The corridor outside the chairman’s office on the 31st floor of Barclays’ head office in London is lined with portraits of the previous incumbents. Stern-faced Victorians, bewhiskered Edwardians and more softly painted chairmen of the modern age offer a sober reminder of the bank’s long history.
Each of the men to have occupied the chairman’s office faced their challenges, some of which were existential, but every single one managed to hand on the bank to a successor. The news on Monday that Barclays Bank, the operating company that holds the group’s banking licences, is to be charged under the UK’s 1985 Companies Act raises the question of whether that line will at last be broken.
There is a long way to go. The case will not begin until 2019. The outcome is not known. If Barclays Bank were to be found guilty, it is uncertain whether or not it would lose its banking licences and, if so, where. But the worst case — defeat in the courts and a ban on operations in a key market such as the US — would be bleak indeed.
The danger is less that Barclays would go bust but that an outside party would step in, believing that under new ownership the sum of the parts would be greater than the whole.
Ironically, it was a perceived threat to its independence that got Barclays into this mess in the first place. In 2008 it was under pressure to accept direct investment from a British government determined to shore up those banks it believed to be in danger. The authorities were convinced that Barclays was at risk and pressed it to accept state capital. It was the depths of the banking crisis, but Barclays’ then management was committed to a universal banking strategy.
It had just picked up Lehman Brothers for a song, had spent 25 years building an investment bank and did not now want a government representative on the board cramping its ambition. It was confident it could survive on its own and raised funds from Middle Eastern and other investors. How it did so is, of course, the subject of the Serious Fraud Office’s case.
The returns to shareholders have been awful, but management’s judgment was partly vindicated by later events. The valuations in its derivatives book, which the authorities suspected of being over optimistic, in fact proved to be fair. Helped by indirect government support through various liquidity schemes, Barclays survived as an independent entity. It did so by rebuilding capital, selling off non-core assets and refocusing the business on to a transatlantic axis.
It is not now in bad shape. While the SFO circles, there remains a big unresolved issue with the US Department of Justice relating to mortgage-backed securities. But Barclays has a clear strategy and a structure in place to deliver it. It now has two clearly defined viable banks — the corporate and investment bank and the ringfenced consumer bank — inside the group. The former’s success depends on market conditions, but the latter has a strong customer franchise and, all things being equal, Barclays should soon be in a position to deliver to shareholders.
There, however, is the rub: things are not equal. If the recovery story is derailed by legacy issues, the business is in a fit enough state to attract external interest. Break-up would not be easy. The investment bank is capital intensive, the derivatives book runs to trillions and there are few institutions with the intellectual or financial firepower to take them on. But as the rest of the global financial services industry recovers, so too do its options.
As John McFarlane, Barclays’ chairman, walks the corridor outside his office, he may wish to look to the future, but he is still being forced to live in the past. Next week’s results will be very interesting.