David Rule
In August 1977, the Bank of England purchased the bank Slater Walker Limited, completing its rescue. The bank had been a subsidiary of Slater Walker Securities, controlled by Jim Slater, which also owned an insurer. This post describes how Slater misused depositors’ and policyholders’ funds to finance his wider business interests. The Bank of England sought to protect depositors by supporting the wider group rather than putting the bank into liquidation. The case remains relevant today when banks and insurers continue to be owned by financial and industrial groups, including private equity sponsors, and supervisors must consider how to address conflicts of interest and how far to insulate the bank or insurer from the rest of the group.
Growth of Slater Walker
Founded in 1964, Slater Walker Securities initially specialised in takeovers of industrial companies. In 1968, it acquired a controlling stake in a bank called Ralli Brothers, which it renamed Slater Walker Limited. A well-known investor and business writer, Jim Slater broadened the scope of the group into financial services, marketing it as a merchant bank and setting up insurance and asset management subsidiaries. By 1972, Slater Walker Securities was one of the fifty largest companies on the London Stock Market by market capitalisation.
UK banks were not subject to prudential regulation until 1979 and not supervised by the Bank of England in any systematic way until 1974. But Jim Keogh, the Principal of the Bank’s Discount Office, had regular contact with Jim Slater. He characterised Slater Walker in 1971 as a ‘rapidly growing but responsible merchant bank’ with a ‘new and well-deserved aura of respectability’. Slater was ‘highly honest, outstanding in his field… according to his bankers, good for anyone’s money’. Nonetheless, the Bank of England did not allow Slater Walker Limited to take over Ralli Brothers’ account with it. One reason was that it distrusted ‘house banks’ that were part of wider groups and used to finance their non-financial activities. In 1970, Bank of England officials described Slater Walker Limited as a ‘group washing machine’.
In the early 1970s, Slater Walker grew rapidly, acquiring businesses globally. By late-1973, however, the boom was over. Recession, falling property prices and a liquidity crisis affecting secondary banks put Slater Walker on the defensive. It began urgently to sell assets around the world.
Table A: Slater Walker Securities: total assets and pre-tax profits 1965–75 (£ millions)
It later emerged that Jim Slater used the bank and insurer to finance both the growth and subsequent shrinking of the group. Slater Walker Limited had financed acquisitions of companies and property developments, and it had lent to buyers of the group’s businesses – what would now be called ‘vendor financing’. A report by Price Waterhouse and Peat Marwick in 1976 revealed that two thirds of Slater Walker Limited’s lending to borrowers outside the group was to companies to which the group had sold businesses. A Bank of England supervisor wrote, ‘Slater has treated depositors’ money as his own, lending it to finance the sale of group assets on concessionary terms’.
The bank had lent to other group companies on a bigger scale, amounting to more than two and a half times its external lending. It also took deposits from these companies, leaving an apparently manageable net intragroup exposure. But these netting arrangements were questionable in insolvency, even after the Bank of England insisted that Slater Walker tighten them. Slater Walker treated its insurer similarly to its bank. According to the accountants’ report, Jim Slater had ‘exercised a dominant role’ over the insurer’s investment decisions and 24 of its significant investments were in companies connected to the wider group.
Slater Walker Limited’s external loanbook was also highly concentrated. More than half comprised four large exposures to companies with business connections to the wider group, each exceeding the bank’s capital. In August 1975, a scandal broke in Singapore that threatened to push Slater Walker over the edge. Three years previously, at the height of the boom, Slater Walker Securities had sold its Hong Kong business to a related company in Singapore, Haw Par Brothers International, financed by a c.US$30 million loan from Slater Walker Limited, the biggest of its four largest exposures. Slater Walker had then sold its stake in Haw Par in 1974 in its period of attempted deleveraging. But the loan remained. The new owners of Haw Par now alleged that the loan was invalid because Slater Walker executives had benefitted from an illegal executive compensation scheme (through a company called Spydar Securities) that had given them shares at below-market prices in Hong Kong companies subsequently purchased by Haw Par. If the courts agreed with Haw Par, Slater Walker Limited would be insolvent.
Bank of England support
Haw Par’s allegations led Jim Slater to resign, replaced by his friend and another celebrity ‘corporate raider’, Sir James Goldsmith. The Bank of England provided a £130 million facility to Slater Walker Limited to allow it to repay depositors and put two prominent merchant bankers on the Slater Walker Securities board. The bank’s interlinkages with the wider group, however, made it difficult to support it in isolation. As the Bank’s Governor Gordon Richardson summarised to Chancellor Dennis Healey, Slater Walker was a ‘tangled skein’. At the end of 1975, the Bank of England was faced with the choice of putting the bank into liquidation or providing additional financial support to the wider group. This choice was to recur five times over the next two years and each time the Bank of England chose to increase its exposure to keep the group alive rather than putting the bank into liquidation.
Slater Walker Securities had issued £91 million of loanstocks in the domestic and Eurobond markets. These had long maturities, mostly to the late-1980s, but covenants required early redemption at par if the total indebtedness of the group exceeded a multiple of its current net worth. Slater Walker Securities needed to make significant provisions at the end of 1975, leading to losses that would reduce its net worth below these trigger values. The Bank of England chose to shore up the net worth of the group by providing a £40 million guarantee of the bank’s loanbook. In August 1977 the Bank withdrew the guarantee and instead purchased Slater Walker Limited at above its fair value. Through a combination of the purchase price and asset sales, around £5 million was transferred to Slater Walker Securities, allowing it to repay the loanstocks early and survive as a going concern. Advisor to the Governor Sir Henry Benson, described this as a ‘bounty’ for the bank’s owners.
Why did the Bank decide to support the wider group? There was a healthy internal debate. The head of banking supervision and later Deputy Governor George Blunden wrote to the Governor in November 1975 arguing in favour of putting the bank into liquidation and protecting depositors at a cost of £10 to £70 million. He described the alternative of providing additional financial support to keep the group afloat as a ‘complete gamble, and we should not gamble’. Several arguments, however, were made in favour of support. Slater Walker was front page news and Bank officials were concerned about contagion to other banks if it was allowed to fail. They wrote about possible damage to the ability of UK borrowers to raise funds in the Euromarkets if Slater Walker Securities defaulted. Some also felt that they had a moral commitment to the management and board of Slater Walker Securities that they had put in place after Jim Slater had left. The most important judgement, however, was that the Bank stood a better chance of recovering the money used to support depositors if the group continued as a going concern, with the bank put into a protracted solvent wind down. They thought that the bank could not be disentangled from the rest of the group and put into liquidation at reasonable cost. The Governor wrote to the Chancellor of the Exchequer concluding, ‘we believe that the alternative of attempting to keep the group alive is better’.
Conclusion
Conflicts of interest, where the owners of a bank or insurer might use lending and investment to support a wider group strategy, remain a live supervisory issue. For example, in December 2019 the UK Prudential Regulation Authority required Wyelands Bank to limit its exposure to the Gupta Family Group Alliance that controlled it. Wyelands Bank subsequently went into wind down and was fined by the Prudential Regulation Authority for breaches of its rules, including unacceptable concentrations of risk to connected companies. The Bank of England began to supervise Slater Walker Limited in 1974 when it was already a ‘group washing machine’ and ‘tangled skein’. But the questions facing it when deciding how to rescue the bank were similar to those facing supervisors today: what safeguards can you put in place to mitigate conflicts of interest and how effectively can you ring fence the bank or insurer from the rest of the group?
David Rule is a Senior Advisor in the Prudential Regulation Authority.
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