The House of Rothschild

by Ferguson, Niall

  Despite the structural differences between Banque Rothschild and N. M. Rothschild, the process of restoring the links between the Paris and London Rothschilds began as early as 1962, when the French house invested £600,000 in a new company chaired by Guy and obviously intended to promote Rothschild reunion: Rothschilds Second Continuation. There followed a succession of joint ventures. The Paris house took a 60 per cent stake in Five Arrows, a holding company set up to manage the English Rothschilds’ mining interests in Canada. The London house then joined Warburgs and two other firms as members of the French Rothschilds’ property syndicate Cogifon. The following year both houses collaborated in setting up the European Property Company and in 1968 Guy de Rothschild became a partner at N. M. Rothschild, while Evelyn was appointed a director of Banque Rothschild. An important development in this context was the transformation of the New York affiliate Amsterdam Overseas into New Court Securities, the shareholders of which included not only Banque Rothschild but also Edmond’s Geneva-based Banque Privée. When the National Provincial scaled down its involvement in 1969 (following its absorption into the National Westminster Bank), a much larger entity was created along similar lines: Rothschild Intercontinental Bank (RIB), which brought together not only the London house (with a 28 per cent share) and the Paris Banque Rothschild (with 6.5 per cent), but also Edmond’s Banque Privée (2.5 per cent), as well as Pierson, Heldring & Pierson and two continental firms with historical links to the Rothschilds: Banque Lambert of Brussels and Sal. Oppenheim jnr of Cologne.

  RIB was conceived as part of a wider global strategy. In 1971 it was brought in to float a $100 million loan to Mexico. Efforts were also made to revive Rothschild connections in Asia. In 1970, for example, N. M. Rothschild set up Tokyo Capital Holdings with Merrill Lynch and Nomura and floated loans for the Philippines and South Korea. In 1975, however, RIB was sold to the American financial giant Amex International (for £13 million). The global strategy appeared to falter.

  One possible explanation for this lies in the changed economic circumstances of the early 1970s, which were characterised by inflationary problems in Western economies, exacerbated by the Organisation of Petroleum Exporting Countries’ decision to quadruple oil prices in November 1973. The oil crisis had its advantages for bankers in that the oil exporters deposited a large proportion of their vastly increased incomes with Western banks, which were then able to “recycle” the money by lending on to the struggling oil importers. However, the Rothschilds were at something of a disadvantage in this business. In 1963, the Arab League—which included a number of key OPEC members—had formally blacklisted all Rothschild banks because of the family’s links with the state of Israel. This ban was repeated in 1975. The identification of the Rothschilds with Israel meant that they could not play a prominent role in recycling Arab “petrodollars” (though it was possible for them to be indirectly involved).

  In many ways, the Arab League blacklist reflects the persistence of the Rothschild myth. In fact—as in the past—Zionist sentiment was not uniformly strong in all branches of the family. Jimmy never ceased to hope for reconciliation between Britain and the Israeli politicians who had overthrown the Palestinian mandate (proposing that Israel be admitted to the Commonwealth in 1955) and left £6 million in his will to finance a new building for the Israeli parliament and the Weizmann Scientific Institute in Tel Aviv, while his widow Dorothy set up the Yad Hanadiv educational foundation, which Jacob and others continue to support. One Rothschild—Guy’s sister Bethsabée—actually settled in Israel. Like that of his grandfather and namesake, Edmond’s commitment to the new state was especially strong. He visited Israel in 1958 to discuss the financing of an oil pipeline from the Red Sea and even flew to Jerusalem during the 1967 Six Day War to make public his support of the Israeli government. By comparison, the London Rothschilds were more discreet, though they were reported to have donated to the Jewish Palestine Appeal in 1967.

  On the other hand, a growing number of Rothschilds—including for the first time male members of the family—were now marrying out of the faith. Guy’s first wife had been in the Rothschild tradition: Alix Schey von Koromla was a Goldschmidt-Rothschild on her mother’s side (so his third cousin once removed) and both were active in the French Jewish community before the war. In 1957, however, he divorced, remarrying Marie-Hélène van Zuylen de Nyevelt—a slightly less distant cousin (her grandmother Hélène had been the daughter of James’s son Salomon), but a Catholic. He resigned the presidency of the Jewish Consistory soon after, though he remained president of the Fonds Social Juif Unifié until 1982. Other members of the family in France and England subsequently followed his example in marrying non-Jews, though when Edmond married a Catholic (Nadine Lhôpitalier) she converted to Judaism, as did Maria-Béatrice Caracciolo di Forino when she married Eric in 1983. When Guy’s son David also married a Catholic, Olimpia Aldobrandini, they compromised: their son Alexandre has been brought up as a Jew, but not their three daughters. He himself sees no contradiction between marrying out of the faith and devoting a substantial proportion of his time to Jewish institutions like the Joint Campaign for France and Israel and the French Foundation for Judaism. But in this respect at least the power of familial tradition was undoubtedly on the wane.

  The N M. Rothschild Group

  By the end of the 1970s, N. M. Rothschild and Banque Rothschild were approaching very different crossroads. In Britain the election of Margaret Thatcher’s government, with its strong commitment to market deregulation, heralded profound changes in the City of London, notably the abolition of exchange controls in 1979 and the ending of restrictive practices on the stock exchange in 1986 (the so-called “Big Bang”). The question was how best to respond to these changes. To Jacob, the success of Rothschild offshoots like RIT and RIB appeared to point towards an altogether new kind of bank, bearing little resemblance to the firm founded by Nathan. In his eyes, traditional London merchant banks were now too small to hold their own. On the one hand, he later argued, there were giants like Amex which made even the biggest UK clearing banks seem small. On the other were the City merchant banks: Kleinwort Benson (with market capitalisation of £235 million), Hill Samuel, Hambros and Schröders. He might have added—near the bottom of his list—N. M. Rothschild & Sons Limited. For when Jacob sold his shares in the bank for £6.6 million, that implied a total valuation of just £60 million. (The annual report suggested an even smaller figure of £40 million.) By this time, RIT had effectively outgrown its parent: it was valued at around £80 million.

  Ever since the mid-1970s, Jacob had wanted to merge N. M. Rothschild with another, younger merchant bank: S. G. Warburg (the founder of which had served part of his banking apprenticeship at New Court in the 1920s).5 This Rothschild-Warburg combination would then have expanded to offer the widest possible range of financial services. But the plan—codenamed “War and Peace”—was opposed not only by Evelyn but also by Jacob’s own father Victor. An alternative strategy (known to insiders as “Pandora”) was to merge N. M. Rothschild and RIT, so that the original bank ceased to be a private, family-controlled operation. This too foundered in the face of Evelyn’s and Victor’s opposition. For them, the preservation of family control took precedence over expansion.

  All this helps to explain Jacob’s departure from New Court in 1980. Given that RIT still held 11.4 per cent of Rothschilds Continuation (now valued at £57 million) compared with N. M. Rothschild’s stake of 8.2 per cent, it was bound to be a painful divorce; there was also the need to distinguish between two now separate entities both bearing the name Rothschild. After long and difficult discussions, it was agreed that a new business called J. Rothschild & Company would manage the assets of RIT (henceforth to be known only by its acronym). It was a serious rift within the English branch of the family.

  What was the alternative strategy envisaged by Evelyn, who had taken over the chairmanship of N. M. Rothschild from Victor in June 1976? Some observers doubted whether there was one; indeed, it
was suggested by some that Jacob’s departure would prove a fatal blow to N. M. Rothschild. Yet a strategy there was; one which, in essence, involved playing to the bank’s traditional strengths.

  From its very inception, N. M. Rothschild had specialised in meeting the financial needs of governments, though it had been primarily associated with government loans; only occasionally (as when state railways were sold off) had it been involved in sales of government assets. In the 1980s, however, this was to become one of the bank’s most important areas of activity, as the Thatcher government—eager to “roll back” state involvement in the economy and to reward Conservative supporters with reductions in direct taxation—discovered the fiscal benefits of what became known as privatisation.

  The origins of the Rothschilds’ involvement in privatisation can in fact be traced back to the period before Margaret Thatcher’s premiership. Though his contribution was only indirect, Victor’s role as the head of Edward Heath’s Central Policy Review Staff (or “think tank”) between 1970 and 1973 brought the Rothschilds back into the kind of direct communication with politicians which had been integral to their success in the nineteenth century. This may partly explain why in July 1971 the Heath government entrusted N. M. Rothschild with the sale of the Industrial Reorganisation Corporation. A year later came the more difficult task of selling the bankrupt Rolls Royce Motors on behalf of the receiver. Having failed to secure any offer above £35 million, the bank took the risk of offering the shares to the public for £38.4 million. Amid threats of a “work-in” by employees and renational isation by the Labour spokesman Tony Benn, the flotation proved less than easy; but valuable lessons were learnt. The following years saw a proliferation of contacts between N. M. Rothschild and the political world. In August 1976 Miles Emley was seconded from the bank to advise none other than Tony Benn as the Department of Energy began to sell its stakes in the North Sea oil fields, beginning with a tranche of BP shares the following year. Less than twelve months later, the former Minister of Agriculture and later Lord President Christopher Soames joined the bank as a non-executive director, while Sir Claus Moser left the Government Statistical Service to become vice-chairman in 1978. Such recruits from the public sector brought expertise and “contacts” to New Court which were to be useful as the volume of government business grew.6

  The traffic also moved in the opposite direction, from New Court to the public sector and government. Shortly after the Thatcher government came to power in 1979, executive director Peter Byrom was appointed by Keith Joseph to the board of British Shipbuilders. Of particular importance was the role of John Redwood, who had joined N. M. Rothschild from All Souls, and who laid much of the political foundation for privatisation in his book Public Enterprise in Crisis, published in 1980. In August 1983 Redwood quit the N. M. Rothschild Equity Research Team to join Mrs Thatcher’s Downing Street Policy Unit, returning three years later as director of overseas privatisation. He and Michael Richardson, who joined N. M. Rothschild from the stockbrokers Cazenove in 1981, can (and do) claim much of the credit for turning the idea of privatisation into a political reality, though the firm’s involvement predated their arrival.

  It would nevertheless be misleading to claim that N. M. Rothschild led the way in the Thatcher government’s asset sales. In fact, the bank was passed over when the new government sold a further tranche of BP shares in October 1979 and again when it sold its stake in Cable & Wireless. However, N. M. Rothschild did manage the sale of the National Electricity Board’s shares in Ferranti in July 1980; and, more important, it also handled the first true privatisation in February 1982 when the high technology company Amersham International was sold—the first time a wholly government-owned concern had been floated on the stock market. Partly for this reason, the flotation aroused political controversy. Geoffrey Howe’s decision as Chancellor was to sell the shares at a fixed price of 142 pence each, but when the issue was oversubscribed more than twenty-three times, pushing the share price up to 193 pence, the Labour party launched an ill-judged attack. Calling for a public enquiry, the Shadow Chancellor Roy Hattersley unwisely implied that there was more than a coincidental “correlation between contribution to the Tory party and the receipt of business from Government.” He was obliged to eat his words when it was confirmed that N. M. Rothschild had made no contribution to the Conservatives. Such attacks continued when the BNOC (Britoil) sale went ahead in 1982, despite the fact that this time the shares were offered by tender with a minimum price. It did not go unnoticed that the head of Britoil was a former N. M. Rothschild director (Philip Shelbourne), though the bank was only one of six underwriters, and it was Warburgs who advised the Energy Secretary Nigel Lawson. A year later, in December 1983, N. M. Rothschild acquired a 29.9 per cent stake in the stock exchange jobber Smith Brothers, paving the way for the creation of a jointly owned stockbroker, Smith New Court.7 Jacob, it seemed, was not the only Rothschild able to prepare for Big Bang.

  Despite being passed over for the British Telecom contract, N. M. Rothschild scored its biggest success in 1985-6 when it won the “beauty contest” to advise British Gas on its £6 billion sell-off. This was to be perhaps the most effective of all the Conservative government’s attempts to promote its ideal of a “share-owning democracy,” personified by the advertisers’ ubiquitous “Sid.” By guaranteeing a minimum £250 shares to all applicants and limiting overseas and institutional investors to just 35 per cent of the total, it was hoped to avoid the persistent problem of oversubscription. When the flotation went ahead on December 3, a total of four million investors applied for £5.6 billion worth of shares. A remarkable feature of the operation was the exceptionally low underwriting commissions charged on domestic purchases by N. M. Rothschild and the other banks involved, which ranged from 0.25 per cent on the first £400 million to just 0.075 per cent on £2.5 billion. It was widely believed that the banks had undercharged the government by accepting such low rates; though as a bid for privatisation market-share it was probably astute.

  The risks involved in such massive operations should not be underestimated. N. M. Rothschild was subsequently criticised by the National Audit Office for advising the government to sell the Royal Ordnance to British Aerospace for £190 million in 1985, on the ground that it was worth more. But the experience of the final BP sale two years later showed the extreme difficulty of such valuations. In April 1987 N. M. Rothschild had won the contract to handle the sale of the government’s remaining 31.5 per cent stake in BP (worth around £5.7 billion) and to issue £1.5 billion new shares. The plan was to offer most of the shares to ordinary UK investors at a fixed price of 120 pence, auctioning the remainder to institutions and overseas buyers. By September there was confident talk of 20 per cent gains for investors and minimal underwriting charges for the government. Then, on the very eve of the sale, came the stock market crash of October 19, 1987. The bank argued for calling off the sale, rightly anticipating that the share price would go into free-fall. But the Chancellor of the Exchequer Nigel Lawson insisted on pressing on and was persuaded only with difficulty to create a “floor” of 70 pence above which the Bank of England agreed to maintain the price. This still implied heavy losses: Smith New Court lost more than £8.5 million.

  Yet the proponents of privatisation at New Court were undeterred. In 1987 the bank was among those appointed to advise the Electricity Council on the privatisation of the twelve regional electricity boards, successfully opposing the Energy Secretary Cecil Parkinson’s plan for an “exploding” or “packaged” privatisation whereby the boards would have been sold as a single unit. In the same year it took on the task of privatising the ten water authorities. The following year brought the £2.5 billion British Steel sell-off. There was renewed controversy in 1991, when N. M. Rothschild was appointed to advise on the privatisation of British Coal, for the bank’s report that only fourteen pits were suitable for stock market flotation led directly to Michael Heseltine’s announcement in October 1992 that the remaining pits would h
ave to be closed, with the loss of up to 44,000 jobs. The bank has since been involved in the privatisation of British Rail and Northern Ireland Electricity, and has advised the government on the sale of housing association loans and student loans.

  It is inconceivable that a programme as radical as privatisation could have been implemented without close contact between the government and the City. It is equally inconceivable that such contacts could have been overlooked by the government’s critics. After Margaret Thatcher’s deposition in 1990, political support for the Conservative government dwindled rapidly; and the links between New Court and Westminister inevitably became the target of fresh Opposition criticism. In the wake of the 1992 election, which the Conservatives narrowly won, it was conspicuous that not only the Chancellor Norman Lamont, but also his junior minister Tony Nelson and the Environment Minister John Redwood were former N. M. Rothschild employees, while others (Oliver Letwin and later Robert Guy) sought election as Conservative candidates. But it was the appointment of former ministers (and senior civil servants) to positions at New Court which prompted the most public comment. Peter Walker, the former Secretary of State for Wales, became a non-executive director of the bank’s Welsh subsidiary and of Smith New Court. Norman Lamont joined the N. M. Rothschild board after being replaced as Chancellor in 1993. Sir Clive Whitmore, the former permanent secretary at the Home Office, also joined the board, as did Sir Frank Cooper, the former permanent secretary at the Ministry of Defence; and Lord Wakeham, the former Energy Secretary who had earlier commissioned N. M. Rothschild to assess the viability (and potential for privatisation) of British Coal.