Remaking A Bank
A British bank with a three-century history makes its presence felt on Wall Street in just over one decade. So, what now?
By Aleksandrs Rozens September 8, 2008
Outside of Barclays Capital's fourth-floor boardroom in Midtown Manhattan hang two flags, one US and the other British. It is a nod both to the more-than-three-century-old bank's UK roots and its plans for a dramatic global expansion, plans that include Wall Street.
The man behind Barclays' global push, Robert Diamond, almost took another career route: academia, following in the footsteps of his mother and father.
"The only profession I considered was teaching. And, I definitely wanted to coach," the 57-year-old president of Barclays Plc recalls.
Looking back at his days growing up in Concord, Mass., a Boston suburb, Diamond points out that he did briefly teach at the University of Connecticut. He was a lecturer at its business school in the mid-1970s, a vocation he has found helpful in his current position. "My interest and experience in teaching was very valuable to the things we have done, particularly if I look back at the 11 years at Barclays Capital, building a business from a small group of people from the bottom up. So much of what we have done--setting clear principles, creating a culture--goes back to teaching."
Archibald Cox, chairman of Barclays Americas who once headed Morgan Stanley International in London, also sees the parallels between an educator and the manager of a business. "It's the way you deal with people. In a classroom you have a bunch of different people and you have got to bring them along. You have to try to get them to buy in, if you will. I think he's done that in spades here."
Diamond joined Barclays in 1996 from Credit Suisse First Boston, where he was vice chairman and head of global fixed income and foreign exchange. In just over a decade, Diamond has had the unique opportunity to build and shape the investment banking arm of a British bank that first opened its doors in 1690.
Barclays Capital's Robert Diamond
The plans for Barclays Capital and its parent go beyond the US and UK. In the US, the firm has expanded its team of professionals and has ambitions for high yield, leveraged finance as well as mortgage finance and structured credit.
Globally, Barclays Capital is expanding its presence in M&A and it wants to bring its asset management business into emerging market economies. While Barclays senior management has no interest in buying regional banks in the US (Diamond and his colleagues see greater opportunities in the Middle East and Asia), Diamond repeats his mantra: "never say never."
An anecdote offered by Diamond at Colby College earlier this summer offers a glimpse of what Diamond has in mind for Barclays.
In a commencement speech to graduates of his alma mater in Maine, Diamond recounted advice offered by his father, who encouraged him to try out for any position on a baseball team even though he wasn't the dominant player on the field. His father suggested taking on any position just to be part of the team and to get involved with the game. Diamond picked up a catcher's mitt.
"In the commencement speech I was using sports as an example, but it is true in our profession as well. Not everyone is cut out to be a bond trader or an M&A banker. Maybe they should focus on different areas," says Diamond, adding "it's important for people to find the place where they can excel. Being average in anything is difficult, certainly with the competitive nature of the business we are in. Being average is not good enough."
The race to the top of the league tables
When Diamond joined BarCap in 1996, the investment banking division of Barclays was not a major presence among London's investment banking firms or Wall Street.
The firm laid off underperforming M&A professionals and exited the sell-side equities business. What began was a push to build a foundation for future growth. That meant getting in place the right infrastructure and specialists in technology, compliance and operations.
These days, the fruits of their labors have become apparent. Even though Barclays--like so many other banks and brokerages--has been saddled with write-downs and has had to turn to capital markets to shore up its balance sheet, it has gained market share when it comes to underwriting of debt and equity.
(Last week, a Royal Bank of Scotland report warned that Barclays may need to go out and raise another $8.6 billion to $13 billion. A Barclays Capital spokesman declined to comment on the report.)
In the first half of this year Barclays Capital was fourth-ranked in underwriting of debt and equity globally with a 6.1% market share, according to data compiled by Thomson Reuters. In the first six months of 2007, Barclays was the eighth-ranked underwriter of debt and equity globally.
The firm has made a big push in structured credit products, particularly mortgage-backed securities. In the first six months of this year Barclays jumped ahead of Lehman Brothers, long a major force in the mortgage bond business, to No. 4 in the underwriting of mortgage-backed securities. Last year, the British firm was not even among the top 10 underwriters of mortgage bonds worldwide.
Diamond is a big believer in structured credit because institutional investors have billions of dollars to invest and securities such as bonds backed by home loans are still a valid place to put money to work.
"If you look at pensions and pension-type assets and the need for those assets around the world, and you look at the secular low level of risk-free interest rates as well as the phenomenally wider spreads credit brings ... the need for structured credit is enormous," he says.
Barclays was among the top four banks in the syndicated loan market within Europe, the Middle East and Africa in the second quarter. It is the leader in the European jumbo covered bond market and is among the top three issuers of international sterling-denominated bonds.
"In 1997, when we formed Barclays Capital, I would like to say no one believed it would be successful. But if I said that, it would imply that anyone even cared," recalls Diamond. "People scoffed at the business model, at the focus, at the selectivity."
Cox, who was brought out of retirement in May to serve as chairman at Barclays in the US, where he will help chart its expansion in the US and Canada, also credits Barclays Plc's board for allowing senior managers to do as they see fit.
"It isn't just Bob. The board had to buy in. The chief executive, [Barclays' group chief executive] John Varley, had to buy in."
Eleven years ago, as they were hatching plans to build Barclays Capital, Diamond and other senior managers believed their firm would benefit from the introduction of the euro and the steady erosion of Glass-Steagall regulations. The euro, says Diamond, offered a competitive advantage to being in London and Europe and it offered an alternative to the US dollar market.
At the same time, Barclays managers focused on risk management and financing rather than chasing the latest trend which, in the late 1990s, resulted in the dot-com bubble.
"We were very clear we should not try to be all things to all people," says Diamond. "We shouldn't try to copy what Goldman Sachs and Morgan Stanley did to be successful."
Asked if the last 12 months of market tumult will not change how commercial banks view risk and spur them to abandon the universal banking model, Diamond says the credit crisis actually advocates the notion of having a bank and brokerage under one roof.
"The market environment over the last 12 months has been as difficult as any market I have ever worked in," says Diamond. "We are, on a relative basis, performing extremely well, [but] it has been really difficult and challenging. But, I don't think it has undermined the principle that the right organization model for the business we are in is the universal banking model. There has been more pressure on the standalone bulge bracket model."
The 'no jerk' rule
At just over 16,300 employees, Barclays Capital has steadily hired professionals in investment banking and debt finance. For example, the firm hired James Paris to head its paper and packaging investment banking efforts. Paris, formerly with Deutsche Bank, is part of an expansion that includes bringing in power, healthcare, retail and industrials bankers. Thomas Rosén, formerly with Bank of America, where he was head of natural resources, was brought in to focus on the power sector, and Barclays got into the infrastructure banking business with Trace McCreary from Bear Stearns.
The expansion has not been easy because there is what Jerry del Missier, BarCap's president, calls the "no jerk" rule. Diamond admits there is a more colorful term to describe the jerk in the "no jerk" rule, but the basic tenet of this unofficial guideline is finding talent that will work well with others so as not to undermine the company culture.
"We look back to those first days of 1997 and we were very disciplined. We did not compromise," says Diamond.
So how does that discipline manifest itself? Barclays Capital never brings in a professional as a managing director or director who has not already proven themselves in that role at another firm. Also, professionals are not hired on a percentage deal and no one is offered a long-term contract.
Those high standards may be easier to live by these days given the massive layoffs on Wall Street, but there were times when talent slipped away. "If you put yourself back in 1997 when no one believed in the success, I think that was the strength of the team to say, 'If you don't start with that discipline, we're not going to be able change the culture down the road,'" says Diamond.
Asked how to best define the Barclays mindset, Cox says it is "similar to the culture of Morgan Stanley in the 1970s and 1980s; client oriented and team-oriented internally. When I say client-oriented I don't mean just issuing clients. I mean investing clients as well."
Cox says avoiding the star system has allowed Barclays to dodge trip wires that have hurt other firms. "The culture that can be developed by having a bunch of superstars is just a terrible culture. There is just tremendous politics internally. There is tremendous fighting between departments. Everyone is not going in the same direction. It's demoralizing and destabilizing and it is destructive to the business organization."
A storied history, but what's next?
In the late 17th century when Barclays first opened its doors on London's Lombard Street--the Barclays moniker didn't show up on the nameplate until 1733--Barclays provided monarchs and merchants with capital they needed to fund their ventures around the world. In its early years, the bank financed a special furnace for lead smelting and participated in a trading venture involving Virginia tobacco.
In a sense, the Barclays Capital of today is no different with its three-pronged approach.
It is a commercial bank (the Barclays Plc parent), it underwrites securities and it happens to have one of the largest asset management arms worldwide. Its Barclays Global Investors, or BGI, has $2 trillion in assets under management.
Looking ahead, Diamond says BGI will push into the Middle East, Asia, Africa and Latin America. "The biggest opportunities are not necessarily in the US, because we are already a market leader. It is the non-Anglo Saxon countries where asset management is just emerging as an asset class," says the Barclays Capital CEO.
Later he notes, though, that Barclays is looking to build its private banking and high-net-worth banking business in the US. "We are looking for an opportunity to expand that into the US because that fits strategically very well with our investment banking and investment management businesses," he says.
When it comes to investment banking, Diamond says that the firm is looking to evolve from a "profitable, successful European player to the very top-tier in the US domestic market."
Amid all the chaos of the last 12 months, Diamond believes there are opportunities for Barclays to strengthen its foothold in North America's investment banking market. "You have six or seven or eight of the leaders of the US domestic market that, because of the market environment, are in risk reduction, headcount reduction mode. That provides opportunity."
For example, while the US residential mortgage market has been the source of woes for many on Wall Street, Diamond says it will remain an important business for Barclays Capital.
"We've always been operating [in mortgages] as a small profitable niche, but we never broke into the top 10. In the first half of this year, we are in the top three," he says, adding that, "we'll continue to grow the whole suite of agency mortgage products here in the US."
Diamond says the build-out of Barclays Capital likely will go on for as long as four years. The firm's senior managers will also add to its rates, foreign exchange and investment grade credit businesses.
When it comes to new hires, Diamond hopes to double the number of senior client-facing professionals in Barclays investment banking business in the US over the next four years.
Other areas of expansion include leveraged finance. Barclays already has 150 professionals within this group, but Diamond says he would like the firm to be leader in the US markets as it is in Europe.
Additionally, Diamond says he would like his firm to be leader in the US investment grade debt arena even though the firm is one of the top three players globally.
Meanwhile, the firm aims to further build up its presence in the US commodities business. "We think there is a lot more growth in the US," says Diamond.
When it comes to mergers and acquisitions, Diamond says the recent hire of 48 bankers from Royal Bank of Scotland aims to snare M&A work in India, Dubai, Russia, Eastern Europe and the greater Middle East. For now, he sees the US M&A market as overbanked. "May we expand there [the US] at some point? Very possibly, but that would not be the first thrust."
At the same time, Barclays has established a group of specialists that focus on illiquid securities such as subprime and Alt-A bonds. This group reduced difficult positions for Barclays by $12 billion in the first six months of the year. Two-thirds of that debt was in the form of whole loans, subprime and Alt-A positions. The other third was largely made up of leveraged loans.
Diamond refers to the group as a "sort of prop desk" and the team has served as an advisor to clients, many of them European banks that have had a tough time valuing or selling complex bonds. Segmenting the tough bonds into a separate book, Diamond says, has allowed other professionals at Barclays Capital to readily make markets for investors at a time when liquidity has plunged.
In recent months the Barclays name has been floated in financial markets as possible suitor for Lehman (senior managers declined to comment on the rumors), but the firm is shy about US retail banking.
"We are very hesitant to be in the US with kind of a starter set in retail and commercial banking when there are so many strong players," says Diamond. "I get asked a lot, 'What if the turmoil of the markets created a bigger opportunity?' You never say never, but you don't expect that to be the case." Instead, the Barclays Capital chief sees more opportunities for retail and commercial banking in Russia, Pakistan and Indonesia.
Outlook on the credit picture
Diamond says liquidity in financial markets has improved thanks to efforts of central banks. But, he is concerned about the credit crunch's impact on the global economy. "We face bigger questions than we did a year ago on the global economy," says Diamond. "The slowdown in the US has had an impact on the UK, Spain, Ireland and the rest of the economy in Europe. It is beginning to have an impact on China and India."
According to del Missier, "people [are] putting capital to work but there isn't the confidence that we have really hit bottom. There's still uncertainty about the housing market and where the economy goes from here."
Asked if some of the securities written down by Wall Street may actually see an improvement in their worth, Diamond acknowledged "there might be some small recoveries. But, by and large, the losses reported to date are pretty real. I don't think well see massive write-backs industry-wide."
Outside of the risks tied to broader market conditions, senior managers at Barclays Capital acknowledge there are pitfalls to rapid expansion. Cox, whose more-than-six-foot frame gives away days on the basketball court for Harvard, leans forward in his office chair and considers possible tripwires.
"As you get to be bigger and bigger you are not able to keep the same culture. I'm not saying it can't be done. I think culture is very important to the organization and the people here. [But] size brings change."
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Robert E. Diamond, Jr.
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