Perhaps the most famous (and with the recent scandals, infamous) insurance institution is Lloyd’s of London developed from a coffee house opened by one Edward Lloyd just before 1687. Gentlemen from the City used to meet there and discuss insurance over their beverages. By the middle of the eighteenth century they decided that they might as well make it their main place of business.
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Corporate mergers and acquisitions have been more important even than new issues in keeping the merchant banks’ names in the public eye. Over the past few years, such deals have become even more acrimonious with charge and counter-charge flying back and forth in national newspapers. The growing importance of American banks in this field is increasing the use of the rather less ‘gentlemanly’ tactics used in US takeovers.
Many merchant banks were begun by immigrants, refugees or Jews, shut out of the rather stuffy world of the clearing banks. The wheeling and dealing involved appealed to the more adventurous spirits. However, after the early inspiration of a maverick leader, the merchant banks quickly became absorbed into the mainstream establishment .there are a lot of very blue-blooded merchant bankers.
The high street banks are household names. Although most people have heard of the term ‘merchant bank’, few can name specific institutions such as Morgan Grenfell or S. G. Warburg. In general, the merchant banks have a bad image and are associated with asset stripping and hard-hearted capitalism in many minds. However, they also offer for some the suggestion of adventure and romance in the financial system.
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Suppose that a country has only one bank, which finds that it needs to keep 20 per cent of its deposits in the form of cash. It receives an extra ?200 worth of cash deposits. The bank the buys ?160 of British Telecom shares, leaving ?40 cash free to meet any claims from depositors. The person from whom it bought the shares now has ?160 in cash, which is deposited with the bank. So the bank has ?360 in deposits (the original ?200 plus the new deposit of ?160), of which it needs to keep only ?72 (20 per cent) in the form of cash. The bank is therefore able to increase its total investment to ?288 (?360 – ?72) and can buy a further ?128 of BT shares. Once again the person from whom it buys the shares will receive cash, depositing this with the bank. This process will continue until the bank has deposits of ?1,000, of which ?200 is held in the form of cash. The bank’s balance sheet will then look like this:
The earliest issues of money that was not backed by gold were known as fiduciary issues. Money is now totally divorced from its precious metal origins. It will never regress. Imagine the political problems involved in basing a monetary system on a commodity whose biggest producers were South Africa and the Soviet Union.
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Primitive societies did not have money, since they did not trade. When trade began it was under a barter system. Goats might be exchanged for corn, or sheep for axes. As society became more complex, barter grew inadequate as a trading system. Goats might be acceptable as payment to one man but not to another, who might prefer sheep or cattle. Even then it was easy to dispute the question of how many sheep were worth a sack of corn.
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Stags are one species of the financial menagerie which commentators use to describe different types of investor. Essentially, stags are speculators who believe that a new issue has been priced too low, and who therefore attempt to purchase as many shares as possible. If they have correctly assessed that the issue is underpriced, the shares will immediately rise in value when the issue is made. The stags can then resell the shares and make a quick profit. A good example of a successful stag deal was the British Telecom issue in November 1984. Read the rest of this entry »
Once the underwriting is arranged, a company will issue a prospectus setting out in very detailed form its structure, trading record and prospects. The prospectus must appear in at least two daily newspapers. Investors are then invited to apply for shares by a certain day. On the day that applications close, the sponsor counts up all the offers and then announces whether the issue is over- or undersubscribed. If oversubscribed, this means that investors have applied for more shares than there are on offer; either their applications will be scaled down or there will be a ballot, in which only a few will get shares. If the issue is undersubscribed, the underwriters will have to buy the shares at the offer price.
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New issues are one of the most exciting parts of the stock market. Not only do they allow investors to spot the successes of the future at a relatively early stage, they are also a direct means of providing capital for industry. Obviously, the daily buying and selling of shares – known as the secondary market – is extremely important. Without the knowledge that their shares could easily be sold, investors would not subscribe for new issues. But it is new issues – and the subsequent capital – raising exercises for expansions and acquisitions – which provide the main economic argument for The Stock Exchange’s existence.
We have already proposed a general principle of finance – that lesser liquidity demands greater reward. That being the case, longer-term instruments should always bear a higher interest rate than short-term ones. This is not always true. Long-term rates can be the same as, or lower than, those of short-term instruments.
Having understood the difference between simple and compound interest and the importance of yields, we can now look at the factors that determine an interest rate. In fact, it is more correct to talk of interest rates. At any one time a host of different rates are charged throughout the economy. So it is important to distinguish the determinants of specific interest rates are well as those which affect the general level of rates in the economy. Read the rest of this entry »
Those who buy shares will eventually receive a share certificate from the company. Dividends will normally be paid twice a year, at six-monthly intervals. However, it is wise to remember that if a company is in trouble it will declare only a small dividend or sometimes none at all. Read the rest of this entry »
It is possible to give a stockbroker a discretionary brief in which case he will handle all the buy and sell decisions for the investor. Again, this is a service worth using only if the investment is large. Read the rest of this entry »
The yield was only 2.3 per cent, compared with 6 per cent for ICI and 4.6 per cent for the property sector as a whole, but the P/E ratio of 15.7 compared well with the property sector average of 22.9. Read the rest of this entry »
The latter figure is in itself calculated by dividing the company’s profits by the total number of shares. (A full explanation of the significance of the P/E ratio appears in next Chapter ) Read the rest of this entry »
Money on its own is a very useful but, in the long run, unprofitable possession. That ?200 stashed under the mattress will in five years’ time still be only ?200. In the meantime inflation will have eroded its purchasing power, so that it may be able to purchase only half as many goods as it could five years before. Had the money been deposited with a building society, however, interest would have been added every six months. At 10 per cent a year the original cash deposit would have increased to ?322.10 at the end of the five-year period. Read the rest of this entry »
The next column, ‘Div net’, is the ‘C’vr’ (cover) column. This figure is calculated by dividing the size of a company’s profits by the dividend. If the company had made ?100 million in profits and paid out ?40 million in dividends, the ‘C’vr’ figure would read 2.5, since the company had enough profits to cover its dividend tow and a half times. Read the rest of this entry »
In the late 1970s and early 1980s, Lloyd’s was hit by a series of scandals which caused much adverse press and parliamentary comment. The first headline case was the Savonita dispute which concerned the loss through fire of a number of cars aboard ship. The Lloyd’s underwriters felt the circumstances were suspicious and refused payment. That was followed by news of heavy losses on computer leasing insurance and a loss to the Sasse syndicate of ?21.5 million which seemed to have been caused by the insurance of some dubious properties in the USA. The names involved protested strongly and the Lloyd’s committee eventually agreed to cover part of the losses, although the names were still expected to find the balance of ?6.25 million.
British governments have historically spent more than their incomes and, like anyone else, they have to borrow to cover the difference. They borrow, as we saw in Chapter 5, in the form of long-dated securities called gilts and short-dated securities called Treasury bills. Money is also borrowed direct from the public through the various national savings schemes on offer. The government can give itself a built-in advantage in the market for personal savings because it can allow savers to escape tax. It does so on some schemes. However, the loss of tax income increases the government’s cost of borrowing. As a result, it tries to maintain a balance between the amount it borrows in the form of savings schemes, bills and gilts.
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