankers took on high-risk customers, many of whom had been refused loans by other major banks. They also charged these clients steeply higher rates of interest.

Many of the loans went to fast-moving merchants dealing with large volumes of commodities, often in politically volatile Third World countries. At one point, the bank's exposure to business with Nigeria, a country that recently experienced its second military coup in two years, amounted to $170 million, more than the bank's net worth.

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