Bonuses are vilified as the villain of the credit crunch. They’re not. That title belongs to the integration of investment banks.

Often overlooked, because it seems an arcane subject, Margaret Thatcher’s destruction of “single capacity” in 1986 replaced piecemeal Stock Exchange spivvery with today’s systemic distortion of financial market relationships. Since then, it has been unworkable for any executive of an integrated investment bank to operate with cast-iron transparent fidelity to client interests. That will continue to apply, with or without bonus caps, until investment banks are forced to break up their corporate advisory, trading and equities divisions and return to single capacity.

Single capacity was an obvious target for free market reformers in the vanguard of the Thatcher revolution. It was all too easily connected with images of Stock Exchange backwoodsmen in bowler hats defending their lazy pickings under a fixed-rate commission system. The trouble was that the Big Bang of 1986 poured out the baby of arm’s length trading with the bathwater of Stock Exchange fixed commissions. It also opened the floodgates for the big battalions of Wall Street.

Before Big Bang, the household names of the City were Warburg, Morgan Grenfell, Kleinwort Benson, James Capel and a dozen more that have since disappeared. Goldman Sachs, JPMorgan, Merrill Lynch, Citigroup and Morgan Stanley had barely raised their heads above the Square Mile parapet. Within a decade, they had swept all before them with their category-killer command of the integrated investment bank model that Big Bang had endorsed. Even Cazenove, the one house able to retain its unique preBig Bang standing, ultimately accepted the restrained embrace of JPMorgan.

Perhaps London had no option other than to adopt the multiple capacity approach favoured by Wall Street. Yet by adopting it lock, stock and three smoking barrels (corporate, trading and equities), it turned market manipulation from a moonlighting pastime into an unwritten code of professional best practice.

Ironically, the whistle was blown in New York in 2001-02 when Eliot Spitzer, the state’s attorney-general, threatened legal proceedings against Citigroup, Merrill Lynch and others for manipulating their research advice to investors in order to shield the business failures of their corporate clients. At his moment of maximum leverage, Mr Spitzer settled, bizarrely, in May 2003 for fines totalling $1.4 billion and accepted agreements from banks to tighten up their internal procedures. It was a pitiful playing of a powerful hand for commitments whose severity on paper had minimal impact on the daily exchanges between analysts, salesmen, traders and corporate dealmakers.

As Philip Augar, star analyst of the 1980s who built up two famous research houses in the 1990s, said: “The new rules left intact a business model riddled with conflicts of interest [and] . . . notoriously difficult to manage.” Five years on, the regulators are waking up to the blank cheques that this integrated model has written for its operators.

— Jamie Stevenson is a teaching fellow at University of Exeter Business School and a former head of research for Dresdner Kleinwort

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