High Financier: The Lives and Time of Siegmund Warburg, by Niall Ferguson, Allen Lane RRP£30, 584 pagesIn late 1994, when I worked in Morgan Stanley’s New York headquarters, the London-based merchant bank SG Warburg and Co opened merger talks with our firm. Its founder Siegmund George Warburg had died 12 years earlier, and his legacy of cachet, caution and control was long gone. Bond traders and hedge funds had eaten away at the Warburg family’s financial dynasty, leaving SG Warburg unmoored, shrinking and barely profitable. The marriage proposal to Morgan Stanley was a desperate last act.
On the trading floor, we jeered at the idea of a merger. Derivatives salesmen don’t read history, and no one could understand what a modern investment bank would gain from buying a stodgy old British firm. Within a week, the deal was off.
This illuminating and important new biography by Niall Ferguson (an FT contributing editor) of the man who built and defined SG Warburg suggests that Siegmund Warburg would also have opposed the deal. Warburg, a leading financial adviser and public intellectual, viewed Americans as more gamblers than bankers. He had no need for derivatives or structured finance. Instead, he saw banking as a means to support business and political activity. He cautioned against financial innovation. Indeed, this book’s main lesson is that, if Warburg’s conservative approach had survived, his bank and others would have shunned consolidation during the 1990s, avoided excess risk and might even have dodged the recent crisis.
High Financier illustrates the sharp contrast between the bankers of yesterday (risk-averse advisers) and today (aggressive risk-seeking traders). Warburg’s defining quality was that he had not a life, but “lives” (political adviser, scholar of German literature, sociologist, handwriting analyst). Today, his eclectic interests would be a liability. Successful traders don’t have “lives”.
Warburg’s own words form the backbone of the book, taken from more than 10,000 previously unavailable letters and diary entries. They reveal a conflicted dual citizen: a German Jew exiled by war to England but reluctant to renounce his roots; a man who first envisaged Germany’s national revolution as an opportunity for German Jews but later dismissed those hopes as “foolish and complacent”.
Although Ferguson begins the book by briefly covering the Warburg family’s success in Germany, he uses that history primarily as a mirror to reflect Siegmund Warburg’s disgust at “all of the bad characteristics of a decadent dynasty”. It is apparent that Siegmund was driven largely by a desire not to repeat the errors of his uncle Max Warburg, who ran much of the family’s business in Hamburg. Siegmund lamented how: “Max struggled painfully to retain the leadership of the firm for himself and his son, without noticing that it had long ago slipped away from him.”
The best section of the book is on Warburg’s central role in engineering Britain’s first hostile takeover, of the British Aluminium Company in the mid-1950s. Warburg frequently met officials from the Bank of England to persuade them that foreign purchases of British Aluminium shares were not a threat. Simultaneously, he worked with German-Jewish bankers in New York to acquire a controlling stake in the company and then overthrew its board. Here, Warburg’s ability to play each side is as sharp as Ferguson’s zippy prose.
Warburg emerges as ascetic and troubled, with what some of his favourite German writers might have diagnosed as sociopathic tendencies. He subjected his own colleagues to handwriting analysis. He called one employee at home at Christmas to admonish him about a missing comma. Daily meetings began promptly at 9.15am, with two back-to-back lunches each day, so staff could meet twice as many clients.
Ferguson concludes that Warburg was a “monk” who “must be judged and understood as much by what he read as by what he did”. What he read? Yes, unfortunately, there is little here of the blood and guts sustaining many popular biographies. Warburg had few friends and rarely entertained: “He did not hunt, shoot or fish. He had no yacht, nor any country estate ... He had no interest in sports or in cars of any sort.” He played golf – once. Even his marriage was businesslike, and there is little discussion of his children. The most salacious detail in the book is a “small dose” of Valium, which Warburg described as having a “wonderful effect”.
Given the staid nature of this material, as Ferguson admits, it’s not surprising that “many quite well-informed people have never even heard of Siegmund Warburg”. But Ferguson’s higher purpose is to introduce not the man, but his ideas. Warburg cited five pillars supporting his pioneering advances: moral standing; reputation for efficiency and high quality brain work; connections; capital funds; and personnel and organisation. Warburg’s bank persevered by sustaining its morals and reputation. Even as the UK economy failed during the 1970s, and Warburg’s Zionist efforts put his bank on an Arab blacklist, the firm stood by its principles and thrived. Right after Warburg’s death, the equity capital of SG Warburg exceeded that of Morgan Stanley.
This greatness was unsustainable and Warburg knew it. Ominously, he wrote that the “hardest job for a good boss is to find a suitable successor”. He failed to perform this last, hardest job. When negotiations between SG Warburg and Morgan Stanley collapsed in 1994, Swiss Bank Corporation swallowed Warburg within months, only to be swallowed in turn by UBS three years later. During the following decade, UBS and other major banks abandoned Warburg’s approach, making more money than he would have deemed proper and repeatedly bringing the financial system to the brink of collapse.
As bankers consider how to reform their business, they would be well advised to follow Warburg’s five principles, and to learn the forgotten lessons of his “lives”. Perhaps, just as Ferguson judges Warburg, bankers today should be judged, not by what they do or say, but by what they read. If so, they would be well advised to start with this excellent book.
Frank Partnoy is a law professor at the University of San Diego and author of ‘The Match King’ (Profile Business)