The House of Rothschild (110 page)

Not that these things made the firm unique in the clubbish, not to say somnolent, City of those days. Part of the problem, of course, was that post-war Britain retained many of the economic controls of wartime, not least restrictions on what had always been the basis of Rothschild business: capital export. Under the Bretton Woods system, there was little scope for traditional international bond issues. This was, moreover, the zenith of British socialism, and although the Attlee governments owed a good deal more to Liberals like Beveridge and Keynes than to Marx, they were scarcely friendly towards the City. Consider the following views of one Labour party supporter, interviewed in January 1948:

The fact that these were the words not of Aneurin Bevan but of the 3rd Lord Rothschild may help to explain why he kept his distance from New Court throughout the 1940s and 1950s. When he finally left academic life for the private sector in 1959, it was to direct scientific research at Royal Dutch Shell (admittedly a firm with which the Rothschilds had historic links).

A restructuring of the old partnership had been in preparation since 1941, when Rothschilds Continuation Ltd had been created to act as a legal successor in the event of one of the two remaining partners being killed in the war: the new company became a partner in its own right. In 1947 N. M. Rothschild took a further step away from its original form with the creation of £1 million of voteless preference shares and £500,000 of ordinary voting shares. In retaining 60 per cent of the ordinary shares, Anthony ensured that he was the dominant partner; after him in the hierarchy came Edmund and Victor, who were each allocated 20 per cent (though Victor received a larger proportion of the voteless preference shares). It was a shift in the balance of power within the family which would have profound consequences in the next generation.

The point to emphasise, however, is the firm’s contraction in terms of capital. On the eve of the First World War, the capital of the London house had been close to £8 million. A reduction to £1.5 million—especially allowing for the pound’s forty per cent loss of purchasing power in the intervening period—signalled a dramatic decline, due in large part to business setbacks and unprecedented taxation. When Lionel died, he left an overdraft of £500,000, but his children also had to pay death duties totalling £200,000.

Anthony’s strategy was to rebuild the firm’s traditional overseas business. This was not easily done, given the fact that the direction of post-war capital flows was mainly from the United States to Europe. True, Edouard and Robert had by now set up Amsterdam Overseas (in conjunction with Peter Fleck of the Dutch company Pierson, Heldring & Pierson) to act as a New York base for Rothschild operations; but this does not seem to have generated much business for New Court. Initially, a great deal of labour went into untangling the various pre-war debts on which countries like Chile and Hungary had defaulted. New issues—like the 1951 offering of £5 million of 3.5 per cent stock for the International Bank for Reconstruction and Development (usually known as the World Bank)—were rare, and had to be shared with other City houses. The old Rothschild predominance in the South African gold market had already been reasserted three years previously when the international gold market reopened: once again, the world gold price was formally set in New Court’s “fixing room.” However, with the international gold pool aiming to hold the price of gold at $35 per ounce, this had lost much of its importance. Under these circumstances, the firm had to concentrate on documentary credit and acceptance business. This was far from unprofitable, but it had previously been the bank’s second or third string.

The most ambitious—and at the same time the most traditional—project of the post-war years was in Canada, more or less unknown territory for the Rothschilds. Joseph Smallwood’s scheme to develop the resource-rich province of Newfoundland (of which he was premier) was probably the most important financial opportunity generated by the bank’s continuing links with Winston Churchill
²
—links strengthened by the fact that his private secretary was David Colville’s brother Jock. Churchill had returned to Downing Street in October 1951 and was immediately attracted by Smallwood’s scheme, which he hailed as “a grand imperial concept but not imperialistic.” In that sense, the British Newfoundland Corporation Ltd (“Brinco”) was something of an echo of past glories, a reminder of the role N. M. Rothschild had played in the heyday of the British Empire. Indeed, Lord Leathers, Churchill’s Minister for Co-ordination of Transport, Fuel and Power, went so far as to ask: “You did Suez, so why can’t you do Newfoundland?” Yet despite this Anthony was hesitant—so much so that the members of the consortium very nearly turned to German banks instead. It was largely owing to the efforts of Edmund that N. M. Rothschild remained on board, and even then it was felt necessary to bring in other City firms, including Schröders, Hambros and Morgan Grenfell. The final agreement reached in March 1953 leased 60,000 square miles of land to the Brinco consortium for twenty years and, after surveys had effectively ruled out the exploitation of the region’s mineral and timber resources, it was decided to construct a hydroelectric plant at Hamilton Falls. It was characteristic of the late-nineteenth-century flavour of the enterprise that, when the consortium privately distributed two million Brinco shares, Churchill himself bought 10,000.

In the years which followed, however, it proved impossible to sustain the “imperial” tie, partly because the Bank of England was obliged to restrict overseas investment to counter the perennial post-war weakness of sterling, but also because the Canadian government wished to diminish the “foreign” control of Brinco. The Rothschilds were not consulted about the first public issue of “Churchill Falls” shares and, although they nevertheless agreed to take up to $7 million of the shares issued, they were discouraged from doing so by the Canadian banks. The obstruc tiveness of the Quebec government was especially damaging, as it controlled the overland cable route to New York, potentially the plant’s biggest customer. Although N. M. Rothschild participated in a subsequent issue of debentures for the Commonwealth Development Finance Co. in 1963 and a major loan to Newfoundland eight years later, the project never really extricated itself from this political tangle.
³
The Churchillian strategy proved a wrong turning in the era of decolonisation.

By the later 1950s, however, there were signs of a change of direction at New Court. In 1955 Anthony suffered a stroke which incapacitated him and forced him to retire; he died six years later. The partnership had meanwhile been doubly reinforced. After Cambridge, the navy and spells at Rio Tinto in New York and the Toronto arbitrage firm R. D. Smith & Co., his son Evelyn joined the bank in 1957; while Victor’s elder son Jacob joined the firm six years later, after Oxford and stints with the accountants Cooper Brothers, Morgan Stanley and the investment partnership of Herman Robinow and Clifford Barclay. “We’ve been through difficult times because of the war,” Leopold recalled Anthony saying. “It’s up to you young people to go out and look for new business.”

It was now that the first steps were taken to narrow what Palin called “the great gulf that separated the partners from even the most senior members of the staff.” A century and a half of tradition ended in July 1960, when David Colville became the first non-family member formally to be made a partner (though he had already occupied a desk in the Room for some time). In September 1961 the general manager Michael Bucks was similarly elevated, followed in April 1962 by the experienced tax lawyer Philip Shelbourne, who helped to create the new Finance Department (responsible for corporate business). Since Jacob’s arrival brought the total number of partners close to the legal maximum of ten, other long-serving senior executives had to be content with the status of “associates” until the 1967 Companies Act raised the maximum number of partners to twenty. The transformation was completed in September 1970 when the partnership was finally incorporated, bringing to an end the era of unlimited liability. A new board was constructed with four non-executive directors and twenty executive directors, and decision-making passed from the partners to a new executive committee.

This “New Court revolution” in the management structure had a physical counterpart. In October 1962, at Evelyn’s suggestion, the old offices in New Court were finally demolished. It had already been necessary to expand across St Swithin’s Lane to Chetwynd House; now the firm had to spend nearly three years in City Gate House, on the south side of remote Finsbury Square, while the present six-storey building was constructed. The new offices symbolised the new generation’s determination to modernise the bank. Still, it was typical of the outside world’s exaggerated impression of the bank’s importance that a Japanese newspaper reported the construction of a new
sixty
-storey building. In reality, the London house was still relatively small. Its issued share capital when it was incorporated was just £10 million (with around £2 million of reserves), and its balance sheet showed assets totalling just £168 million. In terms of deposits N. M. Rothschild was also smaller than its City rivals. Nor did it have as many outside interests as the Paris house. All this helps to explain Jacob’s declaration in 1965: “We must try to make ourselves as much a bank of brains as of money.”

In the first instance, this meant moving into investment banking. In July 1961 Rothschild Investment Trust (RIT) was set up with £3 million capital, two-thirds of which was raised from outside investors. Under Jacob’s leadership, it thrived: initial pre-tax profits were in excess of 20 per cent of capital. By 1970 it had been joined by four other publicly quoted Rothschild investment trusts. Thereafter RIT took on something of a life of its own following its merger with three Eller man-owned investment trusts in 1974, investing widely in everything from oil and gas to hotels and auctioneers. Despite the economic shocks of the early 1970s, its gross receipts reached nearly £7 million by the end of the decade and its net assets were close to £100 million, compared with just £6 million in 1970. For Jacob, who only turned forty in 1976, it was a remarkable achievement. Yet it is important to emphasise that from its very inception RIT was moving in a different direction from its parent company. As early as 1975, N. M. Rothschild had reduced its stake to just 9.4 per cent. When Saul Steinberg’s Reliance Group acquired a quarter of RIT for £16 million in 1979, it seemed likely that the link to New Court might be broken altogether.

The first steps were also taken into the asset management business. In 1959, following the example of Philip Hill, Higginson and Robert Fleming, the bank became trustee of the National Group’s Shield Unit Fund, one of the first unit trusts. Direct asset management business soon followed, all of which (in compliance with the Financial Services Act of 1986) was later devolved to a new subsidiary company, N. M. Rothschild Asset Management.

A third important growth area was corporate finance. Apart from a couple of minor share issues in the late 1940s, little had been done in this line under Anthony. Ironically, in view of the bank’s later role in privatisation, he and Colville had refused to become involved in steel “denationalisation” when the Churchill government proposed it in 1953, regarding the idea as dangerously political. Nor was N.

M. Rothschild involved in the famous battle for the British Aluminium Co. of 1958-9, which is usually seen as ushering in the new era of takeovers and mergers. That changed in the 1960s, however, with a concerted effort to improve the bank’s relations with industry. In 1964 a branch was even opened in Manchester—the first Rothschild office in the city since 1811—followed two years later by one in Leeds. Admittedly, the bank’s first taste of corporate finance proper was discouraging. In February 1961 N. M. Rothschild advised Odhams Press in its resistance to a takeover bid from the
Daily Mirror.
The
Mirror—
advised by S. G. Warburg—won. But two years later, as advisers to the state-owned South Wales steel group Richard Thomas & Baldwins, a New Court team successfully trumped a rival bid for White-head Iron and Steel. By 1968 N. M. Rothschild could claim to be eighth equal in the City takeover league, having organised five deals with a total value of £370 million. Two years later, it was ranked fifth in a league table of issuing houses, having raised a total of £20 million for its client companies in the course of the year.

These were treacherous waters, however—and shark-infested. In 1969 N. M. Rothschild had its first encounter with the ebullient and fraudulent financier Robert Maxwell, when it advised Saul Steinberg’s Leasco in Steinberg’s £25 million bid for Maxwell’s Pergamon Press. The deal fell through when the bidders uncovered irregularities at Pergamon on a scale which prompted a Board of Trade enquiry into Maxwell. Sime Derby’s takeover of Clive Holdings during the “Barber boom” of the early 1970s proved equally problematic when Dennis Pinder, the Sime Derby chairman, was accused of insider dealing and arrested in November 1973. However, when Jim Slater resigned from the ailing Slater Walker bank in October 1975, it was to N. M. Rothschild that the Bank of England turned for assistance in averting a full-scale secondary banking crisis—a tribute to the Prime Minister Edward Heath’s confidence in the bank’s new chairman, Victor, who had belatedly taken up an active role in the family firm that April, and was soon energetically rationalising its antiquated management structure.