| Activity | JMB was founded and incorporated on 28th July 1965, to conduct the bank and bullion business of Johnson Matthey & Co Ltd, who had been engaged in precious metals assaying, refining, fabrication and trading since its foundation in 1817, and in banking since the early 1930s. Once JMB opened for business on 1st November 1965 it assumed Johnson Matthey & Co Ltd's founder-membership of the London gold market. On 4th April 1967, JMB was appointed an authorised bank and an authorised depositary under the Exchange Control Act 1947.
In 1970, Johnson Matthey & Co Ltd considered the sale of JMB to Standard & Chartered Bank but major losses came to light in the dealing area. Senior management of Standard & Chartered joined the board to sort these problems out. On completion of their work, Standard & Chartered made an offer to acquire JMB but unexpectedly Henry Ansbacher came up with an increased offer. Neither party eventually agreed to purchase the shares.
In 1973 the dealing side was re-established after the problems in 1970 and there was a general expansion of JMB's activities: JMB became a member of the Commodity Exchange Inc, New York, in 1973; Johnson Matthey Commodities Limited was incorporated in 1976 to extend JMB's activities into dealing in hard commodities (but it was not a London Metal Exchange ring trader until 1978); Johnson Matthey Hong Kong was set up in May 1978 to act as an agent of the bullion operations of JMB; Johnson Matthey Commodities Inc was formed in New York in 1978 to further expand the worldwide bullion activities of JMB (but did not start trading until 1980); and JMB became a member of the Gold Exchange of Singapore in 1979 and a member of The London International Financial Futures and Options Exchange (LIFFE) in February 1982.
In December 1981, JMB acquired an insurance broker, the Hinton Hill Group, based in Leatherhead and London.
There were also plans to expand Johnson Matthey Commodities' activities into soft commodities, and in April 1982, Brooke Bond agreed to sell Wallace Brothers Commodities, a soft commodity broker with operations in London, Singapore and New York, to JMB. The company became known as Johnson Matthey & Wallace Ltd. The board planned to expand the New York arm, known as Johnson Matthey & Wallace Inc, over a five year period but the results were too volatile, so in August 1984, the board decided to close this operation down.
After the Banking Act (1979) came into effect, JMB was granted authorisation as a recognised bank and it was decided to expand the banking side. From 1980 and 1984, the loan portfolio dramatically increased from £33 million to £450 million. However, commercial lending, in the form of loans and overdrafts, grew much faster than the overall balance sheet. JMB had entered into several large exposures, each of them equivalent to over 10% of the bank's capital base.
It was exposure to JMB's two largest commercial debtors that eventually precipitated a crisis. However, the roots of JMB's problems were more deep-seated: the organisation and management of commercial banking and credit monitoring activities had serious shortcomings; insufficient attention had been given to the concentration of risks involved; and (contrary to normal banking practise) security was not required from borrowers. Furthermore, the need for provisions against bad and doubtful debts was not assessed with the proper degree of caution and (even if no evidence of fraud was discovered) the judgement of management in approving so many high-risk loans was obviously defective.
JMB was already being supervised by the Bank of England before the Banking Act (1979) came into effect. However, until the year ending 31 March 1984, JMB's profit performance had been good and the Bank's knowledge of their bad debt experience, up to and including that year, gave no indication of any sizable problems. The Bank's identification of the problems building up in the commercial loan book was seriously hindered by misreporting of the large exposures (which were significantly understated in the returns) and by late reporting, particularly for the March 1984 quarter. In fact, it was not until August 1984 that JMB themselves discovered the full extent of their exposure.
Following a meeting with the Bank in August 1984, JMB requested that their auditors (Arthur Young) examine their two largest loans in greater depth. On Tuesday 25 September 1984, JMB were compelled to advise the Bank that provisions were required against these loans which would drastically reduce their net worth. At the Bank's urging, the auditors, during the next two days, carried out a review of a wider cross-section of the loan book. Eventually, it became evident that liquidity support would not be sufficient. JMB would have to be recapitalised or its losses underwritten by a third party. If support was not forthcoming, JMB would be forced to cease trading.
Support was first sought from JMB's parent company: Johnson Matthey Plc (previously Johnson Matthey & Co). However - whilst acknowledging its responsibility to stand behind the JMB - Johnson Matthey Plc indicated that it would be unable to provide from its own resources all the support which would be required. Other parties were approached (including a clearing bank and a major foreign bank). Also, the introduction of new minority shareholders was considered. However, time was short and there was still considerable uncertainty over the level of the provisions required. The final potential purchaser withdrew during the late evening of Sunday 30 September. The only possible solution left was for the Bank itself to take responsibility for providing the support required.
Johnson Matthey Plc agreed to sell JMB to the Bank for a nominal £1 and to inject £50 million into the bank before it was sold (the maximum they could contribute without impairing their own credit). Undertakings to contribute support were secured from the banks and other members of the gold market. This support was later embodied in an agreement under which the Bank would provide JMB with an indemnity of up to £150 million to meet losses in their commercial loan book, whilst the banks and other members of the gold market would counter-indemnify the Bank for half of any such losses.
The Bank's fundamental reason for rescuing JMB was a deep concern for the systemic consequences if it was allowed to fail. The failure of one of the five main participants in the London gold market would have created a situation of extreme uncertainty. In any case, confidence in financial markets was generally fragile (particularly, in the wake of the crisis at Continental Illinois National Bank). Also, Johnson Matthey's refining capacity constituted an important encouragement for overseas traders to use the London market. What is more, those overseas traders included foreign governments and central banks. Losses on these official deposits could have had particularly serious implications for the standing of and confidence in British banks generally.
Immediately following the acquisition of JMB, the Bank reorganised the board and Rodney Galpin (an Executive Director of the Bank) stepped in as Chairman. An Executive Committee was established, meeting on a daily basis, to control JMB's activities. Price Waterhouse & Co were appointed as investigating accountants to report on the financial condition of JMB and establish the level of provisions required (eventually, the required provisions were calculated at £245 million). Steps were taken to halt the outward flow of lending where lending limits had been breached or were not properly established and a new Credit Committee was formed.
On 11th July 1986 - following the sale of the majority of JMB's business to the Westpac group - that part of JMB still under the control of the Bank was renamed Minories Finance Ltd (MFL). From 16th January 1986, the Bank continued a separate company in the name of Johnson Matthey Bankers Ltd (formerly Extraprobe Ltd) until 1999, when it was dissolved. |