A banking sector in denial

As long as bank boards continue to ignore the growing push to split investment and retail business arms, chief executives such as Bob Diamond will struggle to do anything but spin the situation to assuage the market.

FT.com

The wretched events at Barclays prompt me to relate something of my own experience there in 1998. The story is topical, since it involves Bob Diamond and traders working for him. It bears on the crucial public policy issue of the relation between retail and investment banking, recently considered by the Vickers commission, of which I was a member. And nothing resembling an accurate account appeared at the time.

In the spring of 1998 I was chief executive of Barclays and Diamond was running Barclays Capital. The previous autumn we had sold the equities and merchant banking business of Barclays de Zoete Wedd in order to concentrate on debt capital markets. The sale had been necessary, difficult and bitterly controversial, inside as well as outside the bank. Now, six months later, Barclays Capital under his leadership was rapidly gaining the confidence of the Barclays board. But it needed bigger trading limits, if it was to develop its business.

One promising direction looked to be the domestic bond markets of developing economies, including Russia. Diamond had hired some traders, and brought to the credit committee – which I chaired – a request for something like a fivefold increase in permitted exposure to Russian counterparties. I cut the request back by roughly half. They were disappointed, but within a few months the situation in Russia had deteriorated so much that no one was arguing about the credit ceiling.

At the end of August, Russia defaulted – not on its foreign currency bonds, which would have been no surprise, but on its rouble-denominated obligations. We were clearly in for a serious loss. I was in Canada and took a call from Patrick Perry, the bank’s experienced and judicious treasurer. At least, I said, we know the extent of the loss is well under control. Not quite, he replied. BarCap turned out to have an exposure significantly beyond the country limit that had been established. It had falsely marked some Russian banking counterparties as Swiss or American, and had blasted through the ceiling.

All international banks took losses on Russia in 1998, but Barclays’ experience was worse than most, entirely because of a failure to respect the internal control system. This breach was not made public, although the regulators were fully aware of it. We looked reckless, and our share price suffered serious damage. The traders were fired. Their leader maintained that he had known nothing about what was going on. He felt terrible. He loved Barclays. He offered to go. I concluded that the embryonic business that BarCap then was would fall apart without him, and that he should stay.

It was a close call. I suspect the subsequent history of the business would have been very different had I asked him to go. I deserve blame for being among the first to succumb to the myth of Diamond’s indispensability, to which some in Barclays were still in thrall only a matter of days ago.

The board decided, unsurprisingly, that controls should be tightened up. That is what boards decide. I drew a different conclusion. I had observed similar things going on elsewhere, and I decided that it was neither safe nor sensible to have trading businesses mixed up in a retail and commercial banking group. Vastly more evidence has since accumulated in favour of this argument. Aligning public and private interests has proved impossible, and so in the crisis taxpayers suffered as well as shareholders – exactly the problem that the Vickers proposals address.

In October 1998, I put to the Barclays board – which, bizarrely, had scheduled a meeting in New York on Yom Kippur (perhaps it was a Quaker thing) – some ways of thinking about disentangling the two businesses. They seemed not to want to know. In those circumstances, I told Andrew Buxton, my chairman, I could not stay much longer. We agreed I would stay one more year, to allow time to find a successor.

Within a matter of weeks it was clear that our strategic disagreement was so deep as to make cohabitation of any kind unworkable, and I left.

A couple of years later the oil price had risen, Russian debts were restructured more favourably and most of the 1998 provision was released – some of it, no doubt, into the pockets of a future generation of traders. I had gone to Canada that August in connection with BGI, the asset management business we had purchased a few years before. BGI was then working on the development of its exchange traded funds business, one of the elements that later made it so valuable, allowing Barclays at the depth of the financial crisis to sell it for a large multiple of book value and thus, providentially, boost the group’s own solvency. Without the sale of BGI, I doubt Barclays could have escaped nationalisation.

It was reported at the time that some of the proceeds of this forced disposal had been paid out to senior Barclays management, including Diamond. If true, this – more than anything else perhaps – shows how far we have fallen, and how far we need to climb back.

The writer is chairman of Syngenta, former chief executive of Barclays and member of the Vickers commission .

Copyright The Financial Times Limited 2012.