The Barlow Clowes Affair. By Lawrence Lever. Macmillan; 278pp; £17.50. Review by Diana Wright.
Barlow Clowes was the biggest financial crash in what some say was the greediest and most cash-obsessed decade of the century: the 1980s. For almost 15 years, Peter Clowes ran a business which ostensibly offered a gilts management service, and managed to attract hundreds of millions of pounds from private investors. Ironically, his big sales spiel was not so much about high rewards as about low risk: "government backed", "guaranteed", "safe" and "secure" were the buzz words of his advertisements.
Thousands, many retired teachers and civil servants careful, cautious, types swallowed the bait. In 1988, the blow fell and his company was closed down overnight. The liquidators found something over £110 million missing, spent, it seemed, on the most cliched of status symbols - fast cars, yachts, executive jets, a French chateau. Three years later, Clowes, after a seven month trial, was convicted on 18 counts of making misleading statements and of theft.
Despite Lawrence Lever's meticulous and compelling account, one is left with an overriding feeling of sheer disbelief. How did Clowes manage to get away with it for so long, when "everyone" knew there was something funny going on, when "everyone" was nudging and whispering, writing notes to the Bank of England or telephoning Department of Trade officials with doubts, theories, warnings?
Lever compares the affair to Victorian novel: it had "the missed opportunities of a Thomas Hardy plot". Clowes, with a combination of astonishing luck, barefaced effrontery and downright lies, walked through the yawning mouths of the regulators, always evading their teeth. His career had begun with a brief sojourn at Bernie Cornfields IOS, as international financial company which collapsed dramatically in the early 1970s, leading to Cornfield's arrest and conviction for fraud. That does not in itself amount to a disqualification; I can think of at least two managing directors of utterly respectable unit trust and life companies today who wouldn't thank me for mentioning that they, too, had started life in IOS.
Clowes soon decided to go it alone. Barlow Clowes started in a small way in 1973, above a shop in the suburbs of Manchester. (Elizabeth Barlow, his first partner, was a more experienced life assurance salesperson and introduced him to the business, but rapidly faded from the scene.). Within a couple of years the firm was specialising in managing gilts and, by the late 1970s, had opened an office in Jersey, outside the UK tax area. Now the scene was set for the systematic swindling of investors, which went on for nearly 10 years before the authorities were persuaded to act.
In those days "bondwashing" was a useful device, allowing investors to get a more-or-less guaranteed income from their investments, which were treated as capital gains and thus taxed more leniently. Like many a useful tax dodge before it, it was quite legal and not particularly adventurous. However, the authorities belatedly woke up to the revenue they were losing, and acted to stop the practice. First, in 1985, it was restricted - only capital could be "washed" - and a year or so later it was stopped altogether. Holders of gilts could still go through the motions, but the results would be taxed as income rather than gains. By law and by logic, Barlow Clowes should have been finished. Yet it adapted and moved on. Clowes had perfected his tale: his service could still provide super returns from gilts, by active management, by stock-lending, by any number of devices which only required economies of scale and a knowledgeable operator in order to succeed.
I well remember sitting through a lunch while being subjected to a lecture on the Clowes system. He had an answer for every question and the closer the questioning the greater the array of apparent technicalities he employed in his reply. Like many journalists, I came away unconvinced, determined not to write about the company or its services, or to give it any publicity. That didn't occur to me, nor to a whole army of officials and professionals, was that Clowes was a complete and utter liar.
In the days before the 1986 Financial Services Act, such regulation as there was of financial companies like Barlow Clowes was carried out by the Department of Trade. Lever's account of the DTI's dealing with Clowes makes fascinating reading. Amazingly, there were in the early 1980s precisely four civil servants in the licensing section, plus a back-up solicitor. They were responsible for overseeing at least 1,500 licensed companies and also new entrants.
The question of a licence for Clowes surfaced in 1975, but nothing was done. In 1981 it arose again; again its wasn't followed up. At the end of 1984, Clowes eventually applied for a licence and, according to Lever, in the summer of 1985 the Department was "hours away" from refusing his application. Yet it drew back. Time after time, it seems, memos were written by civil servants to other civil servants saying "If we're not careful, this could become a scandal". What emerged was a ludicrous decision that it was better to licence Clowes than not to - because the Department would be better able to regulate him if he were within the fold.
Never before has a scandal on this scale been so widely canvassed, so thoroughly feared, and yet allowed to happen. The Barlow Clowes Affair is an excellent book. It's almost as exciting as one of those complicated political thrillers - and guaranteed to send shivers down your spine. Those involved in financial services should read it. Now.
Diana Wright is personal finance editor of The Sunday Times.