The end of investment Banking in London?

In the 'Great Harrumph' that our politicians so enjoy about Banking - with the the Left wing ones desperate to blame banks rather than its own governance for the 2008 crisis, a story is being missed.

The City was a great centre for Investment banking, bigger than New York and far above the weight of any other European city.

Of course, we had our key supporting areas such as law, currency trading and accountancy which provided a good net to support the industry, but nonetheless the rise was large from the 1980's - US Bulge Bracket banks has often bigger offices in London than in New York.

Arguably, the height came in 2009, when Barclays bought the investment banking unit of Lehman Brothers in New York.

How the tables have turned, not just on the British banks, but on Investment Banking in general and particularly in London. Barclays is in a mess, today it announced more disappointing profits at its investment bank. The US CEo, Skip McGee has left and there is talk of a culture war within the Bank. I don't pretend to understand the details, but as an outside it would seem sensible to sell the unit rather than close it down, with all the associated costs, piecemeal.

This after all, is what RBS has done, slowly closing its investment bank. It would have been better to sell it for a £1  a few year ago.

Lloyds Bank has long ago relieved itself of any Equity Capital Market business.

Only HSBC remains in the market of the UK banks. Even in the City, the news is worse. Credit Suisse and UBS have both massively scaled down their Investment banking to focus on their Private Client business.

The US banks too, mindful of the London Whale scandal and also US Regulation, have scaled down in the UK.

So, in effect I would guesstimate that something approaching 50% of frontline roles are no more. many have been replaced with people in compliance or legal, but in terms of generating business this is not the same thing at all.

Of course, many people will just assume this is a good thing - less 'Casino' Banking. They are wrong for the most part. The Casino lives, in Bermuda funds, in direct advice to foreign sovereign entities, in boutiques. The sad news is that this is fine for the generation of bankers who have the contacts already. There is no ladder for the next generation.

Instead the next generation will be in Singapore, Shanghai, Dubai, Hong Kong, New York and maybe London too.

This, over time, will have a big knock on to the professional services business and other UK businesses. We may have a better balanced economy, but sub-prime was not an issue for UK lending really was it? We have killed the goose that laid the eggs. It will be sometime yet before this is apparent but we have done so nonetheless.

I am not saying we will not find a new goose, but at the moment that seems to be a property bubble, as it has been many times in the past and we all know this leads to a cyclical boom and bust that does little good in the long-run and much ill.

Where can Barclays unearth a new Diamond?

So even a teflon operator like Bob Dimaond could not withstand the Political and Media storm generated in the UK over the Libor scandal. it is not for me to write a review of his time at Barclays as many others will do so, he does though take a cult of personality with him which in my experience is a good thing to lose. Down the road of that kind of leadership many a company has been broken  - look at  RBS and Fred Goodwin.

What  now though for Barclays, this week has been an unexpected upset and with Bob Diamond relatively new in the job there has been no time to groom a successor.

Rich Ricci and Jerry Del Messier - the Head of the Investment Bank and Group COO respectively will be seen as too close to Diamond and to the Libor Scandal which was in the part of the Bank they they ran.

Staid Finance Director Chris Lucas will be in with a shout, given his auditing background. For a long-term Barclays time-server there is Antony Jenkins and if they keep there predilection for talented Americans there is Tom Kalaris who heads the Wealth division.

An external appointment could be a welcome one, so for example Peter Harvey, ex-CEO of Barclays UK who is now at the Co-op could be a dark horse, or perhaps Helen Weir, so recently a senior director at Lloyds Banking Group. Another who springs to mind is Nathan Bostock, number 2 to Stephen Hester at RBS.

I'd be surprised if the Board of Barclays went for a big name US CEO - their high pay causes so much resentment and equally in Europe the banks are in such a mess that finding a credible candidate will prove hard.

FSA & Barclays

< Sees bandwagon, *jumps* ... >

Bit of a coincidence, after the Goodwin post below.  One might have thought, after all the FSA mea culpa in 2008, they would have jumped all over Barclays this time.  But no, they have blown them a kiss.

This is par for the course.  From my own little corner of the universe I can relate that several years ago a fairly clear-cut prima facie case of the same kind of distorted price-reporting - this time in the energy sector, and again involving a blue-chip, household name player - was brought to their attention.  They did nothing - nothing at all.

How can the Barclays case (and, we are led to believe, several more that will come to light in due course) not be one of making a false market ?  All the comments on the previous post bear repeating.  It Has To Be Prison.

Finally, late at night, I have just nearly fallen off my chair as Emily Brainless on Newsnight offers the observation: "it hasn't been proved that anyone lost money over this".  What the **** ?!  The whole point of distorting LIBOR was to make the other side lose money (and win bonus for the dealmaker concerned), on each and every occasion !  Sole purpose of the exercise: and self-evidently, it sometimes had the desired effect - read the emails you stupid woman.

ND

Mis-selling Derivatives ? Do Let's Grow Up

OK, first up there are laws about this stuff and no bank should be selling derivatives to any person or organisation deemed incapable of understanding them properly. Know your customer and all that. But an interest-rate collar to a commercial enterprise ? It's pretty simple stuff, despite Robert Peston's silly attempt to make it sound complicated.

An 'asymmetric cap and collar' ? Do us a favour, Pesto, it's a collar (or a cap and floor, same thing), and the asymmetry has nothing to do with the issue. The premium sounds ridiculously steep and it's that which raises the eyebrows, not the collar itself. But who knows what the credit-risk looked like for Barclays on the floor leg ? And how would a basic swap have been priced to the same customer at the same time ?

If Barclays have indeed screwed up on 'know your customer', the deal will be unenforceable anyway. So one presumes that technically speaking, they haven't.

Move along, nothing to see here.

ND

Barclays Protium: Banksters@Work

The Barclays Protium story is utterly reprehensible: a major financial institution held to ransom by a handful of employees threatening to bugger off with the keys to the toxic waste cupboard unless paid an outrageous sum. "All that's wrong in the City", indeed.

One might say that such things happen on a smaller scale quite often, in many walks of life: but being merely egregious by its scale doesn't make it any the less shocking: a dramatic proof that people - be they bankers, trade unions or parliamentarians - will behave atrociously if not regulated properly.

But now a thing of the past ? No, rather a microcosm of how banks are playing their political and regulatory masters as a whole - see this story on their attempts to thwart Basel III.

This isn't really news, of course. But it's worth thinking through how one would conduct affairs at the corporate level to prevent a re-run of Protium - and then thinking how the same principles might be brought to bear at the macro level. We know about too big to fail. Are we to accept too big to be regulated ? Because if we are, let's not imagine this weakness will not be exploited ruthlessly.

A capitalist writes ... no rules, no game. And it's a good game - worth enforcing the rules for.

ND

Barclays the Bank of the Future?

Being a Sunday, my attention was drawn to this article in the Sunday Telegraph. Which is not really an interview with Bob Diamond but a piece on the future of Barclays which has clearly been done with quite a few insiders chipping in.

It makes for an interesting read, BarCap is talked down (as you would expected of insiders keen not to show Barclays is a one trick pony) and the plan for Barclays Wealth is bigged up as if Wealth is some small time show instead of a great business already. The referral to Project gamma inside of Barclays Wealth gives it good credibility though.

There is also talk of not having a bad bank inside Barclays, again no great surprise form the Bank that refuses to mark assets to market and remains happily opaque which has served it well right through the crisis.

Also interesting is the note that Bob's style is so similar to Varleys in application, something that could not be less true. A brash New Yorker the same and an urbane English lawyer; just nonsense.

The final giveaway that this has been informed too much by the 'flaks' (Barclays PR's et al) is that Bob has only taken one of his side-kicks with him. The truth is that the UK Commercial bank is entirely run by ex-Barcap staff and all the main management have been cleared out in the last 18 months - its a Barcap takeover for sure.

Perhaps journalists when trying to get a story should try and speak to some people who are not onside, but then again, they are looking forward to all those interviews with Bob Diamond over the next fwe years aren't they?

Diamond will break-up Barclays

The long awaited day when the super-ego that is Bob Diamond takes over Barclays has arrived. Early next year he will take over as CEO. Now, not many people can hold a candle to Bob Diamond as a builder of an investment bank. Plus in the depths of the 2008 crash he took over a big chunk of Lehmans out of administration which was a huge gamble that paid of spectacularly.

In the last year, Barclays has been engaged in a process of trying to integrate the UK Corporate Bank and the Investment bank. The idea being to sell profitable and complex products to the UK corporate base. The other banks look on in bemusement, wondering how you sell hedges and swaps to small companies in Norfolk.

Still, it is a brave try and perhaps was done with a view of Bob Diamond taking over. Mr Diamond would probably rather run an  investment bank alone and sell off Barclays retail and Barclaycard altogether. Even the UK Government would welcome this as it would reduce some risk in the system of a huge Investment bank going under and taking the retail bank with it (note Barclays did very well our of the credit crunch though, so clearly has some very good risk management practices). Shareholders too might like to see a break-up as they eye an improved sum-of-the-parts valuation.

However, the merger of Barcorp and Barcap now presents itself as something of a poison pill, unless it is purely the retail bank that is to be sold off. Long term I just can't see Barcap and Barclays staying together with Diamond in charge. Fun times ahead for shareholders in the next year or so. The market has been fairly neutral in reaction today, but the bank remains a buy under 300p if I ever free up any more cash.

RBS share price down 70%: We said this would happen..what now?

Ending the short-selling ban has not worked, as predicted. Bailing-out the banks without suspending the shares has not worked, again.

The government has repeated the same mistakes it made in October.

Ideas to move forward are desperately needed, feel free to discuss in the comments...

Chinese Whisper

Trespassing on territory that others perhaps know better ... but the forthcoming major Chinese investment in Barclays seems highly significant. Commentary here suggests it is Barclays Capital’s expertise in financial risk management for commodity transactions that attracts the raw materials-hungry Chinese: and why not ? They have suffered some very bad experiences in commodities trading – the recent oil derivatives scandal for one - and have much to gain from getting their act together.

Barclays, who hired a powerful team of ex-Enron players in 2002, have been well to the fore amongst the banks that have made a serious go of energy trading.

This is all so much more commercially adroit than all that Russian huffing and puffing and finally buying … Pennine Gas (number of customers approx 3). If the 21^st century will bring the eclipse of the West, we may be thankful it will belong to China.

ND