Vicky Pryce

When Greed Was Good

The Bank That Lived a Little: Barclays in the Age of the Very Free Market

By

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I must admit that at first I wondered why anyone would care enough about the subject to buy a heavy volume on the recent history of Barclays. The bank’s main distinction in the last decade was managing to survive the financial crisis without being bailed out by the government. This meant that Barclays didn’t spend time being majority-owned by the state, like Royal Bank of Scotland, or minority-owned, like Lloyds Bank. It avoided state ownership by raising emergency funding, mainly through a deal with Qatar, the method of which is still being investigated by the regulatory authorities. Fraud charges have already been brought against some of the most senior officials in charge of the bank at the time, including John Varley, chief executive from 2004 to the end of 2010.

But once you start reading Philip Augar’s well-researched book, you are captivated. This is not because of the personal anguishes of the leading players, to whom one could never warm, despite Augar’s attempts to imagine their feelings when they entered a boardroom, reacted to someone knifing them, received promises that were swiftly withdrawn and tried to talk to their wives – always wives – before making a decision. None of this frankly matters, or rings that true. In fact, this is the one irritating part of the book. Instead, what makes The Bank That Lived a Little a must-read is the way in which, in its pages, Barclays comes to embody all that has been, and possibly still is, wrong with the entire banking sector. 

Augar reminds us that a large part of the sector’s activities were in 2009 labelled ‘socially useless’ by Adair Turner, head of the Financial Services Authority. The greed, personal ambition and bad corporate governance that proliferated – a result, as Augar perceives it, of weak boards backing poor strategies – come through strongly. His argument that the ‘light touch regulation’ which Gordon Brown, as Chancellor of the Exchequer, oversaw in the run-up to the financial crisis was less than effective is also convincing.

Within the coalition government of 2010–15, the free market tendencies of David Cameron and George Osborne were at least balanced by the more sceptical attitude of Vince Cable. As business secretary, Cable identified banks as public enemy number one and sought, with success, to ring-fence their retail operations from what he termed ‘casino’ banking, represented by investment banking operations. Capital requirements were also tightened and even Osborne had to give in to EU pressure and accept a bonus cap for the sector.

Before the financial crisis, Barclays stood out as one of the most aggressive banks in its search for expansion. By 2004 it was borrowing over thirty times its equity capital (the so-called ‘leverage ratio’ for equivalent international banks averaged only twenty-two times). When the crisis hit in 2008–9, pressure on equity capital mounted, the banks looked vulnerable and the banking excesses of the preceding years became headline news. During those dark days and for a few years afterwards, admitting you worked for a bank was a sure way of being removed from party invitation lists.

Royal Bank of Scotland saw its notorious chief executive, Fred Goodwin, depart in 2009 after nationalisation, but Varley and the high-profile American Bob Diamond, who ran Barclays Capital, the very successful investment bank set up by Barclays in 1997, clung on. Barclays Capital was the successor to Barclays de Zoete Wedd (BZW), which seems to have been an expensive mistake. BZW was Barclays’ attempt to compete with the large American banks following the abolition of exchange controls by Margaret Thatcher in 1979 and the Big Bang in the mid-1980s, which opened up the City to foreign institutions. But the new entrants bid up salaries and made it hard for traditional UK retail banks to compete with them. In 1997 BZW, which Diamond had taken charge of the previous year, sold its equity business. Diamond formed Barclays Capital from the remnants of its operations.

Diamond fulfilled his ambition to become CEO of Barclays in 2011. But he only lasted until 2012, when he was forced out after a series of scandals that shook the sector, and because of a controversy surrounding the size of his own salary and the large bonus he received that year in spite of the bank’s poor profitability. Over a number of pages, we see a Barclays board apparently fearful of confronting Diamond and refusing to accept the no-bonus recommendation of Alison Carnwath, a non-executive director and head of the bank’s remuneration committee. At the AGM that followed, she had to defend the board’s position while keeping her personal views hidden. She only resigned afterwards. The full story did not become clear until 2013. Augar sees this incident as an example of what is wrong with the culture of the small circle of grandees and investment bankers who make up the non-executive directors on bank boards. For as long as this small group occupies these coveted positions nothing much can change.

In the end Diamond and his top lieutenants were made to forgo their bonuses, but by then the writing was on the wall for him owing to the pressure he was under from the regulators. He was replaced by Antony Jenkins, a much more conservative figure who had previously run Barclaycard very successfully and wanted the bank to place greater emphasis once again on its retail operations. But a board still hankering after Barclays becoming a universal bank ousted him in 2015. The new chief executive, the American Jes Staley, rapidly found himself embroiled in a high-profile whistle-blower controversy. He was fined heavily by the Financial Conduct Authority and lost part of his bonus but has retained the board’s support and carries on.

The very public scandal over the persistent manipulation of Libor, used as a reference point for financial contracts around the world, resulted in prosecutions and in criminal convictions for a handful of the traders involved. Augar presents extracts from emails exchanged between government officials and the Bank of England to show that there may have been pressure on Barclays and other banks to keep Libor rates low at the time of the crisis to give the markets the impression of a healthy banking sector, but he leaves it to readers to draw their own conclusions.

For a number of years now, litigation fees, fines (in both the UK and the USA) and compensation payments to customers who were mis-sold financial products have squeezed Barclays’ profits and affected its reputation. One such product was payment protection insurance (PPI), which was designed to enable borrowers, if they fell ill or were made redundant, to service their mortgage or credit card debts. Between 2001 and 2005, PPI fees apparently accounted for some 32 to 42 per cent of Barclays’ UK retail and business profits. By 2005 Barclays’ share of PPI purchasers to overall borrowers was higher than that of all other banks: nearly 70 per cent of borrowers bought a PPI policy when they took out a loan. Another mis-sold product was intended to protect customers from the effects of interest rate increases. This cost companies a fortune in payments to the bank when interest rates fell in the aftermath of the financial crisis. By the time Barclays and others had been forced to pay back the fees and compensate clients, many of the businesses affected had gone under.

Profits are now improving. Regulation is tighter. But one wonders whether the culture that Augar criticises in the book, particularly among non-executive directors, is likely to change any time soon.

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