This article was written by John Wolff. All views and opinions are strictly his own.
Recent articles by Anthony Lipmann on the Lehmann Trilogy and Clem Danin on life on the floor of the LME in the sixties have reminded me how the corporate structure, way of management, and size of City companies has changed.
Anyone employed in the City since the nineteen seventies will most likely have been one of several hundred employees in a public company with limited liability and quite possibly with overseas owners. However, if you worked in the City between 1920 and about 1960, then unless you worked for a clearing bank or large insurance/pension company, none of the above would have applied.
The City then was made up of myriad small, privately owned companies (with about five to forty employees) in specialist businesses, working under a partnership structure. Their businesses were stockbroking and jobbing, merchant banking, insurance broking and underwriting, accountancy, international agency, the law, shipping, and trading and broking in bullion, metals, and soft commodities.
These companies were owned and managed by partners rather than shareholders and directors. Partners had no salary or guaranteed income.
All profits, or losses, were shared between them in an agreed proportion. A gradual realignment of each partner’s share would evolve over time. As a senior partner retired, the share of those creating most of the profits would increase, and up and coming employees would be offered a partnership.
As the profits could not be known in advance, the partners were allowed a monthly draw, but this was set at a modest figure in case there was a bad year ahead. Their final entitlement would be known only after the accounts were audited. Even then, this could only be withdrawn over time, so as not to denude the ongoing business of working capital.
This would also apply if they died. For example, when Rudolf Wolff died unexpectedly at sixty-one, much of his estate was tied up and needed to finance the company. Anticipating that this might happen, his will stipulated that his money could remain in the company earning 3% interest, and was to be repaid over three years, thereby enabling the remaining partners gradually to refinance the company from future profits.
In a bonanza year a partner’s earnings could be very high, but the quid pro quo was that in a loss making year they earned nothing and possibly would have to inject funds into the company to keep it going. My grandfather used to say that in a seven year cycle there would be five average years, one good year, and one terrible one. The problem was that you never knew what in order they were coming. The RW partners annual income between the wars bears this out, including loss making years in the crash of 1929/31.
The ultimate risk was that without limited liability each partner was jointly and severally liable down to their last pair of socks if the company went under.
This had a strong influence on the way the companies were managed. There was more emphasis on reputation than financials when choosing with whom you dealt. My father was taught a lesson in this early in his career. He thought he had secured a new potentially very active and wealthy client, only for his uncle to reject the business. His uncle said "it was not a matter of of how much the client can afford to lose, so much as how much we could afford to lose.” What he realised was that in the unlikely event of the client going bust it might be for an amount much larger than the net worth of the partners.
I wish we had remembered that when dealing for the International Tin Council.
I experienced working under a partnership system when I joined Rudolf Wolff in 1958, but partnership structure was becoming less attractive. The expansion in business right across the City as the world recovered from World War Two led to a requirement for more capital and unlimited liability became less and less attractive.
On the LME itself, the increases in global production and consumption of our metals, more international companies being given authority to hedge by their Governments, and the creation of the first LME delivery points outside the UK (in the light of exchange controls at the time an extraordinarily clever and forward thinking decision) caused a great expansion in turnover. More capital to underwrite this business became necessary, leading to ring dealers being acquired by larger companies. Many were international producers from Germany, Holland, Belgium, France, Canada and Japan, such as SGM, Metallgesellschaft, Billiton, and Noranda Mines.
But in 1971 there came an event whose significance was not really recognised at the time, which within twenty years completely changed the world of financial trading; not only what was traded, but who traded it, and who owned the major players.
Read the second half of this article here next week!