Newsmaker: Bob Diamond, incoming CEO, Barclays
Appointment marks the ascendancy of capital investment over Barclays retail business
BY appointing Bob Diamond as its next chief executive, UK bank Barclays has thumbed its nose at public opinion outraged by the excesses of the "casino" banking of the boom years.
The British economist John Kay once famously described modern banks as being like utilities with casinos attached. The utility was the boring, old-fashioned bit that collected deposits and lent money to individuals and small businesses through the retail branch network, while the casino was the high-risk/high-reward end of the business that traded the bank's own money on stocks, bonds and currencies.
In recent years, it has become increasingly difficult for banks to make a decent return from traditional retail-branch banking. Increased competition, both on-line and off-line, has eroded once-fat margins.
With their traditional activities in seemingly terminal decline, many banks on both sides of the Atlantic have looked at other ways of making money.
Instead of meat-and-potatoes branch banking, they opted for something a bit racier and apparently more lucrative.
Throughout the nineties and noughties, banks everywhere piled into so-called investment banking. This was an imprecise term which covered a wide range of activities, including stockbroking, wealth management and lending to large companies. But more often than not, it involved the bank trading -- i.e. gambling -- with its own money on the financial markets.
And not just with their own money. This "new" banking meant that banks were able to super-charge their trading returns by borrowing money which they also traded. This leverage meant that when the banks got it right, even very small movements in market prices could generate extremely high trading profits.
It wasn't just the banks who raked in the rewards from these apparently successful bets. The masters of the universe who manned -- they were nearly always men -- the banks' trading floors were paid positively obscene amounts of money for their talents. Multimillion-euro salaries topped by even larger bonuses became the norm. And sure why not? Wasn't it their genius that was generating all of these profits?
Well actually, no, it wasn't. With the exception of the brief post-2000 dotcom bust, the bull market that finally came to an end in August 2007 ran for a decade-and-a-half, making it easily the longest bull market of the post-Second World War era.
When markets are seemingly only going in one direction, it becomes easy to confuse genius with mere dumb good luck.
When the credit crunch struck in August 2007, it quickly became apparent that the new banking wasn't all it was cracked up to be. All of that leverage meant that when the markets turned down, huge profits were quickly replaced by mountainous losses.
Things got even worse after the collapse of US investment bank Lehman Brothers in September 2008. The resulting panic forced governments throughout the developed world to bail out their banks at massive cost to both present and future taxpayers.
Thoroughly spooked by the Lehman collapse, American taxpayers were forced to fork out $750bn to keep the rest of Wall Street's finest in business, while ratings agency Standard & Poor's now estimates that the total cost of sorting out Ireland's banking crisis will be at least €90bn.
Meanwhile in the UK, the former chancellor Alistair Darling was forced to spend £76bn (€91bn) pumping fresh capital into RBS and Lloyds, insured £280bn of bad RBS loans, guaranteed £250bn of wholesale borrowing by the UK banks and indemnified the Bank of England so that it could provide an extra £200bn of liquidity to the UK banking system during the crisis.
In fairness to Barclays, it managed to weather the storm without needing an injection of taxpayer-funded capital. However, it was forced to borrow £1.6bn from the Bank of England at the end of August 2007.
While there were rumours at the time that Barclays was suffering from liquidity problems, it later emerged that the loan was required because it was experiencing technical difficulties with its computerised settlement systems, which left it temporarily short of cash.
Unlike many of its UK rivals, who were forced to go cap-in-hand to the British government following the Lehman collapse, Barclays had succeeded in raising fresh capital from private investors before the crisis.
In July 2008, it raised £4.5bn from a rights issue.
However, only 19pc of its existing shareholders took up their rights, with most of the new shares going to the sovereign wealth funds of Qatar, Singapore and China.
So was Barclays success in avoiding the fate of RBS and Lloyds the result of good luck or good management? Probably more the former than the latter.
In March 2007, right at the top of the banking cycle, Barclays announced a £44bn takeover offer for Dutch bank ABN Amro. Fortunately for Barclays, it was outbid by RBS, which ended up paying almost £50bn.
If Barclays had succeeded, would it, rather than RBS, have been forced in the autumn of 2008 to seek fresh capital from the British government, which has left RBS 83pc state-owned?
That's an academic question. What isn't academic has been the strength of the public backlash against fatcat bankers.
While the sight of bankers earning gargantuan salaries and bonuses may have merely grated during the good times, it's a very different story now, in the aftermath of the global banking crisis.
While Barclays can justifiably argue that it didn't require any capital from the British government, it did benefit from some of the other measures, including the easier access to wholesale lending, improved liquidity and the aforementioned loan from the Bank of England.
Whatever the rights and wrongs of the matter, what is indisputable is that, having been paid over £100m during his 13 years at the bank, including £6.5m in 2009 alone, Diamond has become the public face of "casino" banking.
So why did the Barclays board turn a deaf ear to public opinion and give the top job to Diamond? In truth, it probably didn't have any choice.
Helped by its opportunistic purchase of the rump Lehman for a mere $1.35bn in September 2008, Barclays Capital, which Diamond has headed up since 1997, generated no less than 90pc of Barclays' total first-half profits of £3.95bn.
ALTHOUGH Barclays, which can trace its origins back to 1690 and has traditionally been thought of as the quintessentially "English" bank, it has in fact been transformed in recent years. Thanks to Diamond's success in investment banking, Barclays is now much more Wall Street than High Street.
While the statement that announced Diamond's appointment spoke of his predecessor John Varley's "extraordinary contribution" to Barclays during his seven years as chief executive, the fact that Diamond is actually five years older than Varley kind of gave the game away.
Diamond's replacement of Varley marks the final break with Barclays' founding Quaker families, who have controlled the bank for most of its 320-year existence. With Diamond at the helm it is likely that an even greater proportion of Barclays' capital will be devoted to its investment-banking activities -- three-quarters of Barclays' capital is already allocated to Barclays Capital.
This means that its traditional retail-banking activities will decline even further in relative importance and, under Diamond's leadership, could well be sold off altogether.
With the head croupier having been appointed boss of the casino, will the utility now disappear altogether?