Finance freed in the 1980s by governments from stultifying controls which had shackled them since the 1930s, bankers everywhere went on a lending binge. The results were almost all disastrous.
There was a nasty moment earlier this spring when Andrew Buxton faced his press conference as the new chairman-elect of Barclays. Was it true, he was suddenly asked, that the bank's exposure to the collapsed Canadian property company, Olympia and York, and its huge but possibly doomed development at London's Canary Wharf was of the order of £200 million? Oh, no, nothing like that, he confidently replied. But then, only too obviously to his perspective audience, has face showed that he was having serious second thoughts. Did he really know? his expression eloquently signalled; perhaps he should send someone to check. And 10 minutes later, when his messenger returned, he was reluctantly compelled to confirm the fact that, yes, his questioner had got the figure just about right. It was another small but telling landmark in a year - perhaps more accurately half a decade - when very few of the world's big financial institutions did not, at one time or another, find themselves looking down a vertiginously debt-lined black hole.
It has been an awful period for banks, ever since they started flinging themselves over-enthusiastically into the newly-deregulated and suddenly highly-competitive markets that opened up worldwide in the 1980s. Almost overnight they found themselves freed by governments from the stultifying lending and deposit controls which had shackled (but also protected) them since the dark days of the 1930s. Money was easy and cheap to come by, as recession, triggered by the soaring oil prices of the 1970s, gave way to global boom. Bankers everywhere went on a lending binge, in the naive and in some cases near-suicidal belief that loan growth would automatically generate higher profits.
For a time it seemed to be working. From 1981 to 1989, American banks expanded their lending by an annual 9% (much of it to Third World governments) and happily watched revenues grow at an average 10% a year. Fired by their example, the British and Japanese piled in with equal abandon, and even the more cautious, and still relatively tightly-controlled Swiss, French and Germans decided, rashly, that they could not afford to stay away from the party. In an orgy of financial machismo they invaded each other's markets, poached each other's clients and undercut each other's interest rates. And then, slowly but inexorably, the bubbles started to burst and the roof began to fall in.
Overall the results have been pretty uniformly disastrous. Progressively bad-debt provisions have overtaken and in many cases swamped all hopes of a healthy earnings record. Recently the Wall Street investment bank, Salomon Brothers (which has plenty of troubles of its own to worry about) took time off to calculate the return on all this ill-focused hyper-activity.
From 1986 to 1990, they found that the equity investment in the largest American, British and French banks earned substantially less than if the money had been safely tucked away in those countries' totally risk-free government bonds. Only the Swiss, the Spanish and the Japanese managed to nudge a modest point or two ahead of that not very demanding target, and the Japanese probably only achieved their success by the use of some ingeniously creative accounting.
Most fashionably-popular areas of activity have contributed their share of the debacle: sovereign debt, North American real estate, the ill-judged and enormously expensive rush to join London's Big Bang and the leveraged mega-management buy-out. But inevitably it has been the giant, multi-billion construction projects which have caught the headlines, as their troubles multiplied and started to entrap the institutions which had fought so hard for the "privilege" of funding them.
Below we look in greater detail at two of the more lurid examples, Canary Wharf itself and the Channel Tunnel, where progress has been continually hampered by cost over-runs, re-scheduling sessions, over-optimistic projections and bitter recriminations between the various categories of lenders and creditors.
By contrast, we also analyse one of the outstanding exceptions, EuroDisneyland, which seems, so far, to have been a model of accurate planning and precise financial engineering. Everything from delivery of materials to completion of the Magic Kingdom and now through to the start of interest and capital repayments has been achieved on time and in accordance with budget. It can be done. But it has not been happening very often.
To understand why there have been so many costly muddles (and such a bonanza for lawyers, bankruptcy spcialists, arbitrators, administrators and general trouble-shooters) it is necessary to take a broad view of the international banking industry as the various authorities which, for half a century had been fussing over its welfare, suddenly decided to open the doors of the regulatory cage.
Unfortunately no one thought to enquire whether the pampered birds within that cage could still remember how to fly. With hindsight, the answer would clearly have been "intermittently and with difficulty". And even those techniques which had survived the long years of disuse proved pretty inadequate for survival in a dramatically changed (and still changing) world. Several developments conspired to make the adjustment to these newfound freedoms as difficult as possible.
First, there as unprecedented competition for money, the basic raw material for any financial business. Where the banks had historically been able to rely on cheap, captive deposits - because people found it difficult (and often legally impossible) to shelter their savings anywhere else - there was now a proliferation of money-market funds, investment in short-term securities and attractively high rates of interest being offered.
Coping with this was bound to create many problems, even for the leanest and fittest of institutions. Banks, with their swollen staffs and lavish premises, were peculiarly ill-equipped to take on the army of fleeter-footed rivals who had found ways to carve themselves profitable slices of the finance business. Whether it was building societies offering interest-bearing current accounts, as the huge balances accumulated by the issuers of credit-cards, travellers cheques and hire-purchase finance, or the global drive to persuade corporate borrowers to swap loan finance for commercial paper, they found themselves uncomfortably squeezed. But the solution they chose - reckless expansion into foreign and high-risk markets - proved, by and large, a recipe for disillusion and disaster. The mistakes are still being painfully unwound.
A prime source of those mistakes is that many banks, after all those cosily cossetted years, entered the current tooth-and-claw era without even the most elementary tool-kit for managing the resulting competitive risks. Jean Dermine, at Instead, the Paris-based international business school, has studied this area, and reckons that even the best regarded of European banks "lose" a third of their profits each year, because they still do not understand properly how to balance the asset and liability sides of their accounts.
However, inspection of many of the recent corporate collapses suggests that even more fundamental errors may involved. One is the sheer proliferation of creditors. It seems impossible for a Murdoch or an Nadir or a Brent Walker to discuss a refinancing or an interest deferral without calling together at least 100 lending institutions, and often twice as many. In Robert Maxwell's case the list is still being laboriously compiled. But equally striking is the little they seem to know about each other, or the precise ranking and interaction of their various claims. Small wonder that the real crooks are able to borrow half a dozen times the same collateral, which may or may not actually exist.
Bankers continue to talk loftily about the "special relationships" that are supposed to give them a unique insight into their customers' strengths and weaknesses, and give them plenty of early warning when things are starting to turn sour. But not much of this is very likely to survive, in reality, when the client is a multinational corporation engaged in a multiplicity of schemes scattered across two or three continents, each with its own intricate structure of syndicated loans, senior debt and mezzanine finance. In such circumstances "relationship banking" can easily turn out to be little more than an arrogate illusion, where the actual ownership of the cash and the assets involved has dissolved into a legalistic mist.
The resulting problems would be mind-bending enough even if banks were the only institutions concerned (as they used to be, when governments allowed them to operate what was, in effect, a lending monopoly). But a decade of more or less global deregulation has brought in a host of thrusting competitors, and it is a poor finance director who has not learned how to play them off against each other to his company's advantage. In many cases, the new players have proved a lot sharper and more adept than the old in looking after their own interests, and making sure that they head for the exit in good time.
The big corporate rediscovery of the 1980s was the virtue of bonds, in their almost limitless variety, as an alternative method of large-scale funding. They were, and still are, significantly cheaper than traditional bank lending. Among other reasons, this is because they require no costly in-house specialists to keep track of them: all the owner needs to do it consult the appropriate daily Stock Exchange price list.
Unlike the typical large, lumpy and illiquid loan they come in small, convenient packages, readily tradable on the world's round-the-clock financial markets. Investors love them, as they are so much easier to get into when the economic barometer is set fair, and out of when the signals turn stormy. In fact they like them so much that they are normally prepared to pay an appreciable premium: another way in which the issuer gets more for giving away less. Wall Street and the City of London were not slow to get the message, and soon the financial "rocket-engineers" were falling over each other to invent newer and fancier money-raising devices. Even such bank-dominated strongholds as Tokyo and Frankfurt found themselves forced to follow suit: in fact Japan's finance-hungry firms have started putting the sale of their securities out to tender, to whoever, bank or otherwise, who can promise them the most favourable deal.
In the process the new breed of corporate-finance specialists has successfully mobilised a worldwide army of capital providers, and devised ever more ingenious ways to meet their widely-varying objectives and desires. The group, by its nature, is large, fragmented and diverse. But there is one common characteristic uniting its members: their interest is purely in the punctuality of the interest and dividend payments, and the strength of the underlying assets. Once these falter, it takes just one phone-call and the flick of an electronic button to cut the losses and get out.
Such actions have precipitated many of the recent mega-slides into liquidation and receivership. But it is almost certainly wrong - as some bankers, and less forgivably, politicians and government regulators have been doing - to blame the gadget for the troubles which have befallen some of its more aggressive users. The truth is that there woes stem, not from the ways they chose to borrow money but the excessive amounts of it which their assorted lenders allowed them to acquire, and the unprobed secrecy which enabled them to conceal - until the roof fell in - just how deeply they were in hock.
This multi-layered opacity is particularly evident in the case of Olympia and York (see box on opposite page", but there are dozens if not hundreds of other equally pertinent examples. The blithe ignorance with which eight-and nine-figure sums are dispatched in the general direction of a plausible-sounding proposition continues to amaze. But then it is only very recently, and after much anguished experience, that the world's bankers have relearned the lesson that it sometimes pays to say "No".
Unfortunately, there is often an undesirable obverse to that. When the warning bells finally start ringing, and the once solid-looking floor threatens to disintegrate beneath the lenders' feet, there is a strong temptation to call "Halt" before any more of the assets vanish into the cellar. But sometimes such reactions smack more of panic than rational analysis.
Liquidation, administration, Chapter 11 bankruptcy and the many other devices available for saving something from the wreck all have their valuable uses. On some occasions, though, they are unsheathed too hastily, or put into the hands of "experts in insolvency" who are nothing like equally expert in the intricacies of civil engineering, or international aviation, or whatever line of business it is in which the latest victim has burned his fingers. Overhasty progress to the corporate knackers' yard can end up with the baby being thrown out with the bathwater.
The best policy, of course, is never to get into such dire straits in the first place, and for that the EuroDisney management probably offers the most valuable blueprint. There is the classic example of deciding exactly what you intend to do, work out precisely the amount and type of finance required for each phase, settle, unequivocally, the appropriate servicing and repayment timetable, and above all, stick to the budget, even when it means an eyeball-to-eyeball confrontation with the builders and suppliers. That way, everyone knows where they stand, and the contracts - even for the bankers - are as good as money in the bank.
If it works like that for the second-largest construction project this side of the Atlantic, it is perhaps a pity that things are so different for Sir Alastair Morton and the embattled chairman of the Trans-Manche Link consortium, who are collectively trying to bring in the Channel Tunnel, which is the largest of all. But unhappily this appears to be yet another area of human activity where the Disney contribution is unique.
For reprints of this article, contact Annie Oakley (071) 413 4336.