Barclays Hands U.S. Reins to McGee After Vowing Change

Hugh E. McGee III, a former Lehman Brothers Holdings Inc. oil banker, fired his gun into upstate New York’s sky last year. Clients and colleagues, who know him as Skip, watched the one duck tagged with a ribbon fall.

The Texan, who became chief executive officer of Barclays Plc’s Americas business in May, has a trickier target now. He’s responsible for improving relations with U.S. regulators after the London-based bank agreed to pay $450 million in fines for rigging benchmark interest rates and pledged to embrace humility, cut pay and return to its 17th century Quaker roots.

That makes McGee, 54, with an appetite for blockbuster deals and the risks that make them happen, a noteworthy choice.

“Skip’s such a hard-driving guy,” said Gregory Pipkin, a Lehman energy banking co-head who joined Barclays when it bought the firm’s U.S. units in 2008, and McGee’s friend since grade school. “The only thing we didn’t compete for: I didn’t compete for his wife, and he didn’t compete for my wife.”

McGee, head of the investment-banking division until this year, embodies competing pressures inside the firm and across Wall Street. His new role, announced a week before the promise to repair a culture that veered into arrogance and greed according to a 236-page independent review, will require fulfilling that vow and banker expectations at the same time.

His colleagues don’t expect contrition or retreat from McGee, according to interviews with more than two dozen people who have worked with him at Lehman and Barclays. They rally around him as an advocate for robust pay and freer capital.

“Any institution has to be living within its means according to the rules,” said Barbara Byrne, vice chairman of investment banking at Barclays and a Lehman veteran. “But that doesn’t mean you can’t think smart.”

Ethical Ambiguity

Barclays gave McGee responsibility for its Americas business as the firm is expanding in the region that’s already its most profitable. At the same time, the Federal Reserve has proposed making U.S. subsidiaries of big foreign banks hold more capital. Yesterday the Federal Energy Regulatory Commission ordered Barclays and four of its former traders to pay $488 million in fines for manipulating energy markets, accusations the bank has vowed to fight in court.

The review the firm commissioned, conducted by Rothschild Vice Chairman Anthony Salz, calls the investment bank McGee helped lead a source of entitlement and ethical ambiguity.

“A few investment bankers seemed to lose a sense of proportion,” Salz wrote in the report. Steep bonuses and pay for top executives “contributed significantly to a sense among a few that they were somehow unaffected by the ordinary rules.”

Quaker Roots

Antony Jenkins, who replaced Bob Diamond in August as Barclays CEO, has said there’s no returning to old ways.

Diamond took home about 120 million pounds ($182 million) in his seven years leading the bank, leaving after the company admitted manipulating the London interbank offered rate, or Libor, and agreed to pay record fines. Jenkins, 52, has called for reducing pay, clarifying risk guidelines and, in London’s St. Paul’s Cathedral last month, for returning to the ethics of the bank’s Quaker co-founder.

“Banks became too focused on the short term, too self-serving and too aggressive,” Jenkins said then. “There’s a long way to go.”

Barclays already curbed pay too much, according to two people who left recently, especially after the firm capped some upfront cash bonuses for 2011 at about $100,000 and gave none to top bankers for last year. More colleagues would follow if it weren’t for faith in McGee, a third said.

‘Extra Mile’

“Skip is the beacon of hope,” said Brian Korn, a securities lawyer at Pepper Hamilton LLP in New York who worked on banking compliance at Barclays until last year.

That faith is well-placed, according to one of McGee’s former Lehman Brothers bosses.

“Skip will walk the extra mile, working with senior management, to make sure they’re paid competitively,” said Jack Lentz, chairman of drilling firm Rowan Cos., who left Barclays in 2009.

McGee doesn’t only grasp that a big bank needs to reward big bankers, his colleagues said. They think of him as one of them. The Barclays website lists $160 billion of his deals in a single sentence, including an acquisition for Exxon Mobil Corp., the world’s biggest company by market value, and the leveraged buyout of former TXU Corp., the largest in history.

Pipeline Rescue

A graduate of Princeton University, where he played varsity football, McGee joined Lehman in 1993 and became co-head of its global natural resources banking group three years later. He helped find a way to pull Williams Cos., then the second-biggest U.S. natural-gas pipeline operator, from the brink of bankruptcy in 2002, according to Byrne.

“I thought there was no way out,” said Byrne, who recalled a plea to Warren Buffett.

Williams agreed to pay a 30 percent interest rate on a one-year loan from Buffett and Lehman, and the firm survived. That year McGee became head of global investment banking at Lehman.

He has high expectations for himself. After Lehman CEO Richard Fuld asked questions about a deal McGee couldn’t answer, he instituted a regimen to prevent another lapse, according to two colleagues. A rotating group of employees arrived at the office before dawn, sometimes by 4 a.m., to compile a digest they read aloud to him over his morning coffee, the people said. The practice, dubbed Skip News, continued at Barclays.

Loosening Controls

McGee also has high expectations for others. When he thought Lehman was getting outgunned for large-fee deals by Goldman Sachs Group Inc. and JPMorgan Chase & Co., he decided on a way to boost ambition. Lucite “Big Deal” awards started going to bankers each time they brought in $10 million.

He pushed for Lehman to take on more risk in 2006 and 2007 before the firm collapsed, according to the 2010 report by court-appointed bankruptcy examiner Anton Valukas. Along with Fuld and President Joe Gregory, and over the objections of other senior executives, McGee advocated that Lehman loosen controls and lend its own capital to private-equity companies for leveraged buyouts, the report found.

As deals got bigger and riskier, McGee argued that the firm needed to compete to stay relevant, one former Lehman executive involved in the discussions said. Another said leveraged loans didn’t affect the firm as seriously as real estate investments. In 2008, when the U.S. subprime market and the firm’s fortunes soured, McGee led efforts to spin off toxic assets. Instead, Lehman spun out of control and into bankruptcy.

‘Big Boy’

McGee was part of the team that sold the firm’s U.S. units to Barclays that September, and among a group of top executives who negotiated agreements to stay. McGee’s was worth at least $15 million for one year, according to a colleague close to him who wasn’t authorized to speak about pay packages. Kerrie Cohen, a spokeswoman for Barclays in New York, said McGee wouldn’t comment for this story.

Barclays, Britain’s second-largest bank by assets, gave McGee, who works out of Lehman’s former Manhattan headquarters, something else he wanted.

“We’ve long had a big-boy M&A business,” McGee told the New York Times in 2011. “And now we’ve got a big-boy checkbook.”

That year Barclays arranged an $8.3 billion loan to Hewlett-Packard Co. to help pay for the purchase of British software maker Autonomy Corp. and provided more than $11 billion to junk-rated Kinder Morgan Inc. to buy El Paso Corp. in the largest pipeline takeover ever.

‘Thinking Bigger’

Even when McGee wasn’t closely involved, “he drove the culture to be thinking bigger,” said J. Stuart Francis, Barclays’s technology banking chairman and a fellow Princeton and Lehman alumnus. “Skip helped everybody raise their game and raise their sights.”

Big deals helped Barclays vault to sixth place this year advising on mergers and acquisitions globally from 10th place in 2008, according to data compiled by Bloomberg.

Some of those deals backfired. After buying Autonomy for $10.3 billion, HP accused it of misrepresenting results before the acquisition. The computer maker announced an $8.8 billion writedown on the purchase in November. That month shareholders filed a lawsuit in federal court in San Jose, California, naming Barclays and HP’s directors and officers as defendants.

That doesn’t mean the deal was bad for Barclays, said Korn, who worked on the acquisition.

“That was a very big, successful transaction for the bank -- it was not as successful for the client,” Korn said. “People think of that as a bad transaction. I don’t think internally it was really viewed as such.”

Meow Mix

The $5.3 billion buyout of Del Monte Foods Co., maker of Meow Mix cat food and canned fruits, led to another lawsuit. Barclays and Del Monte agreed in 2011 to pay $89.4 million to settle shareholder claims that they were shortchanged in the sale to private-equity firms led by KKR & Co. A Delaware judge found that the bank, which represented Del Monte, “secretly and selfishly manipulated the sale process” to earn fees from both sides in the transaction.

Criticism of the deal was “based on an incomplete factual record,” Barclays said in a 2011 statement.

McGee’s thirst for winning doesn’t mean he’s foolhardy, according to two banking executives.

“He’s not a cowboy, he’s a banker,” said Grant Porter, the firm’s chairman of natural resources banking. “He’s prepared to commit capital, no question about that, but he does it in a very thoughtful way.”

Pipkin described his friend’s defining feature as something more nuanced than sheer ambition.

“When you say ‘Skip,’ you say ‘calculating,’” Pipkin said. “He knows how to balance the risk versus the reward.”

Varsity Drag

Current and former colleagues described McGee as controlled, intense and diligent. Several recalled e-mails he sent when he was disappointed, messages so terse colleagues named them Skipograms. Others said McGee can put people at ease with gentlemanly charm.

His intensity was on display when he sent a letter in November 2009 to the board of the Kinkaid School in Houston, after what he called a jocular pep rally routine featuring his son and other football players in drag was canceled.

“Why is a married, heterosexual coach considered an oddity at Kinkaid?” McGee wrote in the letter, which was e-mailed to friends by Ray Childress, a former all-pro lineman for the Houston Oilers and a Kinkaid parent, and then spread to blogs. McGee wrote that “a gay female coach” had scolded her athletes for supporting the football team and that the head of the school’s diversity committee made his son cry by calling bankers “sleazeballs” in class.

“Radical liberals think that they can say and do anything they want and no one is to confront them,” Childress said in an interview, adding that he got McGee’s permission before e-mailing the letter.

Regulator Relationships

McGee will need both intensity and charm in his new role “enhancing our responsiveness to, and relationships with, the U.S. regulators,” as Barclays said in an April release announcing his appointment.

The Fed is preparing to make foreign banks meet higher capital standards by establishing holding companies for their U.S. subsidiaries. Barclays deregistered its American unit in 2011 to sidestep Dodd-Frank requirements, with Deutsche Bank AG following suit. Fed Governor Daniel Tarullo has said that affected his thinking. At the same time, the world’s biggest banks are facing shifting rules on leverage and swaps trading.

Banks will have a hard time getting their way without earning the trust of regulators, said C.F. Muckenfuss III, a partner at law firm Gibson Dunn & Crutcher LLP in Washington.

‘Risk Factor’

“Arrogance is a risk factor” said Muckenfuss, a former senior deputy at the Office of the Comptroller of the Currency, who wasn’t commenting about any particular firm. “It suggests that you’re insufficiently thoughtful and careful.”

Barclays sent a letter to the Fed in April, signed by McGee, saying proposed rules for foreign banks are “one-size-fits-all” and “not sufficiently nuanced.” He called a regulatory assertion “simply not true” and one proposal “inappropriate and unnecessary.”

The bank’s U.S. government relations are run from New York by Patrick Durkin, a top bundler for Mitt Romney’s campaign last year. McGee is being introduced to regulators, including at the Federal Reserve Bank of New York, according to a person at the firm with knowledge of his schedule. McGee didn’t attend a meeting at the Securities and Exchange Commission in May on market structure with Durkin and Hector Sants, head of global regulation for the bank, an agency memo shows.

Shoe Pebbles

Just how much Barclays has to alter its culture is an open question. Colleagues expect McGee to deliver on pay and risk because the firm doesn’t need to change everything everywhere.

A lobbyist for the firm likened public vows to cut compensation to an ad campaign that no self-respecting banker could ever mean. One bank executive who confessed to only skimming the Salz report and not finding it particularly insightful said his colleagues already had fantastic values.

Another, who read it cover to cover, said the report chronicled old issues tied to specific bad actors.

Francis, the technology banker, read the review too.

“If you had every firm do a Salz report right now, every firm’s would read the same as ours read,” Francis said. “We just did it and made it public.”

He compared the bank’s scandals to pebbles in shoes.

“We dumped out our rocks, which were a couple of small divisions,” he said. “But the rest of the shoe fits.”

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