Diamond Exit Raises Speculation of Investment-Bank Split

Diamond Departure Raises Speculation of Investment Banking Split
A screen grab shows Robert Diamond, former chief executive officer of Barclays Plc, give evidence to Parliament's Treasury Select Committee at Portcullis House in London, on July 4, 2012. Source: U.K. Parliament via Bloomberg

When Robert Diamond took over Barclays Plc’s shrinking securities unit in 1997 he vowed to turn the business into a leading global firm.

Fifteen years later, his success in creating a top investment bank, whose profit reached $4.7 billion in 2011, may hasten its split from the lender after the London-based bank admitted to trying to rig global interest rates. Diamond quit as Barclays’s chief executive officer yesterday and hours later Chief Operating Officer Jerry del Missier followed.

The departure of Diamond may presage a reorganization of Barclays after regulators in the U.K. and the U.S. pointed to the need for change at the company. The interest rate debacle is intensifying political pressure in the U.K. to build higher walls between banks’ consumer lending and investment-banking divisions to protect savers and taxpayers.

“Now is a very sensible time to pause, draw breath, assess what’s happened and look again at this question of a ring fence or separation,” said Clive Hollick, a former CEO of United News & Media Group Plc and member of the House of Lords Economic Affairs Committee.

Barclays was hit by a record 290 million-pound ($455 million) fine last week for rigging the London Interbank Offered Rate, a benchmark for more than $360 trillion of securities. Diamond, as CEO of the investment bank from 1997 through 2010, oversaw the unit where Libor rates were submitted.

Costs, Complexities

The U.K. Treasury plans to implement recommendations of the Independent Commission on Banking, which proposed financial firms should build firewalls between their consumer and investment-banking operations. Bank of England Governor Mervyn King said on June 29 the Libor revelations reinforced the argument for implementing the proposals as soon as possible.

“Barclays management should begin talking to people about the costs and complexities around a break up, the potential scale of U.S. liabilities” related to Libor, “and how it can insulate itself,” said Gareth Hunt, head of European research at Canaccord Genuity in London. There may be assets like U.K. consumer banking which can be ring-fenced or split off, he said.

U.K. regulators are weighing whether to start a criminal probe into Libor-fixing and Diamond, 60, was questioned today by British lawmakers on the Treasury Select Committee. Barclays is one of at least 12 banks, including Citigroup Inc. and HSBC Holdings Plc, under investigation for manipulating Libor.

‘Business Model’

Diamond said the actions of those involved are “reprehensible” and “wrong,” and the 14 traders responsible have been dealt with.

“This isn’t about the business model,” Diamond told the committee. “If it happened in the investment bank it can happen in retail banking.”

In a sign of worsening relations between Barclays and its regulators, the company released a note yesterday of a 2008 call purporting to show that Paul Tucker, then the central bank’s markets director, hinted the firm could cut its Libor rates.

“Tucker stated that the levels of calls he was receiving from Whitehall were ‘senior’ and that while he was certain we did not need advice, that it did not always need to be the case that we appeared as high as we have recently,” Diamond said in an Oct. 30, 2008 e-mail to then CEO John Varley and Del Missier.

Diamond didn’t believe he had received any instruction or that he gave any order to Del Missier to lower the lender’s submissions, Barclays said. Del Missier, 50, concluded that the Bank of England had instructed the firm not to keep Libor so high and mistakenly instructed employees to lower their submissions, Barclays said.

Tucker said today he wants to testify before the committee “as soon as possible.”

Higher Ranking

Damage to the franchise he helped create prompted Diamond to go, the banker said in a statement yesterday. The American was the chief architect of Barclays’s expansion into investment banking, creating a business that had 24,000 employees at the end of last year, more than three times as many as when he took over the unit.

The division, known until March as Barclays Capital, earned pretax profit of 2.97 billion pounds last year, or almost half of the bank’s total. Barclays ranks fifth in advising on global mergers this year, data compiled by Bloomberg show. The firm wasn’t in the top 20 in 2007, the year before it bought the North American operations of Lehman Brothers Holdings Inc.

Political Pressure

“Diamond’s been incredibly successful in turning what was a minor player into a top tier investment bank,” said George Godber, a fund manager who helps oversee about $250 million at Matterley Asset Management in London, and doesn’t hold Barclays stock. “Now you’re likely to see political pressure mount for a separation of Barclays’s investment-banking unit.”

Diamond, a year after joining what was then Barclays de Zoete Wedd, took the helm and steered the firm through the sale of its money-losing European equities unit to focus on bonds, loans and foreign exchange.

It was a rocky start. In 1998, Barclays Capital reported a loss after bets on Russia soured amid the country’s devaluation.

Diamond, who rose through the fixed-income trading ranks at New York-based Morgan Stanley and Credit Suisse First Boston before Barclays, continued to hire and expand the business. He lost out on the CEO job to Varley, 56, and became president of the bank in 2005.

Lehman Purchase

Diamond propelled Barclays into the top ranks in equities and mergers by leading the bid to buy the Lehman operations when the New York-based firm collapsed at the height of the subprime-mortgage crisis. He struck a deal to acquire the North American investment-banking business of the bankrupt firm for $1.75 billion and then embarked on a hiring spree to add stock underwriting and merger advisory businesses and bankers in Europe and Asia to match its standing in the U.S.

Not everyone advocates a change of direction.

“I think they should sit back and relax,” said Christopher Wheeler, a London-based analyst at Mediobanca SpA. “The investment bank is a top three in the world, no argument about it. Why on earth, having made this investment and a very good acquisition of Lehman Brothers, would someone come in and change their strategy?”

Barclays made it through the credit crisis without direct government support. Since then, tightening global capital standards and Europe’s sovereign debt woes have kept investment-banking profitability below pre-crisis levels.

High Leverage

After becoming CEO of Barclays at the start of 2011, Diamond vowed to boost return on equity to 13 percent. The measure stood at 6.6 percent at the end of last year. Net income for 2011 fell to 3 billion pounds from 3.56 billion pounds as investment-banking revenue shrank.

Within investment banking, there has been “consistency of earnings,” Diamond said today.

Barclays has dropped 37 percent in London trading since Diamond took over, compared with a 13 percent decline in HSBC, Britain’s largest bank, leading to impatience among some investors.

“Their leverage is still high, they’ve got regulatory worries, they’ve got capital worries, you can’t look at them and say it’s a conservative investment,” said John Smith, a senior fund manager at Brown Shipley & Co., which manages 2.3 billion pounds, including Barclays shares. “I would like to see them break the bank in two so you have a low-risk retail bank offering savings and loans and an investment bank where they’re using their own money to take on a lot of risk.”

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