Macaskill on markets: Barclays retreat turns disorderly
The partial withdrawal by Barclays from investment banking is starting to look disorderly – more retreat from Moscow than Dunkirk-style retrenchment.
Chief executive Antony Jenkins’ plan to cut the portion of the Barclays balance sheet devoted to investment banking to 30% or less and shave costs by slashing 7,000 related jobs was greeted with cautious approval when it was announced in May. But what Jenkins billed as a ‘bold simplification’ for the bank is increasingly looking like blind over-simplification instead. Jenkins seems to have a poor grasp of the residual risks from the days under former CEO Bob Diamond when the investment bank specialized in clever wheezes that edged as close as possible to legal and reputational boundaries.
Allegations in June by the New York Attorney General that the Barclays equity trading dark pool LX misled its clients about preferential treatment for high-frequency traders were followed in July by accusations from a Senate committee that the bank enabled hedge funds to avoid taxes and dramatically boost leverage with dubious structuring arrangements.
One common thread for the two accusations is that the conduct that regulators are questioning continued on the watch of Jenkins, who took over from Diamond in 2012.
Another common thread is that the alleged misconduct casts doubt over the sustainability of business lines in which Barclays hopes to maintain scale within investment banking.
May’s ‘bold simplification’ was billed as a move to cut exposure to fixed-income products that would leave Barclays with a focus on more liquid equity businesses and on origination of all types. The collapse in activity on the equity trading pool LX since the allegations about customer abuses – with volumes down over 60% by late July – indicates that confidence among equity clients is already suffering.
There is also turmoil among Barclays’ corporate finance managers, just as the global market for M&A finally starts to deliver the deals that the perennial optimists in the advisory industry have been promising for years.
When Diamond took on the rump of Lehman’s US business in 2008 (after UK regulators stopped him in the nick of time from over-paying for the ailing bank before it failed) there were high hopes that Barclays could finally crack the lucrative market for US advisory and equity capital markets business, as well as complement the drive that was already underway to build fixed-income sales and trading scale in the US.
The Lehman legacy business in advisory and equities initially served Barclays reasonably well, if unspectacularly. Lehman’s rankings on the fringe of the top five for M&A volumes and share dealing in the US were maintained until 2013 and Barclays made some progress in prime broking, though not as much as other European banks such as Credit Suisse and Deutsche Bank (which themselves now face returning market share gained after 2008 to Goldman and Morgan Stanley due to balance sheet retrenchment).
But Jenkins has managed to shed senior figures among the Lehman investment bankers who had delivered this unspectacular performance while promising great things for the future, just as the advisory market really returns with a bang.
The most prominent departure was Skip McGee, one-time head of corporate finance at Lehman and latterly CEO for Barclays in the US, who resigned just ahead of the announcement of the Barclays group restructuring in May. He was joined at the exit by global head of M&A Paul Parker, and by investment banking chairman Ros Stephenson, both fellow veterans of Lehman.
Their departures might have relieved some of the strain on Barclays’ compensation bill: McGee was the best-paid employee at the bank last year with a package of almost $15 million-equivalent – more than twice that of group CEO Jenkins. The corporate finance staff left just as they might have been expected to prove their worth, however. Announced global M&A in 2014 has increased by more than 70% compared with 2013 by late July, but Barclays is already showing signs of losing ground as an advisory fee bonanza picks up pace. The bank fell from fifth place in both the global and US M&A rankings at the end of 2013 to sixth place by late July, according to Dealogic, and from fifth to 13th in European M&A.
Debt capital market issuance remains a source of strength for Barclays, with the firm moving above Deutsche Bank to take the number two position behind JPMorgan in the global bookrunner league table by late July.
Barclays might struggle to maintain the related fixed-income sales and trading business that was once another of the jewels in its crown, though.
The fixed-income section of the restructuring plan outlined by Jenkins in May was notable for its studied ambiguity. Foreign exchange and rates were to be ‘right-sized’, a euphemism for slashed staff and assets, while ‘most’ physical commodities, ‘certain’ emerging markets products and ‘capital-intensive’ macro transactions would be shifted into a non-core investment bank for gradual run-off.
Jenkins was unambiguous in one area at least, by maintaining that the sales and trading that relates directly to debt capital markets origination, such as credit products, would remain part of the core bank. It is not clear how effective that approach will be against a backdrop of a reduced presence in areas such as rates that are used to hedge debt issuance.
And the goal of channeling secondary fixed-income trading across electronic flow platforms cannot have been helped by the recent allegations that Barclays was duplicitous in its dealings with clients on its equity platform LX.
Barclays was once the clear leader in electronic trading of fixed-income derivatives over its Barx platform, but changes in market structure driven by regulatory mandates to use swap execution and clearing facilities are eroding that advantage.
Management changes implemented by Jenkins are also taking key executives away from client-facing roles just as an attempted fixed-income pivot gets under way.
Eric Bommensath, a highly experienced derivatives dealer who had a rocky ride when he was briefly co-CEO of the entire investment bank at Barclays, was moved to run the new non-core bank, for example, and was joined by other market veterans such as former head of rates and co-head of securities Harry Harrison.
Barclays now runs the risk that it will be fielding a B team in areas where it was once a market leader – such as rates and FX – just as asset slashing is already complicating relationships with clients.
Any further setbacks in the form of fresh regulatory allegations about misconduct could turn an attempt at a disciplined withdrawal from sections of the investment banking market by Barclays into an outright rout.