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 Barclays' shares rallied 7.69 percent on Thursday after the bank
announced a sweeping restructuring, the central planks of which are
the creation of a bad bank to house impaired assets and, more
importantly, huge cut-backs in investment banking.
It all amounts to an end for Barclays' long-time goal to be a global
universal bank, a project fertilized by the ashes of Lehman Brothers
but ultimately undone by inadequate profits.
But while investors were quick to work out that the global stage was
not the right place for Barclays, perhaps the more interesting
questions are about the read-across for other large banks.
Did Barclays' shares surge because it was bad at being a global
bank? Or did they surge because Britain is a bad place for a global
bank to call home?
Or perhaps shares in Barclays surged because it is flat out bad to
be a global bank.
All three explanations are plausible, and all three have a certain
amount of evidence to support them. But the third - that the
interests of investors are not well-served by committing capital to
the largest banks - is the most compelling.
First, let's be clear by what we mean when we discuss a global
universal bank. This is the idea that a bank that can compete in all
major capital markets around the world will enjoy an advantage, if
sufficient prominence is achieved, in attracting and serving
clients.
The evidence supporting this belief isn't great, the role-models are
few and given to an embarrassing and persistent tendency to bleed
capital at unpredictable intervals. After all, global universal bank
is what Citigroup attempted for decade after eventful decade.
Barclays, which picked up part of the Lehman Brothers operation
after it imploded, said it would shed 7,000 jobs at its investment
bank over the next two years, while cutting both investment bank
leverage and risk-weighted assets by about half. It also plans to
sell retail banking operations in mainland Europe, and will create a
"bad bank" to hold $195 billion of risk-weighted assets from Europe
and its investment bank.
TRANSPARENCY AND CAPITAL
The bad bank is intended to allow, as it has elsewhere, investors to
better grasp both Barclays' downside and its progress in creating
and acquiring better loans and securities.
Retreating from broad swaths of investment banking is a bit more
complex. Not only has the investment bank created embarrassment and
liability - as in the interest rate fixing scandal - it has done so
while requiring huge amounts of capital. At the same time, it has
had to pay out considerable portions of the money it does bring in,
and, worst of all, shown little sign of reversing those two trends.
That, along with a distressing tendency to make large bonus payments
to "key" personnel without ever quite harvesting the promised market
rewards is exhibit A for those who argue that Barclays simply wasn't
doing it right.
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That's possible, but in fairness, the vast majority of the mistakes
made at Barclays are rife in other large banks, both those that have
achieved bulge bracket status and those that have failed at
attaining it.
There is also a line of reasoning that says that Barclays, as one of
the few large British banks left standing, was brought low by
increasing regulation and a hostile political atmosphere. The key
issue here is capital requirements, and those are going up not just
in Britain but everywhere.
And while Barclays was frequently knocked around in Parliament and
the press, it is far more telling that only 76 percent of its
usually quiet shareholders actually backed its 2013 pay report.
Those are the bank's owners speaking, and they were, rightly, not
pleased with what they were getting for what they were laying out.
That brings us to my favored analysis: that the business of being
a global bank, of using a huge deposit base as a tool to compete in
capital-intensive areas of investment banking, can feel like a
long-running and elaborate joke at the expense of shareholders.
That this hasn't escaped the notice of shareholders can be seen in
the generally lower premiums they will pay for banks with large
investment banking operations. That's perfectly sensible: those
earnings are volatile, come with occasional disasters and a culture
in which far too much of the revenue takes the elevator down at the
end of the day.
Barclays may have failed, but its ambitions weren't in its owners'
best interests in the first place.
(At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be an
owner indirectly as an investor in a fund. You can email him at
jamessaft@jamessaft.com and find more columns at http://blogs.reuters.com/james-saft)
(James Saft is a Reuters columnist. The opinions expressed are his
own)
(Editing by Dan Grebler)
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