Business

The Rothschild file

A banker’s banker decries speculative finance

November 30 1998
Business

The Rothschild file

A banker’s banker decries speculative finance

November 30 1998

The Rothschild file

A banker’s banker decries speculative finance

For more than two centuries, the house of Rothschild has been one of the great names of international finance, from its role in underwriting the war against Napoleon and financing the construction of the Suez Canal to its investments in South African diamonds and a host of industrial concerns around the world.

Sir Evelyn de Rothschild, a man of patrician air, is chairman ofN. M. Rothschild & Sons Ltd., the family’s Londonbased merchant bank. A friend of former British prime minister Margaret Thatcher, he is the fifth generation Rothschild to head what he calls the “family business. ” Rothschild professes considerable affection for Canada: one of the first jobs he had after graduating from Cambridge was in Toronto with Rio Algom Ltd. He once said he never thought about being a banker when he was young. “I thought I’d chop wood in Canada or something.”

Although he rarely gives interviews, he met recently with Maclean’s Board of Editors. Excerpts:

Maclean s: What is your view of the state of the world Rothschild in

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Rothschild: We’ll see a gradual slowdown in certain businesses, but you can’t get away from the fact that the businesses in the world today are affected by other parts of the world. The second point is how the politicians are going to cope. You’ve seen [Alan Greenspan, chairman of the U.S. Federal Reserve Board] cut interest rates. If you have a reduction in interest rates and it doesn’t spur the economy, then you could find that you’re going into deflation. Deflation is, in many ways, as bad as inflation, which really is what you’ve got in Japan at the moment. Japan is still the big question mark. Don’t forget, it is the second-largest economy in the world. It is the engine that’s driven the whole of Asia.

I’m sure of one thing: certainly in my world, we’re going to have more regulations. There will be more supervision, more questions being asked. After the hedge funds debacle, there’s no doubt there will be different forms of reporting.

Maclean’s: Is there a risk that we are talking ourselves into a global recession?

Rothschild: The key thing is that there mustn’t be a credit crunch. A credit crunch would be a very dangerous thing. Bankers must go back to being bankers and stop being speculators. There are certainly good companies in the world and bankers should adjudicate them on their merits, give them credit and support them and cut out this speculation on highflyers. They shouldn’t

just, across the board, penalize people and say we’re not going to lend any more because we’ve been bitten by loans that were not very good. They’ve got to go back to being proper bankers. You all realize why they did this lending: because their return on capital in their normal course of business wasn’t good enough, so they got opportunistic and greedy.

Maclean’s: Has there been too much emphasis in the banking industry on size and profitability?

Rothschild: Generally speaking, the reJ turn on capital of some banks has been diminishing. So they thought, well, let’s go into this game of investment banking because it’s much more remunerative than commercial lending. And then they discovered that they should get into derivatives, and then they discovered that they should go into hedge funds. But they didn’t really underm stand some of the things they were in and their record isn’t all that good.

We’re in a completely new age of finance and none of us quite understands what’s going to happen. The reason this has happened is because of electronics. The whole world has been turned upside down by electronics, certainly the financial world. Let me give you an example: the Cayman Islands. It has, I think, 400 banks and you get all these people offshore paying no taxes, getting lines of credit—billions of dollars—and speculating against some poor country. Is it responsible? How do you deal with it? Why can they do it? Because of electronic systems. These computer systems now are dealing in trillions and trillions of dollars. It’s a gambling casino. Stock markets are becoming casinos. People are gambling on what will happen today and tomorrow.

Maclean’s: Do there need to be more international regulations?

Rothschild: Absolutely, but no one knows how to do it. How do you regulate someone sitting in the Bahamas or in Barbados with a satellite transmission system? You can be clobbered by a 16-yearold in a garage moving $5 billion from one account to another. There is a changing world out there.

Maclean’s: How do foreign investors see this country?

Rothschild: They think first of all about natural resources. You have great companies here. You have great opportunities— there are still vast stretches of this country that are yet to be explored. One thing that keeps coming up occasionally is Quebec, of course, and I think most people overseas shy away from Quebec.

Maclean’s: Do they shy away from Canada because of Quebec?

Rothschild: No, but they ask about Quebec and how it would affect them. □