Crash, bang, wallop

Booming stock markets, a record takeover frenzy, the return of six-figure salaries, golden hellos and golden handcuffs. Throw in a current Office of Fair Trading inquiry into an alleged market cartel and the City can perhaps be forgiven for a sense of deja vu.

Next Sunday, London's Square Mile celebrates the 10th anniversary of Big Bang: the momentous day on 27 October, 1986 that scrapped the City's stuffy old ways of doing business and opened the Stock Exchange to all- comers for the first time in two centuries.

Pin-striped brokers and merchant bankers may be forgiven for feeling a little jittery about birthdays, however.

Just 12 months later Black Monday wiped pounds 60bn off shares in the UK's biggest stock market crash.

And just before 1992's fifth anniversary came Black Wednesday, when sterling crashed out of the European Exchange Rate Mechanism.

Who first used "Big Bang" to label the City's revolution remains a mystery. Kenneth Fleet, the former City editor of the Times, was one to lay claim. What is certain, however, is that the event has firmly cemented London's position alongside New York and Tokyo as one of the world's top three financial centres.

But, like its cosmological equivalent, for UK investment houses its effects still reverberate around the City today.

"Before Big Bang, for 40 years London had very much gone into a siding. Everyone expected the landscape to alter, but not everyone anticipated the scale of the change," says John Kemp-Welch, the Stock Exchange's current chairman.

Like all revolutions, it was forced on a reluctant elite. In the early 1980s, when Margaret Thatcher was handbagging the establishment, the Office of Fair Trading launched legal action over the exchange's restrictive practices.

Then, light years away from today's computerised dealing rooms, like punters at racecourse bookies, stockbrokers would still rush around the exchange's trading floor placing orders with jobbers, yesterday's share dealers. A quaint division, known as "single capacity", meant brokers could not own jobbers; outsiders, too, could not take over exchange members.

Worryingly, minimum fixed commissions meant international business increasingly bypassed the exchange. By then, shares of firms like ICI were traded more heavily in New York than London.

Still, Canutes at the exchange lobbied fiercely against the tide. But in 1983 - after the Tories' election victory - Cecil Parkinson, the new Secretary of State for Trade and Industry, finally struck a deal.

Minimum commissions would go by 1986, membership would be opened up and "dual capacity" - brokers acting as market makers - became the buzzword.

For good measure, the exchange developed a new computerised share display - Seaq, the Stock Exchange Automated Quotation System - and a whole new regulatory system was imposed with the 1986 Financial Services Act.

The deal sparked a scramble to snap up any broker or jobber going. Lord Camoys, the head of Barclays Merchant Bank, was on holiday in Ibiza when the news broke and immediately began moves to buy leading broker de Zoete & Bevan and jobber Wedd Durlacher to form BZW.

The second player to buy big, the mighty house of Warburg, snapped up broker Rowe & Pitman, jobber Ackroyd & Smithers and gilt broker Mullens.

Morgan Grenfell, NatWest, Midland, and Kleinwort Benson all joined the rush to form integrated international investment banks that would offer all manner of debt, equity and derivative products.

In all, it is thought that 1,000 partners of member firms walked away with well over pounds 1m apiece. Even unblooded graduates, recruited from Oxbridge, gained two or three salary rises before arriving.

Stock Exchange business has rocketed since: UK share deals rose sixfold from 1985 to pounds 646bn last year; international equity trading eclipsed even that, leaping to pounds 790bn; and Eurobond issues jumped threefold to pounds 24.8bn, as London - out of the sidings - ran Frankfurt and Paris firmly into the buffers.

Institutional dealing costs have dropped by almost half and specialist share shops offer cheaper, no-frills access to the ordinary punter.

There are also more market makers, 306 against 207 in 1986. But the number has been swollen by foreign invaders, and for UK firms Big Bang's "balance sheet" holds more debits than credits.

"While the City has prospered, British financial institutions have suffered. When faced by the resources of US, Japanese and continental European banks they were easy prey," says City expert Colin Mayer, professor of management studies at Oxford University.

Analysts cite two overriding reasons: poor management, lack of capital or most often both.

Black Monday meted out the earliest warning that deep pockets were needed in the new capital markets. In the aftermath, swathes of old established names - Scrimgeours, Vickers da Costa, and Simon & Coates - disappeared as new owners hastily pulled out.

TSB, flush with cash but little nous from its flotation, told the sorriest tale of early profligacy.

In 1987, during the crash, it splashed out pounds 777m on Hill Samuel, which went on a corporate lending spree that led to pounds 440m of losses in 1991 at the height of the recession.

Hill Samuel, once one of the City's high-flying merchant banks, never recovered. That sad chapter was only closed this June, as Lloyds - which stood resolutely back from Big Bang - sold its corporate finance arm, absorbed fund management and closed the rest following last year's pounds 14bn merger with TSB.

Foreign securities giants also largely ignored the early frenzy. And for good reason. The likes of Goldman Sachs, Merrill Lynch and Morgan Stanley were already world players with huge capital bases and, like the naturally cautious Japanese such as Nomura, preferred to start here from scratch.

Those that did take part dipped toes in the water: like UBS, which bought broker Phillips & Drew, but balked at the price demanded for Hill Samuel.

Since then, they have picked off vulnerable UK competitors with a vengeance. Morgan Grenfell, struggling to recover from the 1986 Guinness scandal and the Geoffrey Collier insider dealing imbroglio, was the first top-flight name to run for cover. It had already shut its securities operation in 1988 and succumbed the following year to a pounds 950m bid from Germany's Deutsche Bank.

Charterhouse, part of Royal Bank of Scotland, went to Germany's BHF and Credit Commerciale de France and broker Hoare Govett also passed to ABN- Amro of the Netherlands.

Last year's pounds 850m Barings collapse - the blackest tale so far - and takeover by Dutch bank ING saw several of the last chickens fly the roost.

Kleinwort Benson, hit by securities problems in the US, sought refuge in a pounds 1bn takeover by Germany's Dresdner Bank.

Smith New Court, too - built on the last remaining independent jobber, Smith Bros - also went to Merrill Lynch, Wall Street's aptly named "thundering herd", in a pounds 526m deal.

Fear was not only the key. Last year's ending of Warburg's solo international ambitions had already set the scene for "Big Bang Mark II".

Following a collapse of merger talks with Morgan Stanley, its sale to Swiss Banking Corp meant the City's flagship had given up the ghost of tackling key overseas markets alone.

It has not been a complete catalogue of misery, however. Though the ranks have thinned, both BZW and NatWest remain as the last serious global torchbearers.

BZW recently clinched the advisory role on the $7.5bn (pounds 4.3bn) privatisation of Stet, the Italian telecoms firm, one of a clutch of international and UK mandates hardly dreamt of 10 years ago.

Last week, it also switched control of its pounds 206bn asset management business to San Francisco after taking over Wells Fargo Nikko Investment Advisers last year.

Ten days ago, NatWest also bolstered its corporate finance arm, paying a reputed pounds 155m-plus for Hambro Magan to complement its pounds 95m purchase of Wall Street boutique, Gleacher.

So far both have avoided the temptation to splash out like overseas rivals.

BZW, for example, made pounds 286m profits last year against just pounds 1m after Big Bang. But much of that came from taking over Barclays treasury operations and the true returns from the securities business remain opaque.

However, BZW's total profits dropped from pounds 501m in 1993 and over the period those from equity dealing fell more than a third to pounds 70m.

"If we were able to unravel the return on capital, I suspect it wouldn't be too high," says former BZW banking analyst Terry Smith, now at brokers Collins Stewart.

One barely penetrable cost of Big Bang has been the banks' own misery when bids go wrong.

In 1993, for example, in its first ever losses, Barclays provided pounds 240m against property firm Imry alone - a BZW-led takeover where decisions were demanded overnight, bypassing the usual credit committee structures.

NatWest suffered much the same way, shouldering a a pounds 123m loss on the Blue Arrow scandal in 1987. That cost it a chief executive and set back its merchant banking reputation for the best part of the decade.

The wider City, meanwhile, shows every sign of adapting to the fresh challenges ahead: European Monetary Union, new order-driven dealing, paperless shares, an OFT inquiry into underwriting costs and fresh regulation if Labour gains power.

The shake-out of brokers may be over, but for others it has just begun. Fund managers are being mopped up and the independence of the last merchant refuseniks - Schroders, Rothschild, Lazards, Hambros and Flemings - is hardly assured.

With the stock market at an all-time high, and bids set to beat last year's pounds 68bn record, this birthday the City is angst-ridden about a downturn. In that respect, arch deal-maker George Magan's decision to sell out may be a timely pointer: not so much looking for more international clout as calling time on the market instead.