by Andy McSmith
Even as it became technologically possible to move money across national borders, from computer to computer, there was a bureaucratic obstacle in the way. There were rules imposed by governments seeking to protect their currencies against speculation, which limited the sums that could legally be transferred overseas. Since 1939, anyone wanting to move sterling across the water had to apply to a Bank of England department that employed 750 fulltime staff. But such rules such were becoming increasingly hard to enforce anywhere in the developed world. NASDAQ, a virtual stock exchange founded in the USA in 1971 and consisting of 20,000 miles of telephone wires connecting terminals in dealers’ offices around the world, would soon overtake the London Stock Exchange in the volume of business it handled. Reuters responded to this challenge in 1980 by introducing a system that allowed dealers to trade by telex. Thus, huge sums were being transferred across international borders electronically, making a nonsense of exchange controls. Some of the world’s finance ministers were criticized for being slow to wake up to that reality, but that was not a charge that anyone could level at Sir Geoffrey Howe. In October 1979, exchange controls came to a sudden end, those 750 Bank of England of cials were out of work and the only memento of their department was a celebratory tie that Howe wore for years.16
Gradually, other changes came into view. By 1984, the blackboards were gone from the walls of the Stock Exchange, replaced by video screens supplied by two fast expanding and highly competitive financial news services, Telerate and Reuters. The cash dispensers that had appeared in the walls of banks in the main cities were rapidly replaced, at considerable cost, by the more efficient ATMs. Between 1982 and 1985, their number doubled,17 making it possible to deposit or withdraw money, order a cheque book or print off a bank statement at any time of the day or night, without the need to speak to a bank teller. Once home computers had gone on sale, another thought occurred to the more innovative members of the banking profession – customers did not need to visit a bank at all. If they were connected up properly, they could manage their own accounts on their home computer. In 1983, the Nottingham Building Society teamed up with the Royal Bank of Scotland and Prestel in an ambitious scheme, copied from Germany, under which free consoles were offered to customers with £10,000 or more in their accounts, so that they could look at their accounts, make transfers and pay bills through their televisions. ‘Tired of watching re-runs of Dad’s Army on the television on Friday nights? Why not settle down to sorting out your personal finances instead?’ the Financial Times suggested – though the same writer forecast, presciently:
Few people will spend money on home computery simply to gaze at the size of their overdraft. They will want to do a lot more than that. So home banking is likely to change the very nature of the banking institutions. They will have to offer other services – home shopping, information, news services and so on – in addition to their banking functions.18
And, he added: ‘They won’t need many staff a few years from now because their customers will do all the work.’
The prediction that improved technology would create a demand for new services was as true for professionals working full-time in the money markets as it was for the customer with a console. With the computers in place, it became possible to develop complicated financial products such as options, which allowed the investor to take out an option to buy or sell a share, bond or commodity at a future date; swaps, under which for instance fixed-rate debt raised in one country could be exchanged for floating-rate debt somewhere else; collateralized mortgage obligations; financial futures; hybrids; revolving debt; and other complicated ‘products’. Michael Lewis, of Salomon Brothers, recalled:
To attract new investors and to dodge new regulations, the market became ever more arcane and complex. There was always something new to know . . . therefore the trading risks were managed by mere tykes, a few months out of a training programme . . . That a newcomer should all of a sudden be an expert wasn’t particularly surprising, since the bonds in question might have been invented only a month before.19
By the end of 1985, the central bankers were afraid that the system was changing so quickly that it might be out of control. In September, the governor of the Bank of England, Robin Leigh-Pemberton, sent an open letter to the British Bankers’ Association about the losses they could incur as they ventured into fashionable new ‘off balance sheet’ transactions, which could involve building up liabilities without the necessary capital. ‘Managements of banks undertaking such business should ensure they possess the necessary skills and understanding to manage the of en complex operations involved, to assess the risks and to establish appropriate internal control and reporting arrangements,’ he warned. On the same day, in what was obviously a coordinated operation, his deputy Kit McMahon delivered a speech in Switzerland, not only about the ‘rush to take advantage of new freedoms’ but about the way banks were poaching one another’s staff for ever higher salaries:
If key staff – and even on occasion whole teams – can be offered inducements to move suddenly from one institution to another, it becomes very difficult for any bank to rely on the commitment individuals will give to implementing its plans, and adds a further dimension of risk to any bank which is building its strategy largely around a few individuals’ skills.20
With house prices rising, there was a scramble to get on to the property-owning ladder. To own a house was not only a status symbol, it was also a sensible investment. Unlike those who paid rent, homeowners received tax relief on the mortgage up to a value of £30,000 per head, so, if a high-earning couple took a £60,000 mortgage, they could offset the entire cost of their repayments against tax. This generous transfer of wealth from those who paid rent to those who owned property was known as MIRAS. In 1979 it cost around £1,450m,21 and increased every year until 1988, when Nigel Lawson changed the rules so that couples sharing the property could only make one claim against tax, instead of two. With so many former council properties coming on to the market, there were enough properties to buy, but the building societies were having a struggle meeting the demand for mortgages. The societies had never borrowed on the money markets, lending only what they had on deposit from savers or were receiving in interest and repayments from previous loans. If the money was not available, applicants had to join the mortgage queue. The societies were also notoriously cautious; they liked to lend to married couples with a regular income, who had saved up 5 or 10 per cent of the value of their prospective home. They were averse to customers from the decaying, crime-ridden areas, and they therefore discriminated against ethnic minorities, who were concentrated in the inner cities, and against those who were unmarried, particularly single women.
Those who could not get mortgages from building societies therefore tried their luck with the banks, where they were used to dealing face to face with friendly managers. Helen Thomas was a young nurse working in inner London in 1983, when a godparent left her enough money for a deposit on a flat. She had the income to support a small mortgage, but she was single. She said:
I was turned down by all of the building societies, so I thought I would try the bank. This was just at the time when banks were starting to give mortgages. Somebody said ‘Wear your nurse’s uniform, Helen’ – so I went in, in full uniform, and met the bank manager. He looked up my account, and said to me: ‘You have a lovely little bank account.’ He gave me a £17,000 mortgage, which bought me a flat in Camberwell. I can’t remember the exact figures, but it certainly was not a 100 percent mortgage. I suppose it was two and a half times my annual salary. But the funniest thing was that after we had finished, he said ‘Well, I think this calls for a sherry’, and he produced a bottle of sherry, and we drank a toast to my first mortgage!22
But if the banks dipped their toes in the mortgage business, sooner or later the building societies were going to want a share of the banks’ business. The largest and most innovative was Abbey National, headed in the early 1980s by an unusual businessman named Clive Tho
rnton. He came from a working-class family from the north-east of England, and retained some of the socialist beliefs of his youth. (He also had only one leg, which is why at the Daily Mirror, where he was chairman in 1983–4 and fought a losing battle to prevent Robert Maxwell taking over, it was said by hard-drinking journalists that ‘in the country of the legless the one-legged man is king’.) Thornton’s social conscience gelled neatly with Abbey National’s need to expand. ‘It was said when I was at the Abbey that you could not go and invest in the inner cities because you could not get the security for the money you advanced. I proved it was better to be there,’ he said, when interviewed in the unlikely forum of Marxism Today.23 Under Thornton, the Abbey became the first building society to issue cheque books and cheque guarantee cards. The Treasury had been considering whether or not to break up the building societies’ cartel. Thornton saved them the trouble by announcing in 1983 that the Abbey was leaving to be free to set its interest rates without reference to other societies, whereupon the cartel collapsed.
In 1986 came the Building Societies Act, which allowed building societies to diversify further, or convert themselves into public companies, and to operate in the same way as banks, borrowing money on the markets if they chose. In the short term, this had the look of another Thatcherite success story. Abbey National, which was still expanding and competing with banks, found the few remaining restrictions on building societies irksome and in 1988 announced that it was going public. This was an immensely complicated process, involving vast legal fees and provoking organized opposition from a pressure group, Abbey Members Against Flotation. However, the society’s depositors and borrowers had each been promised 100 free shares in the new company, inducement enough to produce a nine to one majority in favour of flotation. As flotation day dawned, thousands of letters and share certificates were sent to incorrect addresses, refund cheques failed to be sent at all, countless people received the wrong number of shares, and in one unexplained incident share certificates were discovered burning in a skip outside one of the mailing houses. But for all these glitches, flotation enabled the Abbey to grow and grow, faster than the demand for mortgages, and consequently inspired nine other building societies to follow suit.
It was not until nearly twenty years later that people seriously asked whether or not demutualization had been such a good idea. If the building societies had restricted themselves to the service they had always provided, without borrowing on the money markets or becoming institutionally linked to investment banks, none would have been caught up in the crash of 2008. As it was, not one of the ten building societies that had converted to banks had survived on its own. Most had been bought up – Abbey by Santander in 2004, the Halifax by the Bank of Scotland, and so on. Northern Rock converted in 1997, and bankrupted itself by borrowing with a freedom that a building society could not have exercised. The last to demutualize was Bradford & Bingley, which had survived through every recession for 150 years, but in its new incarnation as a bank it went bust in just 8 years.
The Trustee Savings Bank (TSB) was one of the biggest and most popular banking institutions in Scotland. It reached into every Scottish town, employing some 40,000 people in 1,100 branches. Its speciality was serving the ‘unbanked’, who dealt in sums of money so trif ing that the mainstream banks could not be bothered with them. In 1986, TSB caught the bug and decided to convert into a quoted company. The chairman, Sir John Read, and the board gave earnest undertakings that the historic links with the Trustee Savings Bank movement and the company’s Scottish identity would both be preserved. Having converted, TSB bought another bank, Hill Samuel, just before the stock market crashed in 1987. Three desperate years later, despite all the promises made before the flotation, it closed the separate Scottish operation. In 1995, TSB was taken over by Lloyds.
But these problems lay in the future. At the time, the flotation of Abbey National was one more development in the spread of share-ownership that began with the sale of British Telecom. The Thatcher government stumbled on this, its f agship policy, rather late. Before 1983, it sold off bits and pieces of state-owned enterprises, including 51 per cent of British Aerospace, Cable and Wireless and Britoil, a company created by the Labour government to produce and sell oil from the North Sea. The last of these was the biggest sale by far and bombed badly when the price of oil dropped abruptly – about 70 per cent of the available shares went unsold. British Telecom was split off from the Post Office, of which it was anomalously a part in 1980, and a bill to privatize it was introduced before the 1983 election, but did not get through the Commons in time. It was revived with enthusiasm when Norman Tebbit replaced the disgraced Cecil Parkinson as secretary of state for trade and industry.
The BT sale was not just a success for those who shared the spoils. The customers also liked it. Before privatization, a telephone was an instrument attached by a cord to a socket in the wall, and if you wanted one installed in your home, you joined a queue. It could take three months or so for the engineer to turn up. In January 1981, the new rock phenomenon, Midge Ure of Ultravox, had two singles in the Top 10, but no telephone. He had to walk to Chiswick, to a red telephone box that stank of urine, to ring his management and be told news such as that his album had sold 150,000 copies in two months.24 But when BT was no longer a state monopoly, and had to compete with other telephone providers free from government restrictions on public borrowing, investment in the telephone network doubled almost instantly, prices fell, new telephones were available on demand and the number of telephone boxes that actually worked shot up.
Very soon, the first mobile telephones appeared. They were as heavy as bricks and were used only by those who absolutely needed them, or were determined to show off, including Nicholas Pierce, managing director of Cellular One, who arranged to be photographed on 22 November 1984 in a suit and bowler hat, cycling through London on a woman’s bicycle, talking on a mobile phone to someone in the USA. The network that made them possible to use was not immediately available nationwide, but spread outwards from London, region by region. Newcastle upon Tyne was scheduled to be linked up on 1 November 1985. However, the death of a local MP in October meant that Vincent Hanna, a BBC journalist with a talent for getting his own way, was due up north to cover the by-election, equipped with one of the new phones. The now customer-conscious BT obligingly extended the network several days early for his benefit.25
The success of the BT sale awoke Margaret Thatcher’s enthusiasm for something she now called ‘popular capitalism’. She declared in October 1986: ‘The great political reform of the last century was to enable more and more people to have a vote. Now the great Tory reform of this century is to enable more and more people to own property.’26 In that spirit, privatizations came thick and fast, and everyone was invited to join the great share sale. The biggest was the sell-off of British Gas, which brought in £5,434m. It would have been more in keeping with the government’s free-market principles to have broken it up into several companies, but Thatcher accepted the advice of Peter Walker, the energy secretary who was anxious to see the sale completed quickly. It went ahead in December 1986, preceded by two advertising campaigns cleverly crafted to attract small investors – ‘Don’t Tell, Sid’ and subsequently ‘Tell Sid’. Thereafter, small investors were known as Sids. British Airways was next to be sold, in February 1987, followed by Rolls-Royce, the British Airports Authority, the ten regional water companies, sold in November 1989 for £5,110m, and finally in December 1990 the electricity companies, which were sold for just over £5 billion. In all, the number of share-owners increased from 2m in 1979 to 12m in 1989. The share of the nation’s capital stock in public ownership fell from 44 to 31 per cent, while the proportion of homes that were owner-occupied increased from 55 to 67 per cent.
There was an unprecedented amount of money passing through customers’ pockets in these boom years, but the question was always how to lay hands on more of it, as soon as possible. In the rush to lend, banks and building soc
ieties gave 100 per cent mortgages to people who had not saved up at all; they lent three times the main wage-earner’s annual salary, or more. Up to the mid-1980s, no one could increase their mortgage unless they demonstrated that they were using the extra borrowed money to increase the value of their home. A building society would lend to someone who wanted a new kitchen, but someone who wanted a new car had to take a short-term loan from a finance company, at a higher rate of interest. Suddenly, that discipline evaporated, and people happily added to their mortgage debt to pay for consumer spending. And why not? In 1988 alone, according to the Nationwide House Price Index, the price of the average property went up by a third. So if you bought a £60,000 house in January 1988, by the following January, you were in a property worth £80,000. Why leave that £20,000 of extra equity doing nothing when it could be improving your standard of living?