Diamond Parries Attacks on Pay With Vow to Earn Public Trust
As 1,100 managing directors from Barclays Capital descended on the Grosvenor House hotel near London’s Hyde Park in late September, they had more to celebrate than having successfully swallowed the North American unit of Lehman Brothers Holdings Inc. two years earlier. Their guy, Bob Diamond, the Massachusetts-born founder of Barclays Capital, had just been handed the top job at parent Barclays Plc in a sign of how he had transformed the 320-year-old British institution in his 14 years as investment bank chief, Bloomberg Markets magazine reports in its January issue.
“Bobtimistic” is how Rich Ricci, Barclays Capital’s new co-chief executive officer, described Diamond’s eternally upbeat attitude to the assembled executives as he introduced a five- minute video send-off.
“I’d like to say that he’s too humble to recount what we are about to show in this video, but you’ll probably just have to hear it twice,” Ricci joked.
The tribute, heralded by blaring trumpets, featured a digital scrapbook titled “The Wonder Years,” with clips of Diamond hiking up his yellow suspenders in 1997 as he talked about making Barclays Capital a bond market leader; a mock image of him dressed like the children’s cartoon character Bob the Builder; his first pep talk to Lehman employees after acquiring the bankrupt broker-dealer in 2008; and photos of him with Rolling Stone Mick Jagger, soccer stars of London’s Chelsea Football Club and pro golfer Phil Mickelson.
Outside the five-star hotel, the appointment of the 59- year-old American investment banking chief to run one of Britain’s oldest financial institutions was met with less celebration. In some U.K. media and political circles, Diamond is the personification of a greedy banker, a symbol of all that has gone wrong in global finance.
Two years after U.K. taxpayers invested, loaned or pledged more than 850 billion pounds ($1.32 trillion) to shore up the British financial system, Diamond’s rise to the top of the world’s fifth-largest lender by assets prompted London’s tabloid Daily Mail to call him “The Real-Life Gordon Gekko.” Although Barclays itself didn’t take a farthing directly from the British government to boost capital, Diamond has been attacked for the level of his own compensation.
He took home a 21.1 million-pound pay package in 2007 and then pocketed 26.8 million pounds from the $15.2 billion sale of Barclays Global Investors in 2009.
Even though he shunned a bonus in 2008 and 2009, Diamond remains the poster boy for banker-bashing. Just weeks before the May 6 U.K. general election, then-Business Secretary Peter Mandelson called Diamond the “unacceptable face of banking.”
“He hasn’t earned that money,” Mandelson told The Times of London newspaper. “He has done so by dealmaking and shuffling paper around.”
Diamond, who has a fondness for cigars and is surrounded by a coterie of American executives, shrugs off such vituperation.
“I have to live with it,” he says in an October interview, sitting jacketless at a conference table while eating a lunch of tomato soup and salad on the 31st floor of the bank’s headquarters in London’s Canary Wharf. “Although Barclays performed exceptionally well and never took any public money, to some extent the public throws us all in the same basket: We’re all banks. We have to re-earn public trust.”
The man whose mantra is “execution” has more pressing issues to worry about than his image. Diamond, who takes the formal title of group chief executive on April 1, now counts as one of the most powerful players in finance.
Shunned By Investors
Yet the institution he inherits is being shunned by investors. Barclays’s stock declined 16 percent in the six months ended on Nov. 30, to 256.15 pence, while the 53-member Bloomberg Europe Banks and Financial Services Index declined 1.24 percent.
The shares traded at 0.62 times the book value of the bank’s assets -- compared with the 1.31 average multiple for European banks -- as shareholders fretted about the effect of higher capital rules on the bank.
Barclays’s decision to sell BGI to BlackRock Inc. in 2009 to raise capital made the bank even more dependent on investment banking revenue, which slackened in 2010. Barclays Capital accounted for 75 percent of the company’s 4.27 billion pounds of pretax profit in the first nine months of 2010. On Nov. 9, Barclays reported that quarterly pretax profit fell 76 percent from a year earlier, to 327 million pounds from 1.36 billion pounds, as Barclays Capital weathered reduced trading volumes.
The investment bank unit posted a third-quarter loss of 182 million pounds after a 24 percent decline in revenue to 2.8 billion pounds from a year earlier. The bank plans to eliminate hundreds of jobs at Barclays Capital by the end of January, according to three people familiar with the matter. A spokesman for Barclays in London declined to comment today on the report of job cuts.
Barclays’s corporate banking arm has also struggled, hit by bad loans in Spain, as it posted a pretax loss of 414 million pounds in the first nine months of 2010.
Those results show the scale of the challenges Diamond faces in reviving Barclays’s fortunes and strengthening the retail and corporate banking operations, says John-Paul Crutchley, an analyst at UBS AG in London.
“BarCap has been a phenomenal success,” he says. “But for Diamond’s tenure to be a success, investment banking will have to be proportionally smaller than it is now.”
Banks that don’t execute well and can’t boost returns will be ripe for takeovers, Diamond says.
“If you’re earning significantly below your cost of equity, it’s going to create consolidation because it won’t be sustainable,” he says.
That’s the strategic challenge Barclays now faces: Its return on equity is 6.7 percent as of Sept. 30 and its cost of equity -- the return that shareholders expect from dividends and the stock price -- is 12.5 percent, the bank says.
Apart from a side table jammed with pictures of his three children, Diamond’s London office is unadorned. It’s his first day as deputy group chief executive officer in a six-month transition working alongside John Varley, the Oxford-educated Barclays boss who helped navigate the bank through the financial crisis and drove the lender’s dealmaking.
“The stereotypical image of Varley is of the conservative, genteel British banker and Diamond as the aggressive risk taker,” says Naguib Kheraj, a former Barclays executive who is head of Lazard International. “Whilst both are calculated risk takers, if you asked me which of the two is more willing to take risks, I would say John, not Bob.”
While Diamond built Barclays Capital without acquisitions, Varley, 54, spent $4.3 billion buying a majority stake in Absa Group Ltd., the South African lender, in 2005.
At the time, it was the biggest purchase for Barclays outside the U.K. Varley also oversaw the acquisitions of Russian lender Expobank for $745 million in March 2008 and the banking unit of Edinburgh-based insurer Standard Life Plc for 226 million pounds in October 2009.
One of Diamond’s first tasks will be to keep Barclays in one piece. Britain’s Conservative-Liberal Democrat coalition government has set up a commission that will rule in September whether the country’s big banks should be broken up by splitting off investment banking units from retail operations. British Business Secretary Vince Cable says Diamond’s promotion shows the dangers of risky investment banking practices infecting commercial banking.
“What this appointment illustrates is the wider policy question about how banks can be made safe, and we are worried about this combination of the casinos and the traditional banks,” Cable told the British Broadcasting Corp. on Sept 8.
Banks are responding to that rhetoric. Since August, HSBC Holdings Plc, Standard Chartered Plc and Barclays have all threatened to quit London if the commission rules for a split or the government imposes punitive taxes on banks.
That has former Chancellor of the Exchequer Alistair Darling concerned about the future role of the U.K. capital as a center for banking, as financial services account for about 10 percent of the British economy.
“I would like to see as many banks and financial services institutions as we can get based in London,” Darling says. “I very much doubt the commission will recommend breaking up banks.”
Diamond has already won over Mandelson, who now says he was wrong to personalize the bonus debate. Even so, finance executives must do something about their generous pay packages, Mandelson says.
“The banks need to face up to what everyone apart from the recipients, it seems, feels about bonuses,” he says. “They are just way out of line with what is justifiable or acceptable. They need to agree among themselves to bring them down.”
Barclays has attracted negative coverage in British newspapers for paying its employees billions of pounds in bonuses, even during the financial crisis. In 2009 -- the year after the financial crisis widened -- Barclays spent 2.7 billion pounds on bonuses. The bank set aside 2.2 billion pounds in the first three quarters of 2010 for bonuses, including deferred payments, putting it on track to exceed 2009’s total.
The bank is able to dole out that largesse in part because Diamond dodged two major bullets in his rise to the top. In 2007, Varley and Diamond lost the takeover battle for ABN Amro Holding NV to a group headed by Royal Bank of Scotland Group Plc, which bid a record 73.3 billion euros ($96 billion) for the Dutch lender in a deal that eventually brought the U.K.’s second- largest bank to its knees.
Then Diamond drove the Barclays bid to buy Lehman just days before the brokerage declared bankruptcy, only to see the deal slip away when the U.S. government declined to guarantee the firm’s trading operations and British officials, including Darling, quashed the deal. That allowed him to snap up Lehman’s U.S. broker-dealer business for $1.75 billion from the wreckage of the biggest bankruptcy in U.S. history.
The bargain-basement price paid for the Lehman acquisition helped propel Barclays Capital past its rivals. The investment bank still makes most of its money trading fixed income and currencies. It’s also the top underwriter of international bonds, a position it has held since 2008. The Lehman deal helped Barclays move to No. 5 in advising on global mergers and acquisitions in 2010, leapfrogging Deutsche Bank AG, which held that position in 2009.
“It gave us the opportunity to put five or six years of growth into 90 days,” Diamond says. “We needed an opportunity to get scale in the U.S. if we were going to achieve our ambitions.”
Barclays Capital -- which ranked 10th in 2010 in equity offerings worldwide -- has spent 430 million pounds in 2010 to build up the equity and advisory business mostly outside the U.S.
“Scale in the U.S. equity business is key to being a success globally,” Jerry del Missier, co-CEO of Barclays Capital, says. “Building Europe isn’t difficult as long as you have the U.S.”
Like most major banks, Barclays faces regulatory pressure to reduce its risks. Lenders will have to more than double the amount of capital they hold in relation to risk-weighted assets under the new Basel III regulations that were agreed on by regulators from 27 nations in September 2010. Those rules, which take effect in 2019, could add 60 billion pounds of risk- weighted assets that require higher capital, rising to as much as 150 billion pounds depending on how the Basel III capital changes affect different parts of the business, Diamond says.
Barclays will knock that down by about 50 billion pounds through the controlled growth of risk-weighted assets, allocation of capital to businesses with higher returns and asset sales, Barclays Finance Director Chris Lucas told analysts on Nov. 9. As part of that effort, Diamond began chairing a weekly returns committee meeting to control how the bank allocates capital.
“You should not expect us to raise equity,” he says. “We know what the impact will be assuming no actions; that’s manageable. We don’t need to raise capital, and we’re going to take management actions,” Diamond says.
The new Basel rules are so stringent that Barclays Capital would have posted a total economic loss of more than 4 billion pounds in 2008 and 2009 if the capital requirements had been in effect, UBS analysts said in a Nov. 15 note.
Crispin Odey, founder of London-based hedge fund Odey Asset Management LLP, says Barclays’s stock price will stay stagnant until the bank begins paying higher dividends and buying back its own shares.
“We see this as being a slow recovery story,” says Odey, who bought Barclays stock as the price bottomed out, holding as much as 19 million shares in March 2009. “We’ve probably got another year before they have enough capital to start buying back shares.”
Barclays has a market value of 32 billion pounds, less than the 42 billion-pound market capitalization of RBS, the crippled bank that beat Barclays in the ABN Amro fight.
While other British banks needed direct taxpayer bailouts in 2008, Barclays headed for shelter in the Middle East. In November 2008, the bank raised more than 7 billion pounds from investors, the bulk from Abu Dhabi and Qatar, at a time the U.K. government began spending 66 billion pounds buying shares in Lloyds Banking Group Plc and RBS to keep them operating.
“The decision to stay independent has proved to be the right one,” says Florian Esterer, who helps manage about $58 billion at Swisscanto Asset Management AG in Zurich, including Barclays shares. “They were very aggressive about steering their own course.”
While the Lehman deal boosted Barclays’s fortunes in the U.S., it also triggered a legal headache for the duo running the bank. Lehman’s creditors are suing Barclays in U.S. bankruptcy court in New York, alleging the British bank obtained $11 billion of windfall profits when it acquired the bankrupt broker-dealer by undervaluing key assets.
Diamond and Varley testified at the trial in June to challenge the claim, saying the price was fair given the collapsing financial markets of 2008.
At the heart of the case is the allegation by Lehman lawyers that Barclays made $5 billion of “secret” profit on a portfolio of securities it took on with the brokerage and a further $6 billion by writing up business assets, skimping on promised payments and culling money held in accounts including margin deposits backing Lehman trades. Barclays denies all of the allegations.
Share Price Drag
As part of the deal, Barclays says Lehman agreed to make two transfers worth about $1.3 billion to Barclays that the U.S. Securities and Exchange Commission said in a filing could have violated securities laws. In response, Barclays says the assets were allocated to it in a sale document signed by all parties to the transaction in the 2008 financial crisis. The U.K. bank still claims the assets, which were never delivered, and asked the judge to uphold the transfers in a Nov. 29 filing.
The bank says Lehman has no right to challenge the deal because its advisers knew all of the transaction details, which were documented. Barclays’s lawyer David Boies, best known for representing Al Gore in the Supreme Court battle over the 2000 U.S. presidential vote recount, told Judge James Peck that he couldn’t overturn the sale order just because one side benefited more than the other from the deal.
“The Lehman trial is definitely weighing on Barclays’s stock price,” says Simon Maughan, London-based co-head of equities at MF Global U.K. Ltd.
Diamond, a Boston Red Sox fan and a golf nut with a handicap of 9, has a knack for using unconventional routes to achieve his long-term ambitions. The son of a teacher turned high school principal, Diamond was one of nine children born into an Irish-Catholic family in Concord, Massachusetts, a suburb of Boston.
When he was 8, his father, Robert Sr., encouraged him to try out for catcher on his Little League baseball team, instead of the more sought-after position of pitcher. He made the team.
“It wasn’t going to be skill that got me a position,” he told students in a 2008 commencement address at his alma mater, Colby College, in Waterville, Maine, recalling his father’s advice. “It was going to be about attitude and hard work.” In high school, Diamond applied the same principles to playing football, going for the unheralded role of pulling guard instead of quarterback.
Wall St. Outsider
As a member of the Phi Delta Theta fraternity at Colby in the early 1970s, Diamond began as an average student, says Henry Gemery, who taught Diamond economics and, a few years later, Edson Mitchell, the bond trader who built Deutsche Bank’s markets business and died in a plane crash in 2000.
“He was a remarkably enthusiastic student for analyzing markets,” Gemery says.
That fascination with markets spurred Diamond into getting his MBA at the University of Connecticut in Stamford. In another unconventional twist, he turned down a job at International Business Machines Corp. to join the training program in information technology at United States Surgical Corp., betting he could gain more experience at a smaller company.
When his boss at U.S. Surgical left for Morgan Stanley, Diamond followed him to work in the firm’s back office and later became an assistant to the chief financial officer. It was a backdoor route to an establishment Wall Street firm.
“That was when the Morgan Stanleys and Goldman Sachses only recruited people from Princeton, from Harvard and from Yale,” Diamond told the Colby graduates.
He finally negotiated his way onto the trading floor. He moved to London in 1988 and ran fixed-income trading for Morgan Stanley International; four years later, he was lured by the prospect of working in Asia to join CS First Boston in Tokyo as head of its Asian operations, eventually becoming head of global fixed income and foreign exchange in New York.
Diamond spent what he calls four unhappy years at CSFB. He quit in 1996 in a dispute with then-CSFB CEO Allen Wheat over the size of the bonus pool for his fixed income team.
Offers from Wall Street firms came Diamond’s way, but he turned them down to join Barclays, the once-innovative British bank that had introduced credit cards and ATMs to the U.K. in the 1960s. Diamond became head of global markets at its sleepy investment bank unit Barclays de Zoete Wedd. He bet that Europe would adopt a single currency and spur a new, fast-growing capital market.
A year after Diamond arrived, Barclays decided it would be too costly to compete against Wall Street firms and sold BZW’s equities and advisory businesses at the end of 1997 to CS First Boston, the firm Diamond had fled. Diamond became chief executive of the rump group, renamed Barclays Capital, which focused on fixed income and foreign exchange.
“The investment bank was in bad shape,” says Kheraj, who joined Barclays Capital in 1997 and held various positions at the bank, including that of finance director from 2004 to 2007. “We changed 80 percent of the people in three years.”
Under Diamond’s leadership, Barclays Capital adopted what bank insiders say is a “no a--hole” rule, meant to stamp out bankers who hoard accounts and don’t work well with others. The same strict attitude applies to hiring and promotions, as senior candidates are put through three- to five-hour interviews where they’re asked about every job they’ve ever held, Barclays Capital co-head Ricci says.
Ricci is one of the American-born “friends of Bob” who have served Diamond at the investment bank. Others include del Missier and Tom Kalaris, who runs Barclays Wealth, the private- banking business. Colleagues report that Diamond doesn’t cut any slack to any FOB who lapses into jargon at meetings. “Bob has this expression he uses: ‘Don’t give me all this psychobabble; talk to me like a 2-year-old,’” Ricci says.
By 2003, Diamond was a leading candidate for Barclays’s top job. Instead, in October of that year the board picked then- Finance Director Varley, who had married into one of Barclays’s founding Quaker families, to replace Matthew Barrett as CEO when he was appointed chairman of the bank. “It would be wrong to say that Bob wasn’t disappointed,” outgoing Chairman Peter Middleton told journalists at the time.
On the day of the announcement, Varley called Diamond into his office, where they spent several hours discussing future strategy. Diamond stayed at Barclays with the possibility of one day taking Varley’s place, even though he was five years older than his boss. Both practicing Catholics, the pair divvied up responsibilities: By the end of 2004, Diamond took over Barclays Wealth. The next year, he became Barclays president and joined the board.
In 2007, Varley offered 63 billion euros for ABN Amro, in the biggest-ever financial takeover battle. Diamond publicly backed the bid.
Varley pursued ABN beyond the start of the credit crisis. He urged shareholders to back the takeover on Sept. 14, 2007, the same day that Northern Rock Plc was bailed out by the Bank of England, leading to a run on the Newcastle-based lender. RBS, with Banco Santander SA and Fortis Bank, ended the six-month takeover battle with a 73.3 billion euro almost-all-cash offer for ABN Amro.
In October 2008, debt-ridden RBS received an injection of U.K. taxpayer cash to keep operating; today, the British government owns 83 percent of the Edinburgh-based bank.
“They were damn lucky not to win the ABN Amro bid,” says Alistair Milne, a finance professor at Cass Business School in London.
Varley defends his offer for ABN Amro, saying his largely all-share bid would have protected Barclays’s balance sheet.
“This was not luck,” Varley says. “We had our eyes open on this transaction.”
After losing ABN Amro, Barclays began considering another transformative deal by targeting Lehman. As Diamond tells it, the saga began when Robert Steel, then the U.S. Treasury Department’s undersecretary for domestic finance, called him in April 2008. It was a month after the U.S. Federal Reserve had saved Bear Stearns Cos. from bankruptcy by backstopping its takeover by JPMorgan Chase & Co. It wasn’t an official call, but Steel wanted to see if there was a price at which Barclays would be interested in buying Lehman in case the U.S. firm ran into trouble.
“Yes, there is a price, and it’s very, very distressed,” Diamond answered.
When he was asked what Barclays would need from the U.S. Treasury to consider buying the firm, Diamond says he told Steel that Barclays would need help with Lehman’s distressed assets and aid with clearing the broker’s trades.
Over the summer, Barclays was in no position to do a deal. In July 2008, it had raised 4.5 billion pounds from backers including the Qatar Investment Authority to replenish capital after writedowns.
Lehman became a candidate for a fire sale in early September. After Lehman CEO Richard Fuld announced a $3.9 billion loss on Sept. 10, Barclays and Bank of America Corp. began planning separate bids.
The following weekend leading up to Lehman’s bankruptcy was one of the most contentious periods in modern finance -- and Diamond played a critical role.
John Gieve, then deputy governor of the Bank of England for financial stability, recalls first hearing about the Lehman deal while at a European Union meeting in Nice, France, on Sept. 12 with Darling, then-chancellor of the Exchequer.
“I took the view that it was completely crackers for Barclays -- which we thought of as undercapitalized and sailing very close to the wind -- to try to absorb a massive further highly leveraged balance sheet,” he says. “The British authorities were never happy with it, but they were consulted far too late.”
On Saturday, Sept. 13, Barclays became the sole Lehman suitor after Bank of America dropped out. The next day, Darling told then-U.S. Treasury Secretary Henry Paulson that the British government wouldn’t support the deal after it became clear that the Fed wouldn’t backstop Lehman’s trades on Monday morning.
“I had grave doubts about such a move because, effectively, the British taxpayer would be underwriting a big American bank,” Darling says.
Diamond was devastated. “Couldn’t have gone more poorly, very frustrating. Little England,” an angry Diamond wrote in a BlackBerry message to Steel revealed in Andrew Ross Sorkin’s Too Big to Fail (Viking/Allen Lane, 2009).
“I regret having sent that text,” Diamond now says.
With the deal effectively dead and Lehman headed for bankruptcy, an exhausted Ricci, Diamond and del Missier headed to Smith & Wollensky’s steakhouse on Manhattan’s Third Avenue to drown their sorrows on Sunday night. That was when Lehman President Bart McDade called Diamond to see if Barclays was interested in buying Lehman’s U.S. broker-dealer business. It was exactly the prize Diamond wanted.
After Barclays agreed to buy the broker-dealer, Diamond addressed Lehman employees assembled on the trading floor to reassure them that he would try to save as many jobs as possible. “I cannot even begin to imagine what all the people of Lehman have gone through,” Diamond told them.
Later, as Diamond walked the floor, a trader blasted out “God Save The Queen” over the intercom. After the deal was sealed, Diamond -- who had moved to New York earlier in the year -- established his office on the trading floor and mothballed Fuld’s 31st-floor executive suite.
After the purchase, Barclays fired 4,000 people, only about half of whom were from Lehman, Ricci says. Nomura Holdings Inc. bought Lehman’s overseas operations from the brokerage’s creditors in September 2008.
Four months after Barclays bought Lehman, its share price collapsed. Even though the bank had bolstered its capital base with a further injection of Middle Eastern cash in November, Barclays stock plummeted 73 percent in 10 days, dipping as low as 47.6 pence during trading on Friday, Jan. 23, 2009.
Diamond flew back to London during the weekend to help Varley and Chairman Marcus Agius craft a letter telling the market that the bank didn’t need to raise capital.
“We never had any of our big depositors pull out,” Diamond says. When the markets opened on Monday, Jan. 26, Barclays shares surged to 88.7 pence.
Even as he prepares for the top job, Diamond shuttles between his homes and offices in New York and London and faces a challenge to build up Barclays Capital’s business in Europe after losing out to Nomura.
“We wanted the whole thing; I’m not going to deny that,” Ricci says. “But there was such overlap in Europe between Barclays and Lehman that there would have been a bloodbath.”
While Barclays has avoided duplication, it has struggled with the cost of building an equities platform in Europe and Asia. Diamond plans to create a high-volume “flow monster” in equities similar to Barclays Capital’s role in fixed income and commodities. Barclays Capital has hired more than 850 people in equities and advisory in Europe and Asia since 2009 at a time when other companies were shedding jobs.
Besides building the equities unit, Diamond must also figure out how to revive Barclays’s flagging corporate and consumer banking businesses. “We think we can dramatically improve our performance in commercial banking,” Diamond says. He’s betting that Barclays’s position in Africa, where it operates in 11 countries, will boost returns as economic growth outpaces that of developed markets.
Retail banking head Antony Jenkins -- the only Briton running a major Barclays unit -- wants to add another 4 million clients to the bank’s 37 million retail customers worldwide. Jenkins says Barclays doesn’t need a large retail acquisition to build the business. It’s investing 1 billion pounds in its retail unit to boost returns. That means everything from refurbishing branches to getting bank cards out faster and reducing customer complaints.
“Our business is an annuity business that you build a brick at a time,” Jenkins says.
Diamond is also pouring 375 million pounds by 2015 into Barclays Wealth, with the aim of becoming one of the world’s top five private banks.
“Their brand value in the Commonwealth is just incredible; it is seen as one of the truest English institutions, just like English tea, public schools and Burberry,” says Lothar Mentel, a former wealth manager at Barclays and now the London-based chief investment officer at Octopus Investments Ltd. “I am just not convinced they have the patience to wait.”
Diamond’s signature patience finally won him the job he coveted. Now, he faces battles on several fronts to shore up Barclays’s share price, rebuild its traditional business and keep his bank in one piece -- a challenge that may tax even this most “bobtimistic” of executives.