The House of Rothschild (114 page)

The structure of the group at the time of writing can be simplified as follows. At the top of the “pyramid” is Rothschilds Continuation Holdings AG, a Zurich-based holding company, the principal investments of which are the following nineteen firms, here grouped geographically:

The N. M. Rothschild group is thus a multinational entity (more than 50 per cent of its assets are now held outside the UK) with a wide geographical reach—again reminiscent of the system of houses which had been developed by Mayer Amschel’s sons after 1815. But it is also controlled by the family through another Swiss company—Rothschild Concordia AG—which has a majority (52.4 per cent) stake in Rothschilds Continuation Holdings AG. Closely linked to this structure is the Paris-Orléans holding company which controls 37 per cent of Rothschild & Cie Banque in Paris, around 40 per cent of Rothschild North America, 22 per cent of Rothschild Canada and 40 per cent of Rothschild Europe. The financial involvement of the Compagnie Financière is smaller; but the appointment of Edmond’s son Benjamin to the boards of Rothschilds Continuation Holdings AG and Rothschild Bank AG suggests that this may increase.

In addition to the companies listed above, there are also smaller subsidiaries reminiscent of the old agencies of the nineteenth century Another historically charged move was the announcement in May 1989 that the London and Paris Rothschilds would be opening a subsidiary in Frankfurt: Rothschild GmbH. Two months later came the launch of Rothschild Italia SpA. By September 1990 similar operations were in place in Spain (Rothschild España SA) and Portugal. Nor is this network confined to Europe. In 1997 there were offices in Argentina, Bermuda, Brazil, Canada, Chile, Colombia, Czech Republic, Indonesia, Isle of Man, Japan, Luxembourg, Malaysia, Malta, Mexico, New Zealand, Poland, Russia, South Africa and Zimbabwe.

It goes without saying that there are important differences between the structure of the present group of Rothschild houses and the system operated by the five Rothschild houses at their zenith in the mid-nineteenth century. But in many respects the resemblances are close. The subsidiaries in Europe, the Americas and Asia perform functions similar to those performed by the Rothschild agents a century and a half ago, often in the same places. Perhaps most important—and in contrast to most large financial institutions—both ownership and leadership of the group are shared between the key family members. In the nineteenth century, the five brothers and later their sons bound themselves and their houses together with occasional partnership contracts. Today six members of the family have between them a total of thirty-seven board seats (including chairmanships and vice-chairmanships) on fifteen of the principal component companies of the N. M. Rothschild group. In the nineteenth century, the family partners were only notionally equals: in terms of capital shares and even more in terms of leadership there tended to be a dominant partner. The same is true today, with Evelyn the key figure as chairman of Rothschild Concordia AG, Rothschilds Continuation Holdings AG, Rothschild Bank AG, N. M. Rothschild & Sons Ltd and Rothschilds Continuation Ltd, as well as being a director of a number of other companies in the group. And, as in the past, the question of the succession is of crucial importance as Evelyn approaches retirement. A marker in this respect was the appointment of David as deputy chairman of N. M. Rothschild & Sons in January 1992. At a time when other old City families were losing control of the firms they had established, the Rothschilds were reasserting their dominance. Five months later, Evelyn made the line of succession explicit when he told
Le Monde:
“If something happens to me, there is David. If something happens to him, there is Amschel. Working as a family has always been our trademark.” The death of Amschel in July 1996—following a meeting to discuss merging the Rothschilds’ international asset management operations—was a tragic blow; but it still seems reasonable to assume that, when Evelyn decides to retire, David will succeed him in the key positions. David now travels regularly to London—a journey which can now be done a great deal more easily and swiftly than in the days when James had to undertake it.

The integration of the diverse Rothschild businesses has not been without its problems, of course, not least the crisis which hit the Rothschild Bank in Zurich in 1991-2. In the wake of the nationalisation of Banque Rothschild, Elie had become chairman of the Zurich bank, appointing Alfred Hartmann as general manager and later deputy chairman. The first sign of trouble came in 1984, when the bank was censured by the Swiss Banking Commission for its involvement in an illegal 50 million Swiss franc loan. Six years later, there was further embarrassment when the Zurich bank bought shares in Suchard on the eve of a Rothschild-backed bid for the company by Philip Morris. In July 1991, in a bid to stop the rot, N. M. Rothschild acquired 51 per cent of the company and Evelyn took over as chairman. What he discovered there invites a comparison with the experience of Anselm after his arrival in Vienna in 1848 (or perhaps Lionel’s when he was confronted with the Creditanstalt crisis). Initially, it was announced that 63.5 million Swiss francs of the bank’s hidden reserves would have to be liquidated to cover losses on bad loans of around 100 million Swiss francs (£40 million). Compared with the firm’s capital of 185 million francs (£74 million), these were alarming figures. But the process of cleaning out the Augean stables had only just begun. In September 1992 it emerged that a senior executive at the bank, Jürg Heer, had authorised a number of large and illegal loans, principally to two German-Canadian property financiers. Total losses on these transactions were initially estimated at 200 million Swiss francs (£80 million), a figure which later had to be revised upwards to 270 million Swiss francs—more than the firm’s entire capital. Had Rothschild Bank AG been a wholly independent entity, that would probably have been the end of its existence. However, as part of the wider Rothschild structure, it could be salvaged with an injection of 120.5 million Swiss francs, and most of the lost money was subsequently recovered.

The Zurich crisis was a reminder of the dangers of a multinational structure with a family firm at its core: small mistakes can have grave consequences. Yet compared with the disaster which engulfed the Rothschilds’ historic rivals Barings in 1995—when a “rogue” dealer’s illegal speculations in Singapore bankrupted the firm—the Zurich crisis was trifling. The fate of Barings, which was subsequently bought by ING, is the extreme case of what can go wrong for a traditional City merchant bank. It has not, however, been alone in passing into non-British ownership. S. G. Warburg has been bought by the Swiss Bank Corporation, Morgan Grenfell by Deutsche Bank, Kleinwort Benson by Dresdner Bank and the Hambros Banking Group by Société Générale. Of the elite of City firms which used to make up the Acceptance Houses Committee, Rothschilds is one of only four which have succeeded in retaining their independence.
¹⁰

Once again historical parallels come to mind. Throughout the nineteenth century, the single most important reason why the Rothschilds were able to withstand the financial crises; revolutions and wars which swept so many of their competitors into oblivion was that a crisis in one house could be contained and resolved with the assistance of the others. The rescue of the Paris house in 1830 and the Vienna house in 1848 are the two classic examples. The reconstruction of Rothschild Bank in Zurich recalls those earlier episodes.

The development of the N. M. Rothschild group thus needs to be understood partly as a way of defending the tradition of Rothschild independence in a world of ever-larger financial giants, not as a strategy for becoming one of those giants. At the time of writing, Rothschilds Continuation Holdings has shareholders’ equity (capital, reserves and accumulated profits) of £460 million, or total capital resources of around £800 million if a broader definition is used. In addition, the Paris-Orléans holding company has capital of around £ 100 million. Of course, this puts the group a long way behind the biggest bank in the world, HSBC, which has total market capitalisation of around £55 billion; but such a comparision does not compare like with like. A better comparison is with Schröders, one of the few other independent City merchant banks, which is only slightly ahead; or with the firm which was incorporated as N. M. Rothschild & Sons Limited in 1970. An increase in capital and reserves from £12 million to £460 million is no mean achievement: it represents growth, adjusted for inflation, of nearly 400 per cent. The question which remains is how the family-controlled “mini-multinational” structure which Evelyn has created over the past decades will fare as international financial markets become characterised by ever higher levels of integration.

The modern financial world is often said to be quite different from the financial world of the past. Transactions, it is argued, are far larger than ever before and are executed with unprecedented speed thanks to advances in electronic communication. Public and private systems of regulation lag behind innovations like derivatives. The reserves of central banks are dwarfed by the vast turnover on the international foreign exchange markets. In the era of “globalisation,” nation states themselves are obsolete; family firms even more so. The future belongs to vast international corporations. Yet the reader of this history may be inclined to question such crude assumptions. To be sure, compared with the period between 1914 and 1945—and perhaps also with the period before 1979—the financial world has completely changed. But compared with the hundred years before the First World War, the 1980s and 1990s looks less exceptional. Relative to the world’s demographic and economic development in the nineteenth century—and certainly relative to the very limited financial resources of nation states—international capital movements in the nineteenth century were very large. Compared with what had gone before, nineteenth-century communications dramatically accelerated the speed at which business could be done. Regulation lagged far behind innovations on the bond market and stock market. Markets were volatile; trivial errors could have devastating consequences for individual firms. For most of the nineteenth century, there can be no doubt that the kind of firm which stood the best chance not only of prospering but of surviving more than a decade or two was a firm like the one founded by Mayer Amschel Rothschild and led from the ghetto to greatness by his Napoleonic son Nathan. It was rooted in a distinctive ethos of familial solidarity (
concordia
), a religiously rooted morality (
integritas
) and hard work (
industria
)—an ethos which proved remarkably durable despite the fissiparous tendencies of all large families, the corrupting effects of social assimilation and the myriad temptations of wealth. At the same time, its multinational structure gave it a unique degree of flexibility, enabling it to withstand even the worst economic and political crises.

A modern financial corporation may be able to replicate this flexibility. Perhaps, through the various spin-offs of bureaucratic rationalisation we call “management,” it can even improve on the original. But it cannot easily replicate the ethos of the earlier kind of structure; for no amount of corporate rhetoric can turn its widely dispersed multitude of shareholders, directors, executives and employees into a family. Francis Fukuyama and others argue that one of the weaknesses of modern Western institutions like the corporation is that they do not elicit trust and loyalty from individual employees or investors. Perhaps the family firm does that better, even if a price is paid in forgone economies of scale.

It is a moot point whether or not bankers benefit—as bankers—from knowing their own history; as A. J. P. Taylor once said, men learn from history only how to make new mistakes, and too much knowledge of financial history can induce excessive risk-aversion in a professional investor. At least one senior figure in the N. M. Rothschild group has observed that he is a good deal more interested in the future of the Rothschilds than in their past; he is right to be. On the other hand, the history of N. M. Rothschild & Sons and the other Rothschild houses has a contemporary relevance—indeed utility—to him and his colleagues in one respect: the name Rothschild is in many ways as big an asset as any which appears in the balance sheets of the Rothschild group. It is a brand name like no other in international finance; and if nothing else this book shows why that is.

Moreover, the past has a more subtle influence on the present, quite apart from its value as source material for corporate publicity. It is something to live up to—a reputation to preserve—and that is often as good a motivation in business as the more prevalent, and sometimes more short-sighted, profit motive. One of the more surprising findings of this study has been the relatively low rate of return on capital achieved by the Rothschild houses in the second half of the nineteenth century, a phenomenon partly explained by the relatively high ratio of capital to liabilities which they maintained. Part of the secret of long-run success in banking is, of course, not to go bust; the Rothschilds’ relative risk-aversion is one reason for their financial longevity. This has its roots in the psychology—to be precise, the longer time horizon—of a family firm, which has the interests of future generations as well as present shareholders to consider.