Julius Baer wasn't to be my long term home

I can't remember too much about the day to day activities at JBI as it is a long time ago so I can only give you a few snapshots of the time.

I had to find something to do that justified my presence as the bank didn't seem to need my full attention. I guess that I was there because the Bank of England insisted on someone with FX experience being on board, although I didn't realise this at the time. My first attempt at proving my worth was to get involved in the Swiss Franc deposit market. I noticed a quite large discrepancy between the day to day costs of Swissy and the one month interest rate. This led me to lend out some one month and borrow it back day to day. What I didn't know was that banks inside Switzerland had a restriction on how much they could lend out to overseas banks. However, this was only monitored at the end of each month. Banks being banks, this meant that funds were freely available throughout the month but the market dried up on any period which included the last day of the month. My analysis hadn't got that far so here I was nicely over lent with a decent margin against my borrowing and suddenly finding that the overnight market (to be accurate, the tomorrow against next day market as it was almost impossible to deal value today in most continental currencies (see the note at the end for why this should be so). was almost non-existant at any price. A pivotal moment in my trading career.
I sat and pondered this wondering what on earth I could do. I tried calling Zurich but the answer was short and sweet - no can do! I was left with only one choice so with my tail between my legs, I called my old employer. John Botevyle was very sympathetic (I can still imagine him grinning as I told him of my problems) and came up trumps with the Swissy that I needed at a price that I could afford. Lesson one learned.

Lesson two was to understand that, unlike in the District Bank, when the boss asks what is going on, he is only passing the time of day and doesn't really require an answer. I used to have to go into Mr. Battersby - the General Manager of the Foreign Department at the District Bank - on a daily basis and give him a market report. I always took this very seriously because I can't remember a day when he didn't ask me something that I had missed! I think he did this on purpose as I never had any feedback to say that I was lacking in my approach. David Mann, the manager at JBI regularly used to go on long lunches with his old pals and come back full of ideas that worked in big banks but were out of our scope. However, when he used to breeze into the office around 2.45 each day, he always asked "what's going on then?" In the early days, I tried to answer him but soon realised that it was just his way of saying "Good Afternoon, sorry that I am late back".

Lesson three was to fully understand the size of the bank's balance sheet. Henri Jacquier and David Mann worked tirelessly to expand the range of banks that would deal with us. They relied very heavily on business put out by JB in Zurich but, who cares, it did the job and we had an expanding range of counterparties to trade with. I was up to speed with all of this as I was the one doing the trades in the market. Then, one day, I was brought up to see quite how small we were. JB in Zurich did a lot of business with Fidelity - the huge investment corporation in the USA - and they accordingly passed a piece of business our way. A lot of kudos was gained by putting what were know as tombstones in the Financial Times. Tombstones were advertisements announcing that ABC Bank had arrange X million financing for XYZ Corporation and that it was fully subscribed. The idea wasn't to assist in the financing - that was all done before - but to show off that the deal was done. David Mann was desperate for us to have one of these and arranged a fund raising exercise for Fidelity - around $30,000,000 or so as I remember. The funds had a due date when they had to be paid. They arrived in our bank account on the Friday when the due date was the Monday. This meant that I had to invest the money over the weekend. This was the biggest deal that I had done so far so I was quite excited about it. Eventually, I placed the funds at a good price with the Chemical Bank London. (Chemical Bank was a large New York bank at that time - now merged into JPMorgan Chase) It was only later in the day that I was reminded that our total balance sheet on the average day was around £5,000,000 or $12,250,000 so I had placed close to 2 1/2 times the total value of the bank with one outside institution! Not clever. Mind you, lending it out in $1,000,000 bits would have resulted in a much worse rate and would have given our back office more to do than the normal week!

Time plodded on and we worked our way through the period where we were just a Licensed Deposit Taker placing green Forms E with the BofE every time we needed to do a bit of arbitrage. Eventually, we did our time and around February 1969 we were give Authorised Dealer status. This freed us to become a normal part of the FX markets and should have heralded a new dawn for me. However, I had been having my own issues with working at JBI. Firstly, I was angling to get posted to Zurich for a time. Mind you, as Valerie had put the brakes on Canada, I was living in hope that she would finally agree. To this end, JB I were paying for German lessons for me. These took place at lunch times at the City University. One would have thought that learning German in a German speaking Swiss bank would have given me lots of opportunities for practice. In fact, the Swiss pride themselves on their language abilities and whenever I spoke German to them, they answered in English!  Eventually, I came to understand that the scope for me at JBI was very limited and had a long discussion with Henri about my future. I was getting rumours that they were to employ an FX Manager over me and I was very upset as I felt that I had seen them through so should have been given the chance. Again, I don't think it occurred to me that the BofE were pushing them to get some more experience on the team. Any way, the discussions ended with Henri telling me that I must speak to him again before I made any decisions because he really wanted me to stay.

I am afraid that, once I felt I must go, I have tended to go no matter what. I started looking in the FT on a Thursday which was the traditional day for FX market appointments. As a result, I had an interview with the American Express Banking Corporation, London branch in Abchurch lane and got offered a job there. When I went into Henri to tell him, he was most disappointed until I explained that I was getting a pay rise from the £1,600p.a. I was now getting at JBI up to £2,000 p.a. at Amex. Remember that in May the previous year, Valerie and I were earning about £1,600 between us - and she was still at work at this time - but not for long. Did I mention that Valerie was expecting our first child? No? Well that was a further drive to get some more income. I had now got to the point where I had ensured that our income would be a bit larger when she left work than we had 9 months earlier so I was very pleased with the way that things had worked out. Additionally, Amex had a good name in the market so I was going somewhere that would enable me to trade normally.

Note: Most continental banks had a cut off at around 10 a.m. for inter-bank payments (unlike London where the cut off was 3 p.m.) As London is normally one hour behind most of Europe, this meant that any instructions had to be sent by 8.45 to be safe. At that time, most of the London banks worked from 9 a.m. hence, London worked on balancing tomorrow rather than today.

Finding out how it is without Clearing Bank customers!

So, I am sitting here in Julius Baer (JB) wondering quite what I should do. As a new bank, the team are dashing around trying to get things going but their focus is not on my activities but on the areas that they know and have contacts.

I think that, firstly, I ought to list the players. Firstly, we had Henri Jacquier as Managing Director. He had made his name as the Treasury Manager of Kleinwort Benson so he know his stuff when it came to merchant bank business.  The manager was David Mann who came to us from Hill Samuel. His world had been corporate financing. As assistant manager we had Peter de Muralt (or von Muralt). Peter was the JB appointment on the team and he was what we  would now call a "bright young thing". He was of Swiss origin and spoke English fluently as well and French, German and Italian (of course). His job, as I saw it, was to keep David Mann within the JB bounds rather than still living in the Hill Samuel world. Shortly after joining, they employed a back office manager - Peter - and Betty as an assistant for him. The rest of the team comprised two secretaries - Miss Pfaff (JB Zurich appointee) and an English one who was what we would now call a "Sloane Ranger" - very well spoken and OK-ish at her job.

JB had some great contacts and some of these provided us with our first run of business. I learned an awful lot in a very short time because I had never been exposed to the areas we were now to work in. I had never deal with the likes of Fidelity - a huge US based investment manager - or Pemex - a Mexican oil company, for instance. I will leave Fidelity to later but Pemex taught me a lot.  Pemex mostly raised funds by issuing bills of exchange. Now a bill of exchange is a nice piece of paper that is worth nothing until it is accepted by a credit worthy banking institution. The company issues what is effectively an open IOU, say for $1,000,000. This bill has an expiry date of say 90 days. So the company expects to get the million dollars on the day of acceptance and will repay it 90 days later. Pemex issues the paper and we (that is Julius Baer International - JBI) write on the back that this bill is accepted for payment by us on the due date and we, then, give Pemex their funds. It now ceases to be a Pemex debt but becomes one for JBI. There is a borrowing cost on this, of course. This borrowing cost is deducted, in full, from the proceeds payed to Pemex. Let us assume that the US$ 90 day interest rate at that time was around 6 1/2%. So the calculation goes like this:

1,000,000 *0.065 *90/360 = $16,250 deducted from the face value leaves $983,750.00 for Pemex.

This is known as buying the paper at a discount. My job was to sell this onto someone else at a better rate; i.e. at a rate lower than 6 1/2%. But, we had a trick up our sleeve. The market for this type of paper in London was always quoted at a "discount to yield". Humm. Have I lost you? I bet I have.

You see, if you think about what I have said, we have charged interest on the full $1,000,000 even though we only paid out $983,750. In the minutiae of banking transactions, this helps us make a bigger return. To explain, let us start out with the invested amount and see where we get.

We have invested $983,750.00 to get a $1,000,000 return. Thus, we should really be talking about the actual investment yield which is $16,250/90*360/983,750.00. Now this comes out at 6.607%. So, we are actually getting 6.6% on our investment. What we need to do now is to sell the bill on the market at the "discount to yield" rate (DTY). Assuming that Pemex can see the current market rates, they will know that 6.5% is off from the market because we would always have agreed a margin on market prices with them before starting any transactions. As they are Mexican and, at that time, Mexico suffered from having a poor financial reputation, we would probably agree something like a 0.5% margin over market rates.

Note for 2015: This is where LIBOR rates come in. LIBOR US$ rates were set, at that time, by taking a spread of rates for any one period from a range of sources and taking the average (normally after removing any outliers and also, probably, the highest and the lowest) and calculating an average. So, today's 3 Month LIBOR (assuming the 0.5% margin) would have been 6%; this being the average offered rate for US$  over three months.

My job would be to fund this bill by selling it on the market at a "discount to yield price of a little over the current LIBOR, taking into account the status of Mexico. let us say that the market will accept this paper at 6.25%. Using the standard DTY calculation, the amount that we will receive will be $984,615.38 showing us a small profit of $865.38. If we hadn't used our little trick, we would have made $605.54 so it was worth doing. Remember that we would be doing this for $10,000,000 tranches. Sometimes we would find that some counter parties would only trade at a straight discount so we had to forego the little extra but it was worth trying.

The one advantage of holding a bill of exchange was that, if the market moved such that you could   sell it on at a cheaper rate then, being a bearer bill (i.e. issued to the bearer of the paper rather than any specific institution) you could sell it on. You had to take care of the paper, of course, because we would pay whoever turned up with it on the due date!

Enough mind bending stuff. More later

New Job - New Home back in South London

Now, I have always regarded myself as a South London lad. In fact, I would often mock the expression that all City traders were barrow boys by stating that I came from "Sarf Lundun" and switch back to my normal voice (which may fix me as a South London boy in many people's eyes).

Aside: Is everyone else shocked when they hear their voice recorded? It seems that the brain lets you hear what you want to hear and the world gets the truth!

Well, back to the story. Leaving the District Bank meant leaving the flat in Watford so we were desperately looking for somewhere to go. Valerie's Mum mentioned that Valerie's Dad's aunt (Margaret) was soon to have a few rooms spare as her son, Basil, was leaving to get married. I was amused to hear that the flat was in Norbury which is about 2 miles from Streatham, where I was born. Back to my old stamping grounds as Roger and I used to do our Bob-A-Jobbing in that area. We went down to have a look and what we were offered was the upstairs of her house - sharing the bathroom. This gave us a living room, a bedroom and a kitchen. As there was just the two of us and the rent was right, we jumped at the chance. There was only one small problem - Valerie was working at the Wembley branch of the bank - a commute that was impossible. Once again, the District Bank proved that it looked after its staff by transferring her to their branch in Croydon - just as simple bus ride 3 miles down the A23.  However, I was back to travelling into the City from south of the river.  I had a choice, from Norbury station, of going into London Bridge Station and walking over the river or going into Blackfriars Station and getting back up Queen Victoria Street and across to Mincing Lane - where Julius Baer was sited. In the end, I used to get on the next train and not really care which station I went to.

Back to the flat. Auntie Margaret was a "funny" little lady but very quiet and undemanding as a landlord. The first thing that Valerie wanted was to redecorate the living room to match the large pair of orange curtains that she had got me to make at Watford. Her idea of matching meant that we had one wall and the whole ceiling painted orange and some trendy dark brown patterned paper on the rest. I wish I had a photo as the effect was "amazing" and you can read what you like into that word. Valerie was over the moon with the effect.  All of our furniture fitted so we had the nice pine table, chair, bench and my brother's bed settee in the room along with a large orange bean bag.

The kitchen was quite small but had room for a kitchen cabinet. It was very similar to this one:

Then we had the cooker, sink/draining board and our twin-tub washing machine. Remember twin-tubs? One side did the washing and the other side had a spin dryer. This one is similar to the one we had.

I was proving to be a bit of a handy man, even though I had never had any instruction from my Dad - who was definitely NOT a handy man. It was just as well because there was no power point in the kitchen (the cooker was gas powered). I found myself making up an extension lead to run enough power from a 13amp socket in the hall through to the kitchen so that the washing machine would work. Because of the power consumption, I had to make this using some high capacity mains cable. In fact, I did such a good job with it that it is still in use in 2015 powering the Bread Maker on our kitchen. It has been taken apart just once in its life to refresh the screw terminals.

We brought our two cats with us when we moved. Tweetsie was her usual serene self whilst Tinker, who was already a nervous wreck, took advantage of the peace and quiet downstairs to spend most of his time with Auntie Margaret. We left Tinker behind when we finally moved as he couldn't cope with any change or disruption. Maybe, if I had named him after a short line railroad, he would have coped better!

Life was quite good in Norbury. We were two short bus rides from my Mum and Dad and easy access to the train to get to Valerie's Mum and Dad although I have no memories of making that sort of trip. My Best Man, Roger lived a short distance away so he often came to stay over night. It was here that I really got into Hi-Fi in the proper sense of the word. The expression is over used nowadays for very mundane musical reproduction but in those days Hi-Fi was very different from what Mr. Average listened to. My first step on the ladder had me buying a Heathkit kit of parts to build an amplifier. This was a good quality valve based amp. that was well matched against my Garrard SP-25 record deck and Decca Deram ceramic cartridge. I also made up a pair of speakers from a plan in one of the Hi-Fi magazines. These turned out really well and we kept them for quite a while. I learned an awful lot about soldering and making electronic bits from the Heathkit kit and the end result was well worth the effort. However, fairly soon, I was able to consider upgrading to a transistorised amplifier. Oh, Wow. How exciting the world was then with all of these electronic marvels coming along. We had  a great Hi-Fi shop up in Streatham High Road just by St. Leonard's Church. I spent quite a lot of money in Frances of Streatham.

So, I am in a new job, Valerie is in a new branch and we are both in a new flat. Interesting times!

Julius Baer International the first couple of weeks.

I had thought about going to a Canadian Bank, as I was quite well equipped for trading Canadian Dollars but in the end, I went to work for a start-up situation (as we would call it now).  This was a joint venture which had been created by Bank Julius Baer in Zurich in  conjunction with a UK based finance company called United Dominions Trust. I didn't know very much about balance sheets and bank trading limits coming from the District Bank. We pretty much dealt with most banks so my appreciation of credit worthiness was limited to a few absolute no-no counterparts. I soon found out different!

The bank was owned 50/50 and had a massing £500,000 capital. This is the equivalent of about £8,000,000 in today's money so not as bad as it seems but, in retrospect, not good. I had an interview with the Managing Director - Henri Jacquier - and the Manager - David Mann. Jacquier was known to me as he had been Treasury manager of Klienwort Benson, a well know merchant bank and was widely known in market circles but David Mann was an unknown to me. He came from Hill Samual and had made his mark in the more traditional finance areas on mer4chant banking. The interview seemed to go quite well but I wasn't confident because they didn't have any dealers working for them and I was only 23 years old so the likelihood of me becoming their only dealer seemed very remote.

Remember that I was earning around £800p.a. at the time and that Valerie's salary brought our total up to around £1,500 p.a. Thus, when I received a letter from them not only offering me the job but also offering me £1,500 p.a., I was amazed. Their letter, signed by David Mann, turned out to be typical of him in that it contained a lot of talk that turned out to be hot air. He wrote that I was to have the job - fair enough - but that I would also be paid to sit exams which would make it possible for me to operate in the world of the Stock Exchange. This was something that I knew little about (apart from what I had learned in my banking exams) so it sounded quite exciting. In true David Mann fashion, it never came off.

I took the job but, when I resigned from the District Bank I found out that I was quite liked there and that my leaving came as a disappointment to them. Still, I explained that I needed the extra money as I wanted to buy a house and expected to start having children soon. Plus, I was aware of the forthcoming merger of the three banks into the National Westminster Bank and expected that we, as the smallest unit, would get little consideration when it came to handing out jobs. As it ended up, I was partially right in that my boss, John Botevyle, ended up outside of trading and Peter Johnston spent his whole time at NatWest as No.2 on the DM desk. Not quite what I wanted. The other thing that was pointed out was that we would have to give up the bank flat in Watford and find somewhere else to live. I knew that but it was another bit of stress in the move.

Still, I left and turned up in Mincing Lane to their new offices. My, was it a small organisation. There was HJ and DM as mentioned. The Assistant Manager was a Swiss German from Julius Baer in Zurich - Peter de Muralt. There were two secretaries - Miss Pfaff from Zurich and Gloria (but I can't remember he surname). At the same time that they took me on, they also employed Peter Hedges to be the banking/back office manager and young girl assistant to him. It was somewhat of a reality shock to find that I really was the only guy who knew anything about FX and Money Markets - and my Money Market knowledge was pretty thin! One thing I did know was the difference between an Authorised Bank (AB) and a Licensed Deposit Taker (LDT). Every new banking institution, at that time, had to serve time as a LDT before achieving AB status. This normally took about 9 months provided that no rules were broken. The first thing that I found, when I started work, was that the rules, most definitely, had been broken. LDTs were only permitted to carry out money market business - in other words they could borrow and lend money - but only carry out FX transactions within the Exchange Control act which meant that they had to obtain BofE permission, via a green Form E, before any such activity. What I saw immediately on joining was that the bank had outstanding FX forward transactions for which they had no permission. I tackled the management on this and was shocked to find that they thought that it was permissible! This was senior management from established banks proving that they didn't know the rules! I insisted that they must go to the BofE and regularise the situation, otherwise they were unlikely to pass the BofE's rules for obtaining full Authorised Banking status as soon as possible.

A meeting took place(without me and without my bosses explaining that they were only there because a 23 year old dealer had told them to be!). It seems that they had fallen into the trap of believing that they were permitted to swap one currency for another provided that it was part of a funding operation. What they were doing, before I joined, was going to Julius Baer in Zurich for all of their funding. This was provided in Swiss Francs. They were then selling the SF spot (two days time) and buying them back at the required maturity date (say, three months time) against US dollars, which is what they needed. Although there was no exchange risk in this, because the exchange rates were fixed at the beginning, they were still carrying out banned transactions. As they had come clean, the Bank of England looked kindly on them and, unusually, gave them permission to carry on doing this provided that they, retrospectively, presented a Form E quoting a specific reference. Well, that was good enough for me so I could carry on doing what was necessary. In fact, it quite shocked me as I hadn't really considered what working for a bank with such a small capital would entail. It didn't matter to anyone else as they were involved in all the other activities of international banks but it mattered to me as I was severely constrained in what I could do. I did manage to fill my time but it wasn't easy.Still more of that later.

Wrap up on the District Bank Years

Just a few things to touch on and then we move to pastures new.

I never took too many trading positions except in the trading of investment and property currency but occasionally I would get the chance to quote Deutsche Bank in Dusseldorf for forward D Marks. This was generally not successful as they were normally dealing with a few banks at a time so the market always moved against me but sometimes it worked if I sat on the position long enough.

Someone had the great idea, following a visit by the Commercial Bank of Greece (CBG) that we should enter the Greek Drachma market. This was a lightly supported market in the UK so it seemed like a good opportunity. CBG would regularly give us fixed trading prices for Drachma against USD so we could generate Cable business as well. It wasn't our biggest earner but it was an introduction to Greek banks which was useful in later years.

One day, at lunch with Mike - a Swiss Franc broker from Harlow Meyer - he told me of a simple way that they had of calculating forward Swissy/GBP  swap prices from Swissy/USD and USD/GBP. I expressed an interest as it was something that I got involved in on occasion. He sent me round a few sheets of paper which had a table written out in long hand - not many photocopiers around at that time. You could read off the Swissy GBP price by finding the required two rates around the edges with the answer being at the conjunction on the table. I was quite thrilled with this until John Botevyle told me that, until I could explain how it was calculated, I wasn't allowed to use it. Although I had been good at maths at school, I wasn't up to the explanation at that time and neither could Mike so I had to leave it alone. In later years I was not only able to understand it but I ended up working out where it was too simplistic and creating a formula that did really work.

The final crunch came during a conversation I was having on the phone with Brian Bennett - a Canadian $ broker at M.W. Marshall. I was bemoaning the fact that I didn't get a job within the bank that I thought was coming my way. The bank had decided to re-invent County Bank. County Bank was one of the constituent parts of the District Bank back in its history and the idea was that it would now be a merchant bank like organisation. The plan was that I would become the one and only dealer at this new bank when it started. This filled me with excitement but my hopes were dashed when they decided that what they wanted was not a dealer but a processor to manage the transactions. This resulted in someone called Ramsbottom from head office in Manchester getting the job. This upset me as it would have been quite exciting and very good for my career. Brian's suggestion was that I leave and go to join one of the myriad overseas banks that were either arriving in London hotfoot after the regional American banks. On muttering about job security and other worries, Brian asked what salary I was on. At the time I was on around £850p.a. (see earlier discussions about present value!). My coming clean resulted in guffaws of laughter. On asking what was so amusing, he pointed out that I could probably get close to doubling that! Now he was talking. He gave me a few more insights and suggested that I should get on with it.

There was another reason that I was interested in his comments. This was that the District Bank was due to be merged into the National Westminster Bank along with National Provincial Bank and Westminster Bank. This wasn't due to take place until the 1st of January 1970 so about 18 months in the future but firstly, I needed extra money now and I wasn't at all sure what the deal was going to be when we all got merged into one dealing room. For all I knew, they wouldn't want our little team and I didn't fancy trying to get another dealing job having been left out in the cold. Also, I wasn't at all sure that a 100% salary hike would be on offer. So, I started looking.

I didn't want to go to an American bank. As a genre, they had a reputation for pushing you out if you didn't meet their high up-front targets. I hadn't worked with any targets so far and was a bit hesitant of taking on what could be a life changer. I started checking the Financial Times on a Thursday as that was the day that dealing room appointments were listed. True to form, there wasn't much about. Isn't life always like that?  I remember one interview at the Trade Development Bank where the interviewer seemed only interested in finding out the names of our biggest customers so that one didn't work. I can't remember too much about any other interview but the one that interested me most was with a new startup bank that was being created by Bank Julius Baer in Zurich. I will go through that in more detail in the next posting.

District Bank Wrap up - Part 2

So, I am getting close to leaving the bank now so I had better fill you in on some of the last few interesting items.

I must come back to the discussion regarding the Bank of England support that we were providing. However, first I have to explain how the New York money market worked in those days (sorry!). Unlike in London, where everything is cleared between banks on the same day, there were two processes in New York. There, they had a cleared market (FedFunds) and an uncleared one (Clearing House Funds). Basically, anything transferred between commercial banks in New York was regarded as uncleared until it had been held overnight. Anything transferred over a Federal Reserve Bank of New York account (called the Fed from now on) would be regarded as cleared. Cleared meant that it was accepted that the account being charged had sufficient credit for the charge to be paid and thus would not be returned unpaid on the next day.

All dollar transactions in the London FX markets and all of the money market dollars (called EuroDollars if transacted in London) were in Clearing House Funds and thus not really good value until the next day. As, at that time, most London banks had no real knowledge of these complications, no one actually ever thought about it. However, it came to our notice that the Bank of England was paying us out of their Fed account. Actually, our agent in NY, The Bank of California (BoC), pointed this out. It was important because of the way that the NY market worked. If you, as a bank, needed cleared funds today but only had Clearing funds, then you could buy the Fed Funds on the NY market. Effectively, you did a deal with another bank that had Fed Funds in their account. They released the Fed Funds to you and you transferred the Clearing funds to them along with one working day's interest. This was necessary because there were things that they couldn't do with Clearing funds so they had to hold onto them for the one day to make them cleared. Understand? No, I didn't think you would but just read on and don't worry about it.

So, here was us being paid in Fed Funds and paying out Clearing Funds on a daily basis and sometimes in the region of $200,000,000 at a time. BoC told us that they could buy the FedFunds from us for that one days interest and pay the Clearing Funds on our behalf. This sounded like a good idea, especially if the settlement day was on a Friday because that would mean three days interest over the weekend (more about this later - you lucky people). We thought that we should check with the Bank to see if they had any objections, although what we did with our Fed Funds was our business. In those day, of course, everyone kept on good terms with the Old Lady and never wanted to upset her. She told us that it was fine with her but to remember that, should the Sterling market improve between the trade date and the value date (two days) she could always reverse the trade. BoC was happy to have a cancellation up to 12 o'clock NY time so this was going to work. In fact, if I remember, they only ever reversed one transaction. We made quite a lot of money doing this. In fact, in discussion with National Provincial Bank, who owned the District Bank, it turned out that they hadn't ever thought of this, and better still, didn't have any mechanism for doing the deals. They started paying their Fed Funds over to us to dispose of so we gained even more!

This all came to a halt on 19th November 1967. Valerie and I were sitting in front of the television watching, I seem to remember, Midnight Lace - a film staring Doris Day - when the BBC interrupted the film to announce that the pound had been devalued from it 2.80 parity against the dollar to 2.40. Remember that we had been trading at or around the 2.7810 mark. I own up to actually crying at that point. We had put an awful lot of work into our support operations, as had the other clearing banks and it was now to no avail.

On sitting down on Monday morning, we surveyed the market and were amazed to see that overnight swap transactions were trading at 100s of % per annum where normally they would have traded at the equivalent of around 6 - 8%. The one day premium for purchasing Sterling overnight calculated out at these huge rates, purely because everyone outside of the UK had sold sterling and needed to obtain these overnight funds on a daily basis. They had all been expecting the devaluation but hadn't expected such a high daily cost. If you think about it, an annual interest rate of 365% represented 1% for any single day. You would have to move your shortage of sterling from Monday (as it was) to Wednesday so that you could close out your short trade and take your profit. To do this would cost you 2% of your capital so that reduced your gain from the devaluation. BoC NY always left an overnight order with us to cover their Sterling position but we couldn't execute it because, eventually, the cost reached a daily price of 4%. We called them on their opening and , although they were horrified, they had no option but to do the deal. Because of exchange control restrictions, we were (as was every bank in London) unable to lend Sterling overseas so we couldn't help the directly.  We could take a small advantage from it because we, like every other bank in London, had a small BofE limit to sell Sterling and buy it back later (the so called spot-against-forward limit). As a Clearing Bank we always had access to cheap Sterling to lend on the London money market so we took advantage of our unused portion of this and made a nice little profit ourselves.

For a further comment on how London was affected by the the vagaries of the New York Money Markets, check out my 'aside' about the short term London Eurodollar market.

Sorry that this is so technical but I don't think it would be right just to tell you about the easy things. This was such an important part of my life that I really needed to get it down on "paper". I still have a few things to tell you about before I actually leave the District Bank for pastures new. Once they are cleared up, I can also get back to our newly married life.

The London EuroDollar market in the 1960s and 70s - Fed Funds and Clearing Funds

Having been bored to tears with my description of Fed Funds and Clearing House Funds, I am now going to subject you to a treatise on how this affected the London EuroDollar market.

I have tried to explain how you could convert Fed Funds into Clearing Funds and vice versa - basically there was a one working day interest allowance that accrues to a Fed Fund balance when it is converted to Clearing funds. OK, in English, this means that if you have $1,000,000 of Fed Funds and you exchange them for Clearing Funds with a current interest rate of 5% you get $50,000 (being 5% interest for one year) divided by 360 (the US always uses 360 as a year base whilst the UK always uses 365) so you would transfer away $1,000,000 for Fed Funds and receive 1,000,138.89.

Now the interesting thing is that if you did this on a Friday, the interest received would be $138.89 * 3 because the Clearing Funds would require 3 days (Saturday to Monday) to become cleared funds.

In the early 60s, banks in London were content to deal in Clearing funds and not concern themselves with Fed Funds as no-one (except for a small number of US banks) had access to such things in the normal course of business. Step forward to the influx of regional US banks from about 1965 onwards - more specifically to the arrival of National Bank of Detroit (NBD) onto the London scene. Now NBD were in London for one single reason - to tap the EuroDollar market for funds to repatriate back to Detroit for internal use. They quickly worked out the problem with trading in London, vis-a-vis Fed Funds, which is what they were after. So, if they borrowed money on a Friday, they would pay 3 days interest until Monday but would only get 1 days Fed Funds interest from Monday to Tuesday. Are you beginning to see how this works? But, and it is a big but, if they borrowed Clearing funds in London on a Thursday, they only paid one day's interest but got Fed Funds for the three day weekend. Rapidly, they started to bid up on the Thursday market and everyone cottoned onto the weekend so the  borrowers dropped out until the price plummeted.

E.G. Day to day funds are 5%.
Mon - Tues = 5%
Tues - Wed = 5%
Wed - Thur = 5%
Thur - Fri = 15%
Fri - Mon = 1 5/8%

BTW, the NBD gained a nickname in the market. They were known as the "Flying A**hole" for some reason!

The problem got even more complicated. If a one month trade started on a Thursday but finished on a "standard" day of the week, the rate would be inflated by the 3 day effect of the Thursday - Friday and likewise, if a period started on a Friday and ended on a "standard" day, the rate would be reduced because of the weekend rate effect. This caused great complications and there were dealers out there who spent their lives working out rates for strange periods in the hope of catching people out. In fact, some years later, I wrote a computer program for my bank that did all of the calculations. Until everyone else woke up to trading desk software, this gave us a great edge in the money markets.

I left the market in 1985 so I am not sure when, or if, this pattern dies out.

Wrap up on District Bank - Part 1

As Peter took over the day-to-day roles, I took on a new job of managing the Investment Currency and Property Currency books. These things are all forgotten now but there is an interesting history here. After WWII there was an extreme shortage of foreign exchange in the UK and exchange controls were imposed. These were very strict and even covered the amount of cash that could be taken on holiday. This amount, incidentally, was very small and made it difficult to have any sort of real break overseas. Payments for imports were also heavily controlled but permission could be give by the use of what was called the Green Form. This form, along with supporting documentation had to be presented for each and every payment overseas for the import of goods. Each bank could approve up to a certain amount but above that, the form had to go to the Bank of England for approval.

We had two senior personnel in the Foreign Department that were responsible for this. Mr. Harris was one but I can't remember the other chaps name. Harris was quite friendly but the other chap kept himself to himself so I didn't really get to know him. I only knew Mr. Harris to talk to because I was a dealer and his office had a door into the Dealing Room. The hierarchy was very strict in those days.

Anyway, back to the main topic. Two aspects over overseas business that were extremely heavily controlled were securities and property transactions. The rules were quite simple, and very onerous. You only got involved if there was a lot of money involved. There were three rules that really mattered

• To purchase an investment or a property overseas, any foreign currency funds needed to be purchased on the special markets that existed for such funds. As the pool of funds could only be fed by the sale of an asset overseas, there was a substantial premium attached to these. If I remember correctly, the premium for Investment Currency was around 29 - 30% and for Property Currency it was a whopping 50 - 55%. This was because of the lack of disposal of foreign assets. The reason for this is explained below.
• Whenever an investment or property overseas was disposed of, the resultant funds were regarded as Investment or Property Currency. These were different from normal foreign currency funds as any repatriation of funds required that 25% of the proceeds had to be disposed of on the normal currency markets.
• There was no way to increase the amount of available funds as all funds available were created by the liquidation of previously held assets.

Thus, any overseas investment required the payment of a substantial premium to obtain the currency. Then, when you sold up, you only got that premium back 75% of the proceeds. This not only made the whole process extremely expensive but, due to the constantly depleting pool of funds, the situation always got worse.

My job was to not only manage the book, which meant buying and selling on these markets to meet customer needs and maintaining the bank's records of our translations but also to make a profit where I could. This meant that I would trade on the markets and buy an excess when appropriate. I did this quite well and it became a speciality of mine. There were a limited amount of banks in the market that made trading prices. I remember dealing regularly with Hill Samuel and Guinness Mahon (the dealer there was a Mr. Galvanoni I seem to remember).

One day there was quite a flurry of activity in the bank with everyone gossiping about what was going on. Suddenly, I was asked to sell a substantial amount of Property Currency to one of our large property company customers. On asking for the property details, I was told that it didn't matter as he was only going to sell it back to us. It turned out that the owner of the company had bought a property overseas without going through the Property Currency market and that he had been found out by the Bank of England. He no longer had the property but that didn't impress them one bit. As he was a person of some standing in the City (the BofE thought such things were important back then when they really worried about the City's reputation), it seems that they had called him in, given him a dressing down and then gave him 20 minutes to sort it out so that he met the rules. He had then hot footed it round to us and hence my sudden involvement. After buying the currency at a 55% premium and selling just 75% back at a similar price, he found the cost of his misdemeanour.