Double act at the Bank

FOR David Clementi, the offer to be the next deputy governor of the Bank of England came as a surprise. For Mervyn King, it was welcome relief. Clementi, chief executive of Dresdner Kleinwort Benson and the ultimate City merchant banker, was not even on most Bank watchers' radar as a possible deputy governor, while King - the Bank's chief economist - had already been passed over twice.

In the end Chancellor Gordon Brown and Bank of England governor Eddie George took on both the outsider and the insider. "It was a classic compromise," says Prof Doug McWilliams, chief executive of the Centre for Economics and Business Research. "They got one of each."

In doing so, the Bank of England keeps a steady hand on the inflation tiller. As chief economist at the Bank since 1991, King is known for his hawkish stance on interest rates. He is also renowned for his bravura performances in the hour-long press conferences after the Bank presents the quarterly inflation report, which he prepares.

The 49-year-old economist was right behind George in his two-year battle with former Chancellor Ken Clarke over interest-rate policy. "Price stability is a timeless virtue," said King last October, in a not-so-oblique shot at Clarke. He is also believed to have fully backed the Bank's new monetary committee in raising rates both times it has met in the two months since it gained monetary independence.

Where George and King do differ, however, is over the single European currency. The governor is sceptical, but King has, so far, been more favourable.

In Clementi, the Bank gets a major City figure with a list of deals behind him which includes the top privatisations of the past 20 years, including British Telecom, British Gas and the regional electricity companies. The accountant, whose soft voice and often dishevelled appearance cloak a personality that commands respect when he begins talking, has extensive City connections. He will be the first bona fide investment banker at the top of the Bank for a decade.

Although he is only 48, it seems like Clementi has been in the City forever. His handling of the BT offering in 1984 was a watershed for privatisations in Europe. It was the first time shares in a state asset were sold outside the country, and the first time a huge effort was made to sell to individual investors. Clementi was behind a $20m (pounds 12m) advertising campaign to bring the punters into BT. "It set the world alight in terms of the involvement of individuals in these deals," says Gary Dugan, market strategist at JP Morgan, of the pounds 3.4bn BT sale. "It set the pace for most of the UK privatisations, and the model has been used in Western Europe."

Other high-profile jobs in 23 years at Kleinwort include advising on the equity sales of Laura Ashley, Abbey National and Gartmore. But Clementi's big success was pushing through the privatisations of the regional electricity firms in 1991 as they looked like coming unstuck.

"He speaks when he has a contribution to make and not otherwise," says David Luffrum, finance and planning director at Thames Water where Clementi sits on the board of directors. "And when he speaks it is constructive, with a degree of force."

Clementi was only contacted by Brown's office about three weeks ago. He had been in talks with Brown, George and Prime Minister Tony Blair for about 10 days when the news of his offer leaked last weekend. He hadn't had time to notify his bosses in Frankfurt, and the leak was an embarrassment to both the Treasury and Clementi.

Dresdner seemed to take it well, though chief executive Jurgen Sarrazin confirmed at a briefing on Dresdner's earnings that Clementi had received the offer before the UK Treasury had announced the appointment.

Clementi's expertise in putting together deals and his stature among other investment bankers could serve the Bank well if another Barings crisis erupts. When the 200-year-old merchant bank collapsed in 1995 George was criticised for not being able to put together a last-minute rescue. With Clementi's clout, the feeling is that in similar circumstances a quick rescue deal would be put in place. "He's a mixture of an academic and an entrepreneur, and it's a very powerful mix if you can get it right," says McWilliams.

The first problem Clementi may face when he begins work in September is that many of the existing powers of a deputy governor will soon be stripped away and given to his predecessor, Howard Davies.

Davies left the Bank as deputy governor on Thursday to take control of the new "Super" SIB, the unified regulator that will replace the existing Securities and Investments Board and the web of self-regulatory organisations that report to it. The Super SIB will take charge of bank supervision in the first half of next year.

That leaves Clementi, who will be in charge of financial stability at the Bank, seemingly with little to do. But observers say he will take a very similar role at the Bank to that he had at Dresdner Kleinwort, in effect a chief executive with a hand in every matter. Clementi will sit on the monetary policy committee from September, providing a welcome counterpoint to the more hawkish King and George.

"The question is whether the committee has the right balance," says James Barty, UK economist at Deutsche Morgan Grenfell. "Now, it's packed with economists. If you were to pick someone who is not an economist, you might balance it out."

Clementi went to Oxford, King to Cambridge. Both went to Harvard after graduation, with King becoming a Kennedy scholar. Clementi was an athlete, rowing and hurdling and earning a Blue three years in a row. Now he prefers sailing, which should endear him to George, a fellow yachtsman. King prefers tennis, and lists music and European history as interests.

Clementi is a Chelsea fan; King is an avid Aston Villa supporter - he recently turned down an invitation to become a non-executive director of the Birmingham club. George prefers rugby. The rivalry should suit the three, especially if George seeks a new term as governor when his first expires next June.

King's appointment sent a strong message that Brown is prepared to let George carry on. Less clear is whether the Chancellor will give George a full five-year term, taking him to the next election, or renew his contract for a shorter period. Speculation that Gavyn Davies, chief economist at Goldman, Sachs, might be the next governor was dropped when King was offered a deputy governorship. Misgivings about Davies's links with Labour make it difficult for him to jump ahead of King and Clementi directly to the top job.

For King, being offered the deputy post was a sign that he is still on the list for the governor's job, along with Clementi and candidates yet to emerge. King had been passed up twice before, in favour first of Rupert Pennant-Rea and second, Howard Davies. A third miss would have shown that he would never be considered.

With George likely to be around a while yet, Clementi and King have the time to get used to each other. There will be scope for Clementi to adjust to the bureaucratic lifestyle of a central bank. And, indeed, for the Bank to adjust to him.