......The distinction between transactions banking and relationship banking was already well understood in the 1960s. Warburg defined the former as “channelling big sums of money from certain quarters which had a surplus to certain other quarters where there was a scarcity of funds ... trading in money and of moving funds”. Relationship banking, by contrast, meant knowing the client in deep psychological detail. It was not about piling the securities high and selling them dear, it was about advising owners and managers.
The striking thing about this formulation is that Warburg regarded transactions banking as a thing of the past. From his perspective, looking back to his early career in Hamburg, New York and Berlin in the 1920s, transactions banking – the preference for quantity over quality – had been one of the root causes of the Wall Street Crash and the Great Depression. The lesson of history, in his eyes, was that bankers should engage in advising firms they got to know intimately, rather than in speculation.
.......Beginning with his triumph in the hostile takeover of British Aluminium in 1958-1959, Warburg was renowned for his skill in boardroom battles, the key to which was his keen psychological understanding of both his own clients and the other side. Yet the basis for all that Warburg did was a set of five haute banque (elite banking) principles that he referred to in a 1953 memorandum directed at the US investment bank Kuhn, Loeb & Co (which he believed was deficient in all five). He wrote that “the important elements of a first-class private banking business” were:
1. Moral standing
2. Reputation for efficiency and high quality brain work
3. Connections
4. Capital funds
5. Personnel and organisation
.......Relationships were not just with clients. There were also “connections” to be cultivated. “Most of the substantial transactions which have been done by us are the result of the cultivation of contacts over very many years,” Warburg reminded his fellow directors in a typically admonitory memorandum from 1964. “It is, of course, important that the technical details of a transaction are dealt with in the most thorough and painstaking manner possible, but this should not make us forget that ... this would be fruitless without human contact with the client in question ... In our kind of business, the continuity of valuable connections overrides in importance the conclusion of any specific transactions.” It would be hard to find a better expression of the theory of relationship banking.
Relationships, then, were at the core of the haute banque style. “Our ambition should not be ... to do quantity-wise as much or even more business than our chief competitors,” wrote Warburg in 1968. “On the contrary, our emphasis should be on making SGW & Co an elite house, excelling in the service it gives to its industrial clients rather than on doing business on a mass-production basis.”
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