Broke: Who Killed the Middle Classes?

Even now, two decades after the events of the Lloyd’s Scandal became clear, it has a shock value which seems to speak to the plight of the middle classes today. It is somehow the sheer respectability of the families caught up in the scandal that gives it such a peculiar edge, drawn in because they trusted this apparently respectable financial institution, when actually the world had changed.

Stockwell is a tall, imposing presence, six foot six inches in his socks. His upbringing was impeccably middle-class: born in the shadow of Romsey Abbey. As a young man, he was a Labour councillor in Letchworth and one of the founders of the World Development Movement, but he was also one of those people who seemed hardly able to stop himself making money. He had an antiques business, a reproduction furniture business, up to forty properties and much else besides. He describes his property skills as like a sixth sense, being able to ‘see through walls’. ‘I can see the possibilities of spaces,’ he says.

It was also the property boom, as it was with so many other people, that brought him into contact with Lloyd’s of London, which he found had a highly unusual, even archaic, structure. Lloyd’s is made up of a whole number of syndicates, known usually by the name of the underwriter in charge, and each one was supported by a whole range of ordinary investors known as ‘Names’. These Names would need at least £37,500, a third of which would have to be deposited with Lloyd’s, but they would accept a bank guarantee based on the value of your home (£37,500 was worth about £150,000 today). You didn’t have to be rich, and this explained why people whose wealth was almost entirely made up by notional increases in the value of their home became caught up in the scandal.

All this meant that becoming a Lloyd’s Name was within the reach of anyone with some equity in their homes. It was also considered a safe investment. Thousands of ordinary people signed up to become Names after a recruitment drive in the early 1980s. The problem was that the new recruits were actually signing a guarantee that they would underwrite losses as well as profits made by their syndicate. It included the wholly irrational concept of ‘unlimited liability’.

This was a fiction. How could such a thing exist? But the newly recruited Names were assured there was no risk. Nobody had ever been bankrupted and you could sign up for an insurance policy of your own to pay any debts up to £135,000.

‘There they were, sitting on a house which had gone up hugely in value,’ said Christopher Stockwell. ‘They were asset-rich, while their retirement income was going down. They were wheeled around Lloyd’s and the agent got a commission and they would get a five per cent return on the value of their house. It seemed totally secure. This was Lloyd’s, after all, not a bunch of shyster gangsters.’

Stockwell became interested in Lloyd’s as an investment and joined in 1978. The way that Lloyd’s works meant that years had to be ‘closed’, with no more claims expected, before they could distribute the profits. Of course, there might be liabilities to pay for previous years as well – and Names were responsible for previous years before they joined – but, all being well, he would expect his first cheque some time early in the 1980s.

The problem was that all was not well with Lloyd’s. What Stockwell had not been told was that underwriting mistakes were about to threaten the very existence of Lloyd’s – based on a combination of their collective failure to understand how the world was changing, combined with a fatal clubbishness that preferred to shove bad news under the table. Nor had the twenty thousand ordinary Names recruited after 1982 been told either. The establishment had consistently closed ranks to prevent proper regulation of Lloyd’s, and this was about to guarantee financial misery for many of those middle-class investors who had been assured that being a Name might be a good way of helping out with the grandchildren’s school fees. It was also providing a strange dress rehearsal for the far greater banking scandal and collapse in 2008.

The immediate trigger of disaster was the asbestosis insurance claims in the USA, though there were other disasters as well, natural and predictable. Asbestosis should have come as no surprise either to the companies or their insurers. The fact that exposure to asbestos fibres might cause cancer was first noticed way back in 1918 and confirmed in a series of medical studies in the 1920s. But it was a test case in the US Supreme Court in 1969 that made this directly relevant to the Lloyd’s Names and their ‘unlimited liability’.

The case concerned a former asbestos worker called Clarence Borel, and was brought by his widow, Thelma. He had been told so little about the little white asbestos fibres that were to kill him that he used to bring them back to decorate the Christmas tree at home. The Supreme Court found in favour of Thelma Borel, and, as a result, the asbestosis claims began to mount and the ultimate insurers – those with the unlimited liability – turned out to be some of the Lloyd’s syndicates which specialized in reinsurance. In 1979, the US courts ruled that the insurers were liable for all the years between when the workers were exposed and when they fell ill.

Perhaps Lloyd’s could not have reasonably predicted this extension of their liability, or the rise in hurricane damage, though it was clear in the world outside that both cancer liability and climate were changing. But the real problem was how the senior officials at Lloyd’s responded. Exactly who was aware of what, and who was informed of what, was to be the subject of a series of legal actions in the UK, but Lloyd’s bankers NatWest could see, and wrote a warning report – known since as the Armageddon report – about the terrifying implications for their clients. All copies later disappeared. The losses were small by then, but the line on the graph showing their rising impact was terrifyingly steep and getting steeper.

The appeal court ruled later that there had been a gross misrepresentation to the Names, but not fraud, and – although more evidence has come to light since – that is where matters now rest. The decision was important because the Conservative government of John Major had by that stage rushed through legislation giving Lloyd’s immunity for negligence but not for fraud. They were not therefore responsible for ruining so many Names, yet this was another sign for the future. Among the huge privileges of the financial industry, as we have seen more recently, is that they have been so deregulated that they also have immunity for the results of their negligence, though not, so far anyway, for their fraud. In practice, it is hard to distinguish between the two.

The British establishment closed ranks, and for the first time – but definitely not the last – ordinary middle-class investors found themselves on the outside. Even when the implications for the Names should have been growing apparent, Lloyd’s continued their recruitment campaign to attract new ones.

In his Oxfordshire home, running his businesses, Christopher Stockwell knew nothing of this. He realized at the start that it made a big difference which syndicate he joined. He met one of the rising stars of Lloyd’s, Dick Outhwaite, liked him and joined his syndicate – and then joined others too. The first sign that there might be anything wrong appeared when it came to closing the books on that fateful year of 1982, because the Outhwaite auditors insisted on leaving the year open. Stockwell was angry about it and remonstrated with the auditors. By 1987, it was clear that something was extremely wrong and that losses on other syndicates had somehow been diverted onto one of his syndicates as the bearer of the ultimate risk. The following year, he summoned up his old campaigning experience and formed an action group.

Even so, he wasn’t too worried. The losses at the troubled syndicate were being covered by profits from others. Never one to do things by halves, Stockwell was by now a member of many other syndicates, but more accounts for more years were being left worryingly open. Not until the end of 1991 did the penny drop. He had been expecting a cheque for £250,000. Instead, he got a demand for an immediate £500,000. Most ordinary investors would baulk at anything remotely on that scale, but Stockwell was no ordinary investor. The trouble was that, six weeks later, there was a similar letter. By February 1992, in the run-up to the election stand-off between John Major and Neil Kinnock, the demands were pouring in at the rate of £100,000 a week.

‘It coincided with the collapse in property values and astronomical interest rates after Black Wednesday, and I was facing total wipeout,’ he says. ‘I had no income coming in. All my businesses were in receivership. I was spending 30 or 40 per cent of the time with the receivers, just picking up the pieces out of the chaos.’

The Stockwell family lost their home, which was then sold by the bank later in the summer, while they rented a cottage on what had been their land. In July, his bank made him bankrupt too. It was a desperate situation for a self-made man, and a huge strain on any marriage and on the children, especially when the furniture had to be sold.

‘It was a catastrophic blow,’ he says now. ‘It was emotionally traumatic, leaving your home and everything, totally unclear about where the next meal was coming from.’

By then, Lloyd’s was threatening 39,000 Names with legal action for failing to pay up. They could have approached the Lloyd’s hardship fund they had set up under the fearsome chairmanship of Mary Archer, novelist Jeffrey Archer’s fragrant spouse. But like Stockwell, many desperately resisted that fate too, because they would have had to accept all their losses, abandon any appeal over their fairness, and hand over all their other assets to Lloyd’s.

Behind that 39,000 figure, the suffering was also now widespread. Elderly couples who had been persuaded to invest their money as Names found themselves evicted from their homes and living in caravans. There were very public suicides and very quiet divorces and evictions. People who had saved for their retirement their whole lives were finding themselves effectively on the street. Yes, they were a privileged class with family to fall back on. Yes, they had been chasing unlimited profits in return for those unlimited liabilities, but they had not been told the risks and were often no wealthier than the theoretical rise in value of their homes.

Within eighteen months there were more than twenty-five action groups, and Stockwell was involved in many of them. At one meeting of the activists, there was a stand-up row between two prominent Names. Stockwell, towering over both of them, told them to sit down and shut up. He attributes to this the decision to ask him to chair the meeting, which led him to chairing the Lloyd’s Names Association and made him the obvious choice to chair Lloyd’s Open Years Working Party, Lloyd’s own attempt to hammer out a compromise.

Either way, it put him at the heart of a whirlwind. The phone rang at home all the time, and his young children had to learn how to deal with the outpourings of fear and betrayal that came down the line.

‘I spent hours and hours listening to tales of human misery,’ he says. ‘From people who had just done what they had been told. Who never intended to take any real risks and who were losing everything. They just couldn’t understand how this could happen.’

In that same year, 1992, the Sunday Times concluded that ‘the professionals at Lloyd’s are not fit to regulate a flea circus, never mind a multi-billion market’.

But it was worse than that. It was quite clear by then that some Lloyd’s professionals regularly kept the most profitable business for their own mini-syndicates, for their families and relatives, and shifted the loss-making ones onto the absent Names. It was also clear that the leading underwriters were themselves avoiding the worst-hit syndicates and warning friends and family away from them. They knew, but said nothing in public. The nod-and-wink culture that the English middle classes specialize in was being turned against them. ‘Many members of the Lloyd’s community in senior positions’, concluded the 1986 Neill Report to Parliament, ‘were not even vaguely aware of the legal obligations on agents to act at all times in the best interests of their principals, not to make secret profits at their principals’ expense and to disclose fully all matters affecting their relationship with their principals.’

The journalist Adam Raphael, himself a Name, described the plight of a secretary who had worked at one insurance brokers for twenty-five years. As a reward, the company chairman had asked her and a colleague if they would like to be Lloyd’s Names, promising to provide the guarantee and an insurance ‘stop-loss’ policy. As her losses began to mount, she contacted the retired chairman, who had completely forgotten her existence. The new chairman replied in 1988: ‘I am afraid there is nothing to suggest any sort of commitment to indemnify you against losses incurred by that membership. Indeed it would be highly unusual if any such arrangement did exist.’ Her insurance policy would not pay out because the wording was wrong. When, in desperation, she contacted the chairman of Lloyd’s, he warned her to do nothing that might ‘prejudice the reputation of Lloyd’s’.

Julian Tennant attacked the underwriter of his syndicate at a meeting of Names in the Albert Hall in May 1993. ‘Our faith in Lloyd’s has been totally destroyed,’ he said. ‘It’s bad enough to be forced to move out of your house into a small cottage, but it’s even worse to learn that Mr Brockbank’s salary [underwriter of his syndicate] was £430,000 last year. That is obscene.’

In 1988, the Lloyd’s market made a loss of £500 million, but the managing agents and members’ agents earned £124 million in commission. As late as 2009, another group of thirty-five Names were bankrupted at the end of their legal process.

Two decades on from the eye of the storm, Stockwell accepts that there were aspects of the experience that provided some compensation for the lost years and lost money. It was fascinating to work at the cutting edge of the law, dealing with some of the cleverest lawyers in the country. But in the end, the establishment shut the door on the Names and bolted it, and, despite the new evidence that he had amassed, the Court of Appeal refused to reopen the case against Lloyd’s. Now, viewed with hindsight, the Lloyd’s Scandal looks like a curtain-raiser for the banking scandal – the same refusal to provide proper regulation, the same scramble to cover things up, and to provide immunity for the financial community rather than to protect vulnerable people.

‘The legal system let us down badly,’ says Stockwell now. ‘I understand why. I understand their need for the legal system to give some kind of finality. I understand the need to protect the Lloyd’s market so that it could get back on its feet. But nevertheless, allowing the establishment to cover up was what made the banking crisis possible.’

Here is the conundrum of the story, and the paradox for the middle classes today. They believe the great financial institutions are on their side, believe they understand the way the world works, pride themselves even on their ability to navigate through it – they had welcomed the deregulation of financial services and all the other changes since the 1980s. But they have been horribly deluded.

The truth is that the world has changed, and the middle classes failed to see it. Their sturdy English conservatism has not served them well in this respect, because the financial sector is not on their side at all, and has not been for some time, and for reasons that go way beyond the shenanigans at Lloyd’s. Through no one’s fault and no one’s conspiracy, their collective failure to see the world clearly has made them vulnerable – so vulnerable that their survival as a recognizable class is now in doubt.

There are two big objections to the thesis I have set out here, and we need to look at them now. Doing so will also force us, and not before time, to look at the other big question: who are the middle classes these days anyway?

There have always been middle classes, right back to ancient times. They were the professionals, the shopkeepers, the tax-collectors and all the rest of the population between the peasants and the aristocracy. There they were in Britain too, through the centuries, running the pubs, owning property, riding to hounds. But the great influx into the middle classes coincided with the development of the railways, so that – for the first time – they could move away from their place of work. They no longer needed to live over the shop. These were not so much gentry as commuters, setting up home in the suburbs, and their emergence coincided with a new kind of middle-class society, dedicated to independence from the tyranny of bosses and landlords. From Mr Pooter to Captain Mainwaring, they thrived well into the twentieth century, but not smoothly or universally. There was always the chance, as they were well aware, of a politician determined to squeeze them until the pips squeaked.

Perhaps the biggest shift came after the war when, thanks to the 1944 Education Act, the upper middle classes began to shift from the grammar schools to fee-paying independent schools, until the prices shot up out of reach at secondary level – while the new middle classes filled their places.

The first objection to the idea that the middle classes are disappearing is that, for as long as they have existed – and even Aristotle warned that it was important that they survived for the good of the state – there have been warnings or bleatings from inside them that their days were numbered. This is a collective peril for anyone who writes about the death of the middle classes. In fact, there have been so many predictions of their demise, all of them premature, that it is hard to imagine them expiring at all – despite everything I have set out so far.

The Marxist critic and novelist Raymond Williams famously talked about an ‘escalator’ that took every generation back nostalgically to a golden age a few generations before.

The same phenomenon seems to work the other way around for the struggling middle classes. For more than three decades I have until now left unread on my bookshelf a book by Patrick Hutber, one of the cheerleaders for Margaret Thatcher, called The Decline and Fall of the Middle Class.

This was at least subtitled ‘How it can fight back’, which did imply some hope.

The 1970s were certainly a tough period, especially for anyone practising ‘thrift’, which Hutber called the defining characteristic of the middle classes. For Hutber, the middle classes were the ‘saving classes’, which was difficult for them when inflation was then only just down from 25 per cent and the top rate of income tax stood at 83 per cent. He put a note in his Sunday Telegraph column asking for people to write to him, and was deluged with accounts of the mid-century middle-class life.

One correspondent described himself as ‘up against the wall’. ‘I haven’t seen a play in London in two years. I only eat in restaurants on business. I can’t afford the gardener once a week any more. You start adding it up and it amounts to a social revolution.’

‘It is my belief that, the way things are going, the middle classes are doomed to a gradual extinction over the course of the next generation or two,’ said another. ‘We are mainly living like the camel in the desert does on the fat stored in its hump.’

Another reply added, in typical middle-class self-deprecating style: ‘I hope to receive the “final call” before the roof falls in.’

Even the great egalitarian playwright J. B. Priestley was worried. ‘The full effect in our culture, largely based on the middle class, has not been felt yet, but many of us are feeling gloomy about our prospects.’ Who would have thought it: the Sage of Working-Class Bradford brought down to such a level of pessimism?

In 1974, the prominent Conservative MP John Gorst set up the Middle Class Association (he sent out a mailshot to people he knew might be interested, but the two or three replies he received back all said that, although they were interested, unfortunately they were upper-class).

It was taken over by a small right-wing group who kicked him out, renamed it and allowed it to collapse the following year. The middle classes are not good at political movements at the best of times.

You might think, given Hutber’s fears, that the middle classes had never felt quite so embattled. Yet go back on the escalator another generation and you find a fascinating 1949 book by the future playwright and Washington editor of TheEconomist Roy Lewis and the future Conservative cabinet minister Angus Maude, father of the current Cabinet Office minister Francis Maude.

Like Hutber, they were writing at the end of a period of Labour government, in the austerity years, immediately after the abolition of most fee-paying in primary schools and grammar schools.

‘We thought of calling it “The Decline and Fall of the Middle Class”,’ they wrote, ‘but they are kicking so hard they must still be alive.’

Again, you might think that the late 1940s were a unique moment of fear and anxiety for the middle classes, because of uniquely high taxation and government on behalf of another class. Not a bit of it. Travel back on the time conveyor belt another generation and there was the Daily Mail castigating David Lloyd George’s People’s Budget, the one that introduced old-age pensions, under the headline ‘Plundering the middle classes’. Three years before had seen the launch of the Middle Class Defence Organisation which ran candidates in the London County Council elections and eventually became the Middle Class Union. This was a branch of Middle Class International, though the existence of such an organization does make the mind boggle a little.