Opinion

James Saft

Was Barclays the problem, or was it the business model?: James Saft

May 8, 2014

May 8 (Reuters) – When the world applauds your obituary, as
it has the death of Barclays Plc’s global ambitions, it seems
you have been doing something wrong.

Barclays’ shares rallied 7.69 percent on Thursday
after the bank announced a sweeping restructuring, the central
planks of which are the creation of a bad bank to house impaired
assets and, more importantly, huge cut-backs in investment
banking.

It all amounts to an end for Barclays’ long-time goal to be
a global universal bank, a project fertilized by the ashes of
Lehman Brothers but ultimately undone by inadequate profits.

But while investors were quick to work out that the global
stage was not the right place for Barclays, perhaps the more
interesting questions are about the read-across for other large
banks.

Did Barclays’ shares surge because it was bad at being a
global bank? Or did they surge because Britain is a bad place
for a global bank to call home?

Or perhaps shares in Barclays surged because it is flat out
bad to be a global bank.

All three explanations are plausible, and all three have a
certain amount of evidence to support them. But the third – that
the interests of investors are not well-served by committing
capital to the largest banks – is the most compelling.

First, let’s be clear by what we mean when we discuss a
global universal bank. This is the idea that a bank that can
compete in all major capital markets around the world will enjoy
an advantage, if sufficient prominence is achieved, in
attracting and serving clients.

The evidence supporting this belief isn’t great, the
role-models are few and given to an embarrassing and persistent
tendency to bleed capital at unpredictable intervals. After all,
global universal bank is what Citigroup attempted for decade
after eventful decade.

Barclays, which picked up part of the Lehman Brothers
operation after it imploded, said it would shed 7,000 jobs at
its investment bank over the next two years, while cutting both
investment bank leverage and risk-weighted assets by about half.
It also plans to sell retail banking operations in mainland
Europe, and will create a “bad bank” to hold $195 billion of
risk-weighted assets from Europe and its investment bank.

TRANSPARENCY AND CAPITAL

The bad bank is intended to allow, as it has elsewhere,
investors to better grasp both Barclays’ downside and its
progress in creating and acquiring better loans and securities.

Retreating from broad swaths of investment banking is a bit
more complex. Not only has the investment bank created
embarrassment and liability – as in the interest rate fixing
scandal – it has done so while requiring huge amounts of
capital. At the same time, it has had to pay out considerable
portions of the money it does bring in, and, worst of all, shown
little sign of reversing those two trends.

That, along with a distressing tendency to make large bonus
payments to “key” personnel without ever quite harvesting the
promised market rewards is exhibit A for those who argue that
Barclays simply wasn’t doing it right.

That’s possible, but in fairness, the vast majority of the
mistakes made at Barclays are rife in other large banks, both
those that have achieved bulge bracket status and those that
have failed at attaining it.

There is also a line of reasoning that says that Barclays,
as one of the few large British banks left standing, was brought
low by increasing regulation and a hostile political atmosphere.
The key issue here is capital requirements, and those are going
up not just in Britain but everywhere.

And while Barclays was frequently knocked around in
Parliament and the press, it is far more telling that only 76
percent of its usually quiet shareholders actually backed its
2013 pay report. Those are the bank’s owners speaking, and they
were, rightly, not pleased with what they were getting for what
they were laying out.

That brings us to my favored analysis: that the business of
being a global bank, of using a huge deposit base as a tool to
compete in capital-intensive areas of investment banking, can
feel like a long-running and elaborate joke at the expense of
shareholders.

That this hasn’t escaped the notice of shareholders can be
seen in the generally lower premiums they will pay for banks
with large investment banking operations. That’s perfectly
sensible: those earnings are volatile, come with occasional
disasters and a culture in which far too much of the revenue
takes the elevator down at the end of the day.

Barclays may have failed, but its ambitions weren’t in its
owners’ best interests in the first place.
(At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be
an owner indirectly as an investor in a fund. You can email him
at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft)

(Editing by Dan Grebler)

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