End Of The Line; The sale of Cazenove, broker to the queen, marks a milestone in the decline of Britain's elite private banks.

Byline: Rana Foroohar

Twenty years ago, when British investment banks began selling out in a wave that would transform the City of London from a bastion of "gentlemanly capitalism" to a hub of American-style wheeling and dealing, one firm stood apart. Cazenove, broker to the queen and half of the country's top firms, took a firm stand. "We do not believe it right to sell the good will of the firm to a big brother," said then senior partner John Kemp-Welch. "We do not see Cazenove becoming part of the securities division of some large bank, only to lose our identity a few years hence." Yet earlier this month, this whitest of white-shoe houses finally did sell its good will to a U.S. giant, JPMorgan.

Like characters in a Henry James novel, the banks swapped titles for cash. JPMorgan paid Cazenove just 110 million pounds for a half share in the new investment bank, JPMorgan Cazenove. It also invested another $50 million in capital, plus 70 employees, but most of the staff will be from Cazenove, which is broker to 43 of the FTSE 100 companies. For JPMorgan, the merger was a cheap way to access the best clients in Britain. For Britain's most mythologized bank, which will retain sole ownership of its asset-management business, it was an inevitable bow to globalization. "Cazenove has a long tradition of listening to clients' needs and providing services which meet them," said Cazenove chair David Mayhew at the merger announcement. "Increasingly, that means access to capital, and a broad range of sophisticated financial products." Translation: we needed a big brother, and JPMorgan has $1.1 trillion in assets.

This was not unexpected. Despite the City of London's position as the center of the European financial universe, nearly every other independent bank in Britain is already in foreign hands. The change goes back to Prime Minister Margaret Thatcher's deregulation of British financial markets in 1983, known as "the Big Bang." This erased the barriers between brokers, merchant banks and market makers, allowing them to merge and grow in new ways. British banks like Barings, Kleinwort, Morgan Grenfell, Warburgs, and NatWest became involved in various pairings, and generally moved toward an American-style model in which ongoing, personal relationships with clients were less important than bidding aggressively on each new piece of business. While this shift should have paved the way for global banks based in Britain, the homegrown firms weren't able to navigate the new landscape. Today only one British bank, HSBC, is among the world's largest, and even it cannot compete with the giant investment banks, like Goldman Sachs and Morgan Stanley.

The reasons behind the demise are twofold: American banks bolstered by a massive domestic market and Continental European banks propped up by governments had an edge over the smaller British players when it came to M&A. But some insiders, like former Schroders managing director Philip Augar, believe that a lack of professionalism and managerial skill also played a role. "The older British banks and brokers were not as innovative as their American rivals or even some of their newer British competitors," he says. "The investment-banking market changes every year, and while it is right to stick to old values, new products are required to keep up with the pace of change."

In his book "The Death of Gentlemanly Capitalism," Augar points to class wars and a culture of insularity that sabotaged many potentially successful deals between British banks--public-school-boy merchant bankers refused to take order from lower-class brokers and dealers, and so on. London's regulators, generally more lax than their U.S. counterparts, did not push hard enough for more ...