It is hard to see how Barclays can hope to stay in the top division of global investment banks much longer. Costs are rising, revenues aren’t going up, and chief executive Antony Jenkins is under pressure to find a way out. With RBS also in full-scale retreat from the capital markets, the City may soon have no major British investment bank.
While a few people may regret that, the reality is that the UK has been a failure at investment banking – and it would be better if it got out now, before it does any more damage.
A quarter of a century ago the City tried to copy the American investment-banking model, creating giant integrated financial institutions. But this has been a comprehensive failure, and has generated huge losses in the process.
Under its old boss, Bob Diamond, Barclays made a serious attempt to challenge the big American investment banks. It had the scale to do so, and when it doubled up its bet on the sector by taking control of the remains of the failed Lehman Brothers, it looked briefly capable of challenging the likes of Goldman Sachs and JP Morgan.
But Diamond resigned as chief executive following the Libor scandal, and since his departure the investment banking unit appears to have drifted.
The results last week confirmed that its investment-banking unit wasn’t the powerhouse it had been only a couple of years ago. It slumped into a loss for the fourth quarter of the year and reported lower profits overall for 2013.
At the same time the bonus pool went up, leading many people to suspect that Barclays was allowing staff to swallow up all the profits, while leaving shareholders with all the risks and potential losses.
Now there are reports that Jenkins is coming under pressure from his shareholders to come up with a new direction for the investment bank – or else cut his losses and get out as fast as he can.
If Barclays retreats, the UK will effectively have given up on investment banking as an industry. RBS is no longer any kind of challenger, and only at the height of the crazy Fred Goodwin era looked likely to be. HSBC, despite sporadic,expensive forays into the business, has always been far too cautious and sensible to bet the farm on investment banking. Lloyds, wisely, has always stayed away from it.
Investment banking was a model created on Wall Street, and one the City only attempted to emulate after the ‘Big Bang’ deregulation of financial markets in 1986. Before that, city firms were divided into brokers and merchant bankers.
Some firms traded bonds or shares, some advised on listings and takeovers, others managed people’s money for them. They were all distinct activities, walled off from each other.
On Wall Street, by contrast, firms such as Goldman Sachs, JP Morgan, Morgan Stanley, Bear Stearns and Lehman Brothers did everything. They made markets, traded them, and advised on and invested in them.
It was fabulously profitable when they got it right, and extremely dangerous when they got it wrong. The idea behind the Big Bang reforms was that the British banks could do the same.
Plenty tried. Barclays put together BZW out of a number of city firms. SG Warburg attempted to turn itself into a British version of Goldman Sachs or JP Morgan before finally selling out to Swiss Bank Corporation inthe 1990s.
Firms such as Barings started dealing in securities as well as advising on them. Brokers, advisers and fund managers were swept up into giant financial supermarkets.
None of them quite worked out. Barings went bust. Warburg ended up selling itself off. BZW was a disappointment that later had to be resurrected as Barclays Capital. It now seems that investment banking (in the sense of bundling up a whole range of financial products into one company) is a concept that only works on Wall Street.
The rest of Europe has not had much success with it either. The Swiss giants Credit Suisse First Boston and UBS have made hugely expensive acquisitions to establish themselves alongside the American giants, but have never quite managed to make it into the first division.
Indeed, you could argue that it hardly works in the US anymore. Goldman is fantastically profitable, but that firm seems able to make a business work in a way that is impossible for its competitors. But it was investment banks such as Lehman and Bear Stearns that created the financial crash. The risks inherent in the business are so high that disaster is seldom more than one trade away.
What the City is good at is what it was good at before the Big Bang; namely, advising on finance and managing money, which both make rich profits and require little capital; trading and brokering, so long as not too much risk is taken onto a firm’s own books; and playing host to American investment banks, providing them with all the ancillary services they need.
Once Barclays has pulled out of investment banking, as it surely will, the City should restrict itself to what it used to do well – and forget about competing with the American giants.