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Thursday, August 05, 2010

Not Cricket

A rather scathing review of Niall Ferguson's new book:

Consequently, this is not an impartial account of a fascinating and important, although often very controversial, businessman, and it does not place Warburg’s life (and indeed the life of S. G. Warburg & Co) objectively in the wider historical context. Ferguson is determined to lionize Warburg as the initiator and presiding genius of big trends, and to put him on a moral pedestal so that he appears more decent and honest, more of a gentleman, than his equivalents in the City of London of today. Both these endeavours involve spin. Ferguson overstates Warburg’s significance in the evolution of international finance and understates the ethical ambiguity of many of the transactions in which he was involved.

I have not read Ferguson's book, though I have read some of his other door stoppers. My shelves creak with unread books, so I'm not sure if I'll even have the time to read Ferguson's biography of legendary financier Siegmund Warburg. What strikes me about the review is its rather odd notions about modern finance. Ferguson clearly thinks highly of Warburg. A sympathetic biography can sometimes, very easily, veer into hagiography. The reviewer, however, seems to condemn Warburg for not playing by the rules, not actually breaking the law, but simply not behaving like a sensible chap, like all the other sensible chaps who went to Harrow and Eton. 

There is something to be said for the code of honour that held fast the British upper classes for centuries. It is not, however, akin to some toffish version of the Nicomachean Ethics. Waterloo might have been won on the playing fields of Eton - which is something Wellington never actually said, but should have - but a modern economy works differently from playing and battle fields. The code of the gentleman can, in business matters, be a protective cover for mediocrity. Case in point, take the reviewer's complaints about the Warburg orchestrated takeover of a key British firm in the late 1950s:

Again, he ought to delve further and think more widely. The rest of the City did not object to competition between rival bidders. What it disliked was Warburg’s method of operation, which was cavalier towards the London Stock Exchange’s central principle that market participants must not create a false market. The rulebook says that potential investors should have access to the same information and opportunities, and – if one company wants to acquire another – it should make its intentions clear at an early stage. But this was not Warburg’s approach in the Aluminium War. As Ferguson comments, “transparency was emphatically not Warburg’s watchword”. Along with its American partner, Kuhn Loeb, Warburg had set up eleven nominee companies to make the purchases, with “stealth” being “of the essence”.

Right. So Warburg's sin was not announcing to the world his intention of buying a large industrial firm, thus preventing others from profiting from his actions. It was Warburg's vision, but it was unfair that Warburg did not let others profit from his insight, and his pocketbook. The unfairness was that, essentially, others were not as clever as Warburg. I have a feeling that Warburg would have been an excellent poker player, unlike many of his flatfooted contemporaries in the City.

Clever underwriting is like that, an exercise in mild deception, and there is nothing inherently wicked or immoral about it. All traders are selling something they don’t themselves want to own in excessive amounts. The trouble with Ferguson’s book is that repeatedly he tries to glorify the activities of Warburg and his bank, and to see in them a public benefit that is not and never was there. Often this habit is harmless, even if the boundary between biography and hagiography is transgressed.

Hmm. So efficient risk allocation isn't an important aspect of modern finance? And finance is not an essential aspect of a modern economy? Now, read this bizarre sentence again:

All traders are selling something they don’t themselves want to own in excessive amounts. 

Which is tautological. By definition a trader is someone who sells things which he does not want to own in excessive amounts, otherwise he would not be trading. The trader is not simply a central figure in modern capitalism, he is a central figure in civilization. Trade, of both material and spiritual values, is the essence of civilization. Only hermits do not trade. Making good and efficient trades are, by any standards, a public benefit, if one wishes to use a collectivistic standard. Then the reviewer takes a swipe at Ferguson himself:

Ferguson has a thing about the inventors of “the” international bond market. Early in the second volume of his history of the Rothschilds, he says that “without doubt” their “most important contribution to economic history was the creation of a truly international bond market”. In his essay for a volume on The Origins of Value (2005), he went further and proposed that it was “not far-fetched to describe the loans issued by the Rothschild brothers for Prussia and Russia in the aftermath of the Napoleonic Wars as the first true Eurobonds”. Now, in High Financier, he has another go. The final paragraph of Chapter Eight on “The financial roots of European integration” includes the sentence, “The fact that around 70 per cent of all Eurobond issuance and secondary trading is in London is no accident of history, but the result of a conscious effort by Siegmund Warburg and his associates in the 1960s”.

Can Ferguson please make up his mind? 

Even from the quotes provided, he clearly has. He does not claim that Warburg invented the Eurobond market, simply that he fixed it London. This claim may or may not be true, but it is scarcely inconsistent with the previous quotes. Barking up several wrong trees.

Posted by Richard Anderson on August 5, 2010 | Permalink


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