13 May, 2014
Diamonds or Flowers
It isn't every Wealth Management practice that has their own resident Professor. Prof Jon Rushman is an acknowledged leader in the fields of economics and computing science. Here he provides us with some insight as to 'what went wrong' at Barclays capital. If anything even has....
Thursday’s headlines announced Barclays’ retreat from investment banking and rang the death knell for Barclays’ aspirations to be a global force in investment banking. If they are to be believed, they should be a reason for sadness for anyone who likes to see British companies being successful in the wider world. Perhaps only when the British company involved is an investment bank could talk of retreat be received so appreciatively by the general public.
Throughout the global financial crisis that started in 2007, Barclays led a charmed life. Having spent much energy trying to acquire ABN-Amro bank, Barclays’ management wisely decided not to “win at any price” and left the dubious prize to its rival RBS. A little later the same management team found itself in the miraculous position of being able to acquire the US operations of Lehman Brothers for no more than the cost of a data centre. At a stroke, the bank known to most Brits for its high-street branches had become an investment banking colossus encompassing world class equities and fixed-income capability.
In weathering the subsequent years, Barclays for the most part avoided the worst of the fallout from the financial crisis. By raising capital privately (albeit sometimes unconventionally), it was able to avoid any injection of British taxpayers’ money and thus kept its shareholders’ interests relatively intact. Crucially, it was able to keep its operations free from political control. Anyone in doubt about the desirability of this should compare the business performance of Barclays with that of RBS from 2007 onwards.
However, government influence comes in many forms. Frustration with the lavish pay awarded to senior staff and outrage with Barclays’ involvement in the LIBOR scandal made a wholesale change of management unavoidable. The new management team have been right on message, ditching talk of global investment banking and talking about a simpler Barclays, something a British public can feel warm and fuzzy about.
In fact, the reporting on Thursday’s strategy update may not reflect what is really happening at Barclays. The equities businesses acquired from Lehman are amongst the most profitable in the group and there is no mention of scaling those down. Indeed, it would be an amazing act of self-harm to acquire such a great franchise and then not give it what it needs to succeed. Some senior managers have recently left that part of the business and time will tell if that is just natural job turnover or a sign of lack of commitment on the part of Barclays’ board. I sincerely hope and believe that Barclays’ board is committed to making Barclays the best business it can be.
Some of the journalism surrounding the strategy update had the feel of schadenfreude as the investment bankers get their just deserts. Perhaps it is associations with Bob Diamond, Barclays’ ex CEO, that has polarized British public opinion about Barclays so much? Despite what we may dislike about a person’s style we British should be wary of our tendency to be comfortable with the mediocre. Another bank ex-CEO was in the news this week: Paul Flowers, previously with the Cooperative bank and who memorably had to be taught some of the most basic facts about his business by a committee of MPs. The gulf in competence between the two could not be greater. When faced with a choice between Diamonds and Flowers, I think the answer is obvious.