Bob Diamond, president of Barclays PLC, loves to tell the story to each year's crop of new managing directors. In 1997, Barclays' investment banking unit was so marginal that its centuries-old parent, Barclays, dumped most of its businesses, including equities and mergers and acquisitions. All that was left was a bond business and a few other odds and ends, rechristened Barclays Capital. British newspapers at the time quickly dubbed the unit "the rump" of Barclays. Says Diamond, an American from Massachusetts who has been running Barclays Capital since that inauspicious beginning: "That wasn't the best branding I have ever seen."
Barclays' decision to focus on the staid world of bonds seemed like a suspect move at a time when the likes of Goldman, Sachs & Co. (GS) and Morgan Stanley (MS) were thriving on initial public offerings and M&A. Yet nine years later, once-puny Barclays Capital is churning out profits that its U.S. rivals would hardly sneeze at. Diamond has parlayed Barclays into a world-leading debt, derivatives, and commodities business that has been chalking up growth in the 20% range year after year. Pretax profits at Barclays Capital were up 25% in 2005, to $2.2 billion, on revenue of more than $7 billion. For 2006, David S. Williams, a Morgan Stanley analyst, forecasts a 12% rise in revenues to $8.2 billion, with profits up 8% to $2.4 billion.
So far this year, Barclays Capital is the largest debt player in Europe, and the third largest globally. San Francisco-based asset manager Barclays Global Investors, which Diamond has also headed since 2002, holds the No. 1 position in exchange-traded funds, packages of securities designed to give investors low-cost exposure to anything from indexes to industrial sectors (see BW Online, 4/10/06, "Making Barclays Sparkle"). Its pretax profits surged 61% last year, to $940 million. Barclays Capital and Global Investors accounted for about a third of overall profits last year but two-thirds of the company's profit growth.
Of course, Barclays' fortunes could change. If interest rates continue to rise, corporate issuance might slow and investors might have less appetite for its yield-enhancing products. A bigger concern would be some sudden loss of confidence in the markets -- another terrorist attack, say, or a regional stock market collapse -- that would chill demand for financial risk. Diamond is "smart and a good leader," says one top investment banker. "But he is not untouchable."
So far, he's sure looking good. Diamond, who came to Barclays after senior posts at Morgan Stanley and Credit Suisse First Boston in New York, London, and Tokyo, is an ultracompetitive former high school football star. His office at Canary Wharf is festooned with Boston Red Sox and New England Patriots memorabilia. Those who know him say Diamond is a natural leader and teacher, traits acquired, perhaps, from his late father, a teacher and school administrator whom Diamond calls "my hero." His dad finished up his career as principal of a high school on Nantucket, where Diamond today has a home.
Diamond, who taught management while getting an MBA at the University of Connecticut and who originally intended to be a business school professor, thinks culture ultimately is more essential to a bank's success than products or technology. He has been meticulous in designing the right way to hire new bankers and in tracking their subsequent performance. Job candidates are grilled in four-hour sessions and probed for flaws, especially any possible resistance to the team approach Diamond favors.
That philosophy also affects the choice of who will make managing director. After lengthy vetting, some 30 senior executives assembled in one room vote on each candidate for managing director, using electronic buttons. A score of 85% to 90% is required for success: Hotshots who alienate colleagues are told to change or leave. "We have a 'no jerk' rule around here," says Chief Operating Officer Rich Ricci.
Several of Diamond's key associates are also Americans, which has hastened the transformation of the bank's culture away from its British roots and into something much more freewheeling and entrepreneurial. Says Diamond: "We really put a lot of time and a lot of process into measuring [everyone] based on how they perform -- not on who they know or how long they have been here."
Of course, Diamond's decision to focus on bonds a decade ago has also played a huge role in the company's success. Low interest rates have helped spawn vast pools of liquidity, which have fostered a boom in innovative financial products. Companies are increasingly concerned about hedging their risks from foreign exchange exposure, fuel costs, and pension liabilities. Providing financial solutions to such problems is Barclays' meat and drink.
At the same time, investment banks such as Goldman and Morgan Stanley no longer dominate the business. Big, integrated banks such as Barclays or JPMorgan Chase & Co. (JPM) have taken market share, especially in the debt markets. It's not hard to see why. The hefty, complex financings that companies demand today are sometimes not even possible without the backing of a powerful institution such as Barclays bank, which has an AA rating and a $1.5 trillion balance sheet with which to guarantee deals.
Diamond is putting that firepower to good use in the U.S., where Barclays Capital's business has nearly doubled in two years, to $2.8 billion. When Barclays first tried to do business with ACC Capital Holdings in 2003, the Orange (Calif.) company's CEO, Aseem Mital, feared he would be dealing with "somewhat stodgy" types. He changed his mind after Barclays showed it could take on large, sophisticated deals for ACC, America's largest subprime mortgage originator.
Mital particularly likes a complex securitization dubbed "memory lane," which allows his company to gain cash in advance from its $80 billion portfolio of mortgage collections. "They have become our go-to guys," says Mital, who rewarded Barclays Capital with $12.5 billion in coveted securitizations over the last year.
Diamond is making other moves, too. Last November, Barclays entered the U.S. commodities big leagues by taking a money-losing portfolio of derivatives off the hands of Charlotte (N.C.)-based Duke Energy Corp. (DUK) for $700 million. In the Middle East, it helped raise $10 billion for Dubai Ports World's recent acquisition of Britain's P&O. Part of the financing was a $3.5 billion "sukuk," or convertible bond issue designed to conform to Islamic strictures against charging interest. When Deutsche Bank missed its deadline, Barclays won two-thirds of the deal, and an extra $30 million in fees.
Is there more he can accomplish at Barclays? Diamond says: "That is the right question, and it is scary." His name came up when Morgan Stanley was looking for a CEO last year, and he is likely to be on the short list for other top jobs. Diamond insists he's happy right where he is. Whatever happens, he won't be running a rump business anymore.
By Stanley Reed