City: No bonanza

Attempts by Lloyd's of London to tap the City for new sources of capital have proved not quite as easy as everyone hoped. At one stage it looked as if perhaps as much as pounds 1.5bn might be raised this autumn through a variety of stock market and other corporate vehicles; the final tally is likely to be a lot less, possibly no more than pounds 800m.

Many of the new funds have had to scale back, while lack of interest has caused some - including, amazingly, the one launched by Cazenove and Lazards - to be abandoned altogether. I can't remember the last time Cazenove had such an embarrassing corporate flop on its hands.

Though the process has by no means been a debacle - pounds 800m isn't bad - it is clear that something has gone seriously wrong. The reasons are varied and complex. Some funds - BZW's CLM Insurance Fund being the most glaring example - were judged by investors to be charging far too much in management fees, while in other cases the quality of the underwriting capacity was seen as poor. In still other cases there was simply insufficient preparation.

The common theme, however, is Lloyd's itself. After all that has happened there is still a huge credibility gap. Even with premium rates on the turn, limited liability and the promise of 26 per cent plus returns, it's hard to believe that an institution whose name has become synonymous with mismanagement, incompetence and worse, can in truth be quite the investment bonanza promoters of these funds claim. If names were fleeced, what's to stop Lloyd's doing the same to the new breed of corporate capital?

There have been, and as long as the market continues to exist always will be, large areas of secure and highly profitable insurance risk to be had at Lloyd's, but what about the rest?

The problems of Merrett and Gooda Walker may prove little more than minor tremors once the big environmental, workplace and financial negligence claims that Lloyds has exposed itself to start rolling in.

Last week, the rumour went round the City like wildfire that somehow or other the new capital would be roped into still secret Lloyd's plans for an out-of-court settlement with distressed names. Alternatively, a substantial one-off levy to the central compensation fund could be imposed. Most of the new trusts have been given an 'off the record' assurance by the authorities at Lloyd's that this in fact won't happen, but can you trust them?

For Lloyd's, trying it on would be a highly dangerous game. Lloyd's will have to rely more and more on limited liability corporate sources of capital if it is to remain in business. Given what has happened in the past, nobody from my generation is going to sign up as a traditional Lloyd's name, and I imagine that by the turn of the century there won't be many of them left. If Lloyd's has a future at all, it is with the new corporate sources of capital.

To clobber it so soon having promised promoters they would be ring-fenced from past mistakes wouldn't be just a shot in the foot, it would be tantamount to suicide. That assumes, however, that Lloyd's problems are not overwhelming, that it has a viable future. The chances of all or part of the new corporate capital vanishing into some unforeseen black hole may seem remote, but with Lloyd's you never can tell.