American Robert Diamond once mocked “Little England” regulators for failing to match his global ambitions. He sparked a power shift that cost him his job and changed the way the world’s top financial centre is governed.
When Mervyn King and Adair Turner, the UK’s top two financial overseers, agreed to summon Barclays Plc’s chairman to the Bank of England on July 2 and said they had lost confidence in Diamond, London’s best-known banker, they were making clear that the rules of the road had changed.
“The signal to the City has got to be that if you behave badly you will be removed from your employment,” said Paul Myners, the government’s financial-services minister from 2008 to 2010 and former chairman of Gartmore Investment Management Ltd. “It will send shivers down the spine of anybody who is up to no good.”
Diamond’s rise and fall mirrors London’s ascension to the world’s No 1 money centre through a decade of light-touch regulation to one grappling with cutbacks and the Libor interest-rate fixing probe, the latest in a series of scandals that have provoked public outrage. His departure marks a watershed moment for regulation in a city struggling to reconcile the wealth created by its financial firms with their potential for losses that threaten the country’s entire economy.
Cultural shift
Blamed for failing to prevent the biggest financial crisis since the Great Depression, the Bank of England and the Financial Services Authority are remaking regulation and attempting to change a culture exemplified by Gordon Gekko in the 1987 film Wall Street. Diamond, who 18 months ago pushed back against popular anger by saying the period of banks’ “remorse and apology” should end, is the most prominent example of regulators reclaiming the clout they were reticent to use in the previous decade.
“The authorities have always had power,” said Martin Taylor, the former Barclays CEO who hired Diamond and now says he should have fired him for presiding over losses on Russian debt in 1998. “They seem at last to be ready to use it.”
King told Barclays chairman Marcus Agius that Diamond, 60, no longer had the backing of the Bank of England or the FSA a day before he resigned, the governor testified before Parliament’s Treasury Committee on July 17.
“You handed him a loaded revolver,” said Andrew Tyrie, the committee’s chairman.
“The world has changed,” King, 64, said at the hearing, adding he couldn’t have acted as he did before the government’s decision to move the FSA’s powers to the Bank of England starting next year.
Record fine
“We would have never done this back in 2007 and 2008,” Turner, chairman of the FSA, said to the committee. “We have been on a journey toward a tougher style of supervision in all sorts of ways.”
Diamond’s departure came a week after Barclays was fined a record £290 million (Dh1.6 billion) for rigging the London interbank offered rate, the global benchmark for $500 trillion (Dh1.8 quadrillion) of securities. Barclays, founded by Quakers in 1690, was criticised by the FSA for gaming regulations and using accounting ploys in the months beforehand. Political leaders including Prime Minister David Cameron and Labour leader Ed Miliband have ratcheted up their critiques of the industry.
“It was gently, gently light touch regulation and the banks and many other people could see loads of ways to increase the bottom line,” said Brian Winterflood, founder of market- maker Winterflood Securities Ltd.
“It will be a new start.”
Big bang
Diamond, one of nine children born to suburban Boston teachers, came to London in 1988 to run fixed-income trading for Morgan Stanley International. It was two years after the so- called Big Bang, when UK Prime Minister Margaret Thatcher deregulated financial markets, attracting capital and talent and the beginning of a 25-year boom in securities trading.
“There was a fundamental opening of the chicken coop to the foxes,” said Michael Kirkwood, who worked in London during that time and rose to become UK chairman of Citigroup Inc in a 31-year career at the bank.
The American influence on the City was palpable as US banks took over smaller British broking firms, said Martin Vander Weyer, a historian and journalist who wrote Falling Eagle: The Decline of Barclays Bank (Phoenix, 2000). The Americans “got up early, worked late and didn’t drink port at lunchtime,” he said.
In the more than two decades since the Big Bang, London has grown into the world’s top global financial centre ahead of New York and Hong Kong, according to research firm Z/Yen Group Ltd. The number of people employed in London finance has increased 63 per cent to 200,000 while the contribution of financial services to gross domestic product has increased to 9 per cent in 2010 from 6.5 per cent in 1992, according to TheCityUK, a lobbying group. The industry today accounts for 12 percent of tax receipts, more than any other sector.
Barclays capital
Diamond joined Barclays in 1996 when the bank was selling off parts of Barclays de Zoete Wedd, its investment banking unit. He became CEO of the rump group, renamed Barclays Capital, and focused on fixed income and foreign exchange.
Over the next 15 years he expanded profits and headcount and made Barclays Capital the bank’s most profitable unit. The investment bank built by Diamond posted £2.97 billion of pretax profit at its investment bank last year compared with 207 million pounds when he joined in 1996. It was number one in global fixed income last year and in the top five for mergers and acquisitions, data compiled by Bloomberg show.
“He never took his foot off the pedal,” said Vander Weyer, who worked for Barclays and was a board director at BZW. Diamond was “the best trading floor chief of his era in London. He built a very substantial business for Barclays from the quite unpromising thing he inherited.”
Lehman acquisition
Despite his success, he lost out on the CEO job in 2003 to John Varley, the finance director who married into one of Barclays’ founding families. Varley persuaded Diamond to stay, and he continued to build investment banking, purchasing the North American arm of Lehman Brothers Holdings Inc in 2008. Diamond had wanted to buy all of Lehman, a deal that was blocked by then Chancellor Alistair Darling and the FSA.
“Couldn’t have gone more poorly, very frustrating. Little England,” Diamond said in a BlackBerry message to Robert Steel, then the US Treasury Department’s undersecretary for domestic finance, according to Andrew Ross Sorkin’s Too Big Too Fail (Viking/Allen Lane, 2009). Diamond said in a 2010 interview he regretted sending the message.
Diamond was finally rewarded with the CEO’s job in 2011.
Long known as one of London’s best-paid bankers — earning at least £120 million in pay and bonuses since becoming a Barclays board member in 2005, according to Manifest Information Services Ltd. Diamond also became the poster-boy for banker bashing.
Many of his top Barclays deputies were Americans, and he counted Rolling Stones singer Mick Jagger and golfer Phil Mickelson among his friends. He was labelled “the unacceptable face of banking” in 2010 by then UK Business Secretary Peter Mandelson and ‘The Real Life Gordon Gekko’ by the London-based Daily Mail tabloid.
“He was the most-high profile banker and the most highly paid, so he came to symbolise the whole bank culture,” Vander Weyer said.
Since the financial crisis of 2008, the UK government pledged at least £1 trillion at its peak in direct investments, loan underwriting and capping losses, the costliest undertaking in British history outside of the world wars.
A generation of bankers who fuelled the financial-services boom up to 2007 are now either out of work or no longer in their former jobs, including Fred Goodwin and Johnny Cameron of Royal Bank of Scotland Group Plc, Andy Hornby and Peter Cummings of HBOS Plc and Adam Applegarth of Northern Rock Plc.
FSA letter
While Barclays avoided a government bailout by raising capital in Qatar and Abu Dhabi, Diamond lost his job due to an accumulation of bad blood with regulators, not just Libor, King and Turner made clear at the Treasury hearing. In an April 10 letter to Barclays’ chairman, Turner spelled out a series of concerns over several years, mostly around the way the bank was calculating its capital levels.
“It is possible to sail close to the wind once, you can sail close to the wind twice, maybe even three times,” King testified at the hearing. “But when it gets to four or five times and becomes a regular pattern of behaviour, you do have to ask questions about the navigational skills of the captain on the bridge.”
The government, in an attempt to prevent a rerun of the regulatory missteps from the financial crisis, plans to abolish the FSA next year and move its powers to the Bank of England, the main regulator until 1997, in the biggest regulatory shakeup in 15 years.
Regulatory remake
Under the new system, the Bank of England will oversee two bodies as well as continuing to operate as the lender of last resort. The Prudential Regulation Authority will oversee banks and the Financial Conduct Authority will police markets.
The plan effectively kills off the regulatory regime whose light-touch approach has been blamed for failing to prevent the near-collapse of Lloyds Banking Group Plc and RBS as well as the run on Northern Rock.
Even as it gains new regulatory authority, the Bank of England was grilled at the Treasury hearings on whether it did enough to curb the manipulation of Libor, the latest in the financial scandals rooted in London.
JPMorgan Chase & Co’s trading loss of at least $5.8 billion and the alleged $2.3 billion fraud at UBS AG happened in London. American International Group Inc and Lehman Brothers booked transactions in London that helped lead to their downfall.
‘Latest watershed’
“It looks like the Bank of England was sleeping on the job,” said Kent Matthews, a finance professor at Cardiff University Business School and former researcher at the central bank. “They may be capable of taking on the regulatory powers, but the question is whether they have the credibility.”
While the FSA, not the Bank of England, was primarily responsible for financial regulation until now, not everyone is convinced the new regime will make much difference. Winterflood, who began working in the so-called Square Mile financial district in 1953, says no amount of regulation can stop market abuses happening again.
“It’s the latest watershed, but it’s not the first and it won’t be the last,” he said.
“In 25 years’ time there will be people who breach and break every rule in the book and people will be ripped off and nothing will have changed.”
Diamond, who came to the City when he was 36 and was the oldest CEO of London’s largest banks by the time he resigned, declined to comment for this story.
Shares decline
“My motivation has always been to do what I believed to be in the best interests of Barclays,” he said in a statement July 3, announcing his resignation.
“The external pressure placed on Barclays has reached a level that risks damaging the franchise — I cannot let that happen.”
Barclays’ shares were down as much as 4.7 per cent on Monday in London trading. Michael Rake, chairman of discount airline EasyJet Plc, said he doesn’t want to be considered as a candidate for the same post at Barclays, complicating the lender’s search for a replacement for Agius.
Vander Weyer, the Barclays’ historian, says there are only so many bank scandals the public can endure.
“There’s a point at which the public, the politicians, the business community are sick to the back teeth of one story after another about misbehaviour and incompetence of banks,” he said. “It feels like a turning point.”
