The date was October 4 1997 and Martin Taylor, Barclays’ then chief executive, had just announced that the bank was to sell the equities and corporate finance parts of BZW, its investment bank. It looked like the end of Barclays’ universal banking ambitions and, according to the FT’s Lex column: “Faced with a choice between pouring perhaps billions of dollars into BZW to take it into the top division or cutting loose, Barclays’ board had a fairly easy decision.” In future, Barclays’ investment bank would be cut back confine itself to fixed income products, leaving the top table to the likes of Citigroup and Morgan Stanley Dean Witter, who which at that time were busy assembling broad -scale debt-to-equity financial conglomerates. Barclays, like the other leading British banks, of the day, readjusted its sights to a more limited role in the financial universe.
“If you want to make God smile, show him your plans,” a City sage told me years ago, and so it proved in banking in the first decade of this century. Many of the aggressive business builders of the 1990s blew themselves up and, totally unexpectedly, Barclays clawed its way back. The choice of Robert Bob Diamond as its next chief executive puts the seal on the recovery.
That recovery had its origins in 1996, the year before BZW was dismembered, when Barclays’ investment banking ambitions were still running strong. In that year Mr Taylor had hired Mr Diamond, then a heavy-hitter with Credit Suisse First Boston, to run debt trading. The introduction of Wall Street people and habits to the staid environment of Barclays was a culture shock at first. As one BZW veteran put it: “The place was suddenly filling up with these million-dollar fruit-eating bond people.”* But Mr Diamond kept his nerve. After the old investment bank downsized in the late 1990s, and on the back of the great carry trade in the following decade, Barclays Capital, as BZW was renamed, won accolades for its bond and derivatives prowess. BarCap was not yet a full-scale investment bank but, in 2008, Mr Diamond bought key parts of the Lehman business at the bottom of the cycle to round out the gaps.
It is a beautiful piece of corporate history and Mr Diamond has got his reward. But his and Barclays’ success serves to underline the weakness as well as the strength of British banking. The strength is obvious: the UK’s tax revenues, export earnings and employment benefit from the presence in the City of a globally acclaimed financial institution. The weakness lies in the instability of the universal banking model operated by big banks such as Barclays and the impotence of governments to do anything about it.
Over the past decade, Barclays has changed from being retail banking-led to being investment banking-led. The advantages that retail customers derive from being part of a large investment-banking group are debatable when compared to the risks involved in co-mingling these businesses. Investment banking is a volatile industry that tips into loss at least once every two decades, as it did in 1973, 1990 and 2007. Outside of loss-making years, it experiences a violent downturn in profits about one year in three, according to industry data. Barclays has been successful in minimising these pitfalls but in risk management, you are only as good as your last trade, as all good bankers know. No matter how good the risk management, retail customers tacked on to an investment bank run the theoretical risk of losing their deposits in the event of an investment-banking crisis.
In practice, retail customers need scarcely worry about this because recent history shows that when universal banks get into difficulty, governments step in and this, rather than lost deposits, is the systemic problem. As a consequence of their protected species status, banks that are considered too big to fail get a higher credit rating and lower funding costs. Investment bankers working at big banks can afford to load on risks because they know that there is a safety net if everything goes wrong. In turn this feeds into the “heads we win, tails you lose” scenario that causes public outrage at bonus time.
Barclays’ position illustrates the difficulty individual governments have in doing something about it. In theory, they can split banks into retail and investment arms or ring-fence the retail business into a stand-alone part of the balance sheet. This solution is unpopular with the industry, whose mobility means that such reform can only be achieved on an internationally co-ordinated basis. The UK government’s current banking inquiry does have a remit to examine structural change but, in the absence of serious interest in splitting up banks elsewhere, British bankers have seen an arbitrage opportunity and have been quick to play the relocation card.
To date, Barclays has kept a low profile on the subject and it can afford to, since its options are obvious.Barclays Bank and BarCap are perfectly viable stand-alone businesses, the former based in the UK, the latter in New York, and there is no need for the company’s senior management to spell this out. However, should they wish to do so, they will have the perfect opportunity when they give evidence to the government Banking Commission, one of whose five members is Martin Taylor, the man who recruited Bob Diamond and broke up BZW.
*Quoted in Martin Vander Weyer, Falling Eagle.
The writer covers the demise of BZW in The Death of Gentlemanly Capitalism (2000) and the growth of Barclays Capital in his latest book Reckless: the Rise and Fall of the City (2010)