Not so long ago banking was a relatively simple business whose main focus was on deposit-taking and lending. Then in the 1980s everything changed as a powerful tide of deregulation swept through the industry courtesy of Ronald Reagan and Margaret Thatcher. The utility-like prudential ethos of banking metamorphosed into a culture of gung-ho short-term profit maximisation. Trading in financial derivatives — swaps, futures and options and so on — mushroomed, while loans were packaged into securities and shuffled off bank balance sheets, permitting the banks to extend yet more loans. Bonus-hungry young men (and the odd woman) on huge trading floors operated as hired guns, feeling no loyalty to their employers. Big international banks took on increasing amounts of risk in relation to dwindling cushions of capital. This transformation culminated in the great financial crisis of 2007-08, which showed that the global economy had become hostage to a bloated and rickety financial sector.
Today, even after the post-crisis toughening of regulation, it is arguable that the big banks are so complex and lacking in transparency as to be unmanageable. That argument derives considerable support from Philip Augar’s new book on Barclays. In The Bank That Lived a Little, this former banker provides a brilliantly readable account, based on exceptional access to most of those involved, of the transformation of the old Quaker bank into a hard-charging capitalist adventurer.
At one level, it is a tale of a running battle over strategy between those at the top of Barclays who wanted it to join the club of pre-eminent global banks and those who wanted a more domestic focus — a tension that has afflicted other big banks across Europe. At another, it is about the growing prominence of the City of London in Britain’s social and economic life. Augar brings forensic skill to the task of chronicling the change in ethos in banking, showing how even very talented people struggled to manage the risks and strategic challenges of the new global financial marketplace.
There is no question that many of the top executives at Barclays were exceptional people. Consider just three. Lord Camoys, the architect of Barclays’ response to Big Bang, the deregulation of the London Stock Exchange in 1986, was a visionary who saw that the big investment banks were challenging the traditional lending business of the old commercial banks. In this new world, instead of simply lending to clients, Barclays needed to also be able to raise money — and lots of it — for them on the capital markets by selling and trading debt and equity securities to investors. To do that it bought in the run-up to Big Bang the pre-eminent jobbing firm Wedd Durlacher, which made markets in securities, and the broker De Zoete & Bevan. Camoys was prevented by illness from playing a full part in implementing the vision, but Barclays was second only to SG Warburg in the strength of its acquisitions and the coherence of its strategy.
Martin Taylor, who became chief executive in 1994, had done a superb job as chief executive of Courtaulds Textiles, a business that confronted numerous challenges in a declining sector. At the much larger Barclays, the former FT journalist brought formidable intellectual capability and was prepared to address the uncomfortable reality that investment banking contributed little to Barclays’ profits. He was sceptical about his predecessors’ ambitions to take on the big Wall Street banks and boldly decided that the equities and corporate finance businesses should be sold. Yet the sale coincided with the Asian financial crisis of the late 1990s and was botched. When Taylor later proposed to sell the residue of the investment bank after it incurred big losses in Russia, he failed to carry the board with him and felt obliged to resign.
The most intriguing of Barclays chief executives was the American Bob Diamond. A former Morgan Stanley and CSFB fixed income trader, Diamond rebuilt the investment bank after Taylor’s departure and turned it into the UK’s first globally competitive investment bank. He did so without spending a cent on acquisitions and by plundering his previous employers for talent. By the time he stepped up to the top job in 2011 Barclays Capital, the investment bank, made up over half of the group’s profits and earned a remarkable 16 per cent on equity capital.
The holy grail for elite London bankers had always been to break into Wall Street and take on the giants of US banking. None succeeded, although Siegmund Warburg came close to merging SG Warburg with US investment bank Kuhn Loeb in the 1960s. But the deal foundered because of personality clashes. Yet where the legendary Warburg failed, Diamond, with notable support from the then chief executive John Varley, succeeded. When Lehman Brothers collapsed in 2008, Barclays picked up the equities and corporate finance businesses — the non-toxic parts — for a song. It thus became a top-five universal bank, taking its place alongside the likes of JPMorgan, Goldman Sachs and Morgan Stanley.
Meantime, while Diamond was chairman of Barclays’ fund management arm Barclays Global Investors from 2002 to 2008, profits rose from £110m to £595m. When BGI was sold to the BlackRock fund management group in June 2009, it bagged a profit for Barclays of £6.3bn, a hugely valuable boost when the bank’s capital ratios were under pressure during a financial maelstrom in which it narrowly escaped a government bailout.
There were nonetheless snags: while Diamond was a brilliant builder of businesses, he was never sufficiently in control of the investment bank. The reason Barclays Capital lost so much money in Russia was that Diamond put too much trust in traders who disguised Russian counterparties as Swiss or American in order to breach country lending limits they regarded as unduly restrictive.
To the extent that the enlarged group had common values, they were built around the pursuit of bonuses. In the years after the financial crisis Barclays was to be plagued by revelations about traders manipulating the Libor interest rate — the reference point for everything from credit-card rates to student loans and mortgages — along with many other forms of market malpractice. At the same time the retail bank gulled hapless customers into buying toxic derivatives. And as well as being insensitive in his dealings with the Bank of England and the regulators, Diamond had a tin ear for public opinion, especially in relation to pay.
His pay package in 2009, when Barclays was already the beneficiary of state support through the Bank of England’s special liquidity and credit guarantee schemes, was £27m. Although he declined performance bonuses for 2009, this figure provoked outrage among politicians and public. Together with the Libor scandal, it caused Mervyn King, Bank of England governor, to apply pressure to the board to fire Diamond.
These vignettes and those of Barclays’ chairmen and other chief executives are skilfully drawn by Augar. He is damning on the non-executives before and during the period of the financial crisis, suggesting that they completely failed to offer a constructive challenge to the executive or to insist on adequate discussion of strategy. One of the book’s more powerful anecdotes concerns the board’s decision to overrule the chair of the remuneration committee, Alison Carnwath, on curbing excessive pay.
In discussing the dramatic decline in standards of behaviour in banking, Augar makes an illuminating comparison with football in the 1960s, when the abolition of maximum wages for players and the arrival of big money from television made the temptation to pretend to be fouled or argue with the referee irresistible. Gamesmanship was tolerated because everyone was doing it.
So, too, in banking after Big Bang. High rewards, weak regulation and the demands of short-term shareholders corrupted the business. What happened at Barclays was symptomatic of a system-wide decline in behavioural standards. Banking had turned into an ethics-free zone.
In his brief tenure as chief executive from 2012 to 2015, Antony Jenkins made a determined effort to instil better values across the group. But as long as performance-based incentives remain central to banking remuneration, attempts to improve conduct will surely be an uphill struggle.
Augar tells a gripping tale and tells it colourfully. We learn, for example, that the current chairman of Barclays, John McFarlane, has his office suite laid out according to the instructions of his feng shui adviser, a Mr Wong, to create an atmosphere of positive energy. And we are told where and what people were drinking when vital decisions were made.
If I have a quibble, it is, oddly enough, that the book puts too much blame on bankers. Yes, they were overpaid and took excessive risks, but they did so in a monetarily dysfunctional world. Asymmetric monetary policy, whereby central banks put a safety net under falling markets but no cap when prices rose, created a global property bubble. In today’s short-termist capital markets, bankers are excoriated by investors if they fail to join the party. By contrast central bankers have had — so far — an easy ride. But the quibble is minor. Philip Augar’s book is both a thriller and a reminder that business is fascinating because all human life is there.
