It’s a bit like the Gulag with all this ‘re-education’ going on," my mole grumbled. Mole is a senior trader at Barclays in London and has witnessed, with a jaundiced eye, the new Barclays chief executive’s purging offensive. Antony Jenkins, who replaced Bob Diamond last September, has been babbling to anyone who will listen that he will change the culture at the bank and turn it from a wicked hobgoblin into a fragrant princess. Jenkins purrs that murky episodes like complex tax planning that aimed to "rip the Revenue’s eyeballs out" (in trader’s parlance) and fund-raisings that lack transparency are things of the past for the UK bank. However, I wonder if this will be the case.
Andrew Tyrie, MP, the redoubtable chairman of the UK’s Parliamentary Commission on Banking Standards, would appear to be another sceptic. Tyrie described Barclays’ Sir John Sunderland‘s defence of the generous bonuses awarded to former CEO Bob Diamond as "absolutely extraordinary". Sir John is the head of Barclays’ remuneration committee and appears more mellow towards the former CEO than Alison Carnwath, his predecessor. Carnwath, stiletto in hand, skewered Diamond when she told the commission that he "thought he found loyalty in people around him by paying them a lot of money".
Round two occurred in early February and this time it was Jenkins and chairman Sir David Walker who appeared in front of the commission. One commentator amusingly described Jenkins as wearing such a drab suit that he resembled a chemistry teacher and Walker, who is a former Treasury mandarin, as exuding "a world-weary Sir Humphreyness". Sadly, this latter encounter didn’t fare much better than the first and ended with Tyrie – I like to imagine him rolling his eyes towards the ceiling – grumbling: "Well, um. We’ll see. We’ve heard a lot of good intentions. What we want is some concrete evidence."
A savvy investor would share Tyrie’s caution. Diamond was forced out from Barclays in early July. In late July, the shares slid to an eight-month low of £1.50 and since then they have more than doubled on little more than hope and air. Of course, we must take into account that the banking sector as a whole has done well during that period. A source told me that the hedge fund community believed Jenkins would spin out the investment bank and that would provide a windfall for shareholders.
I never shared this belief. Why would any sane chief executive divest an operation that as at year-end 2012 accounted for some 57% of the group’s adjusted profit before tax. Also capital intensive, full-service investment banks will have difficulty funding themselves in this new era of low leverage and higher regulatory scrutiny. Think about little Jefferies, an independent US investment bank, which ran into the arms of the more chunky conglomerate Leucadia National last November. Jefferies sold itself to its largest shareholder for some $3 billion shortly after Moody’s downgraded its debt to one notch above junk.
In mid-February, Jenkins unveiled his new strategic plan in an effort to put the bad old Bob days behind the bank. Barclays would focus on three main geographies – the UK, the US and Africa – rather an odd and unlikely combination. There would be job cuts (1,800 in the investment bank, 1,900 in the retail and business bank), business closures (the infamous structured capital markets division, where Roger Jenkins once practised his alchemy, is to be shuttered) and pay for staff will decline while pay to shareholders should increase. The market loved it, with the share price rising by some 8% in the next few hours.
But there are choppy waters ahead. Jenkins has to negotiate the tricky annual bonus round. How will he incentivize the restless investment banking troops? The new culture of parsimonious pay might not be as appealing as the old regime of fulsome largesse. Many of BarCap’s investment bankers are former Lehman employees. I doubt they relish the new regime and being part of a stodgy commercial bank run by a proselytizing Brit. And of course, Jenkins needs the various businesses to make money so that he can improve the bank’s return on equity: he has promised to deliver an ROE above the bank’s 11.5% cost of capital by 2015.