On the 10-year anniversary of Lehman Brothers’ bankruptcy, the event commonly cited as the start of a global financial crisis, it’s still worth asking: What the hell happened?
The Bank that Lived a Little: Barclays in the Age of the Very Free Market (Penguin Random House), a new book by former banker and financial commentator Philip Augar, is a timely tale of the folly of bank deregulation, unchecked greed, and wild ambition. Augar’s book is a dramatized retelling of Barclays’ history, focusing on how it was transformed from a Quaker family bank in the UK into a global giant.
Through a detailed look into the inner workings of this one bank, a story emerges about how banking evolved from mostly lending to people and companies to becoming about finance in and of itself. During that time, the financial services industry ballooned to become the biggest part of the UK economy and forged connections worldwide. When it all came crashing down, and banks wouldn’t lend to each other, there was no choice left but to use public funds to rescue them.
In 1986, the London’s financial sector experienced what was known as the “Big Bang,” a sudden and massive deregulation of financial markets under Margaret Thatcher’s government. This came 10 years after Wall Street’s version (paywall), which ended fixed commissions for trading and created heated competition in the sleepy banking industry overnight. British banks were a decade behind.
The first part of Augar’s history is about how some at Barclays didn’t want to just be the biggest and best bank in the UK, but also a major player in the US. It portrays Barclays as the underdog. It makes it sound daring and impressive, but you’d be forgiven for thinking it was just greedy and reckless. In early 2007, even as there were signs something was amiss with the US mortgage industry, Barclays pushed on. It bought EquiFirst, a mortgage originator with 9,000 brokers on commission. The day the deal went through, New Century Financial, a US mortgage lender that specialized in subprime mortgages, went bankrupt.
The Bank that Lived a Little is a reminder of just how quickly financial services went from deregulation to running off the rails. After the Big Bang, it was only 20 years before it brought the global economy down.
Even in September and October 2008, the height of the financial crisis, the global ambitions of Barclays were undeterred. Barclays executives, including Bob Diamond, who would later become CEO, were negotiating to buy bits of the bankrupt Lehman Brothers to complete a 25-year process to join the investment-banking big league. “Barclays could at last rejoice in being a top five universal bank,” Augar writes. There is a view within the bank that the credit crisis will blow over in a couple of months and that, unlike RBS and Lloyds, Barclays couldn’t accept government funds. This wasn’t because of any moral objection to taking public money, but because having government representatives on Barclays’ board did not suit the bank’s international ambitions. (Barclays did gladly accept extra liquidity from the Bank of England, another form of state support.)
Who is to blame? Augar appears keen to point out that this was a system-wide failure. Barclays was doing what it needed to keep up with other banks, particularly smaller banks that entered the US mortgage market and made big money (until they collapsed). Traders were doing what they needed to take home multimillion-pound bonuses. Meanwhile, politicians and regulators prided themselves on “light-touch regulation” that enabled London to become the world’s foremost financial district. The bank’s board was asleep at the wheel, with non-executive members cycled in and out by headhunters with little knowledge of the risks building up at the bank. So few people seemed to really understand what was happening that it served in a clever sort of way to help them avoid taking responsibility.
Take Carol, a corporate risk manager in Barclays Capital’s Birmingham office. She convinces Karl Edwards (a pseudonym), the owner of a record shop in the Midlands who had been a customer of Barclays since the early 1990s, to take out a type of interest-rate hedging product when he gets a mortgage for a second business property. But when interest rates go down instead of up, Karl is left with the bill for a “bet” he made and lost. Eventually, the charges and penalty payments force Karl to close his business. Is it Carol’s fault? Augar writes:
No one appeared to have thought through the consequences of incentivizing people like Carol. She was a school-leaver entrant to banking who had worked her way up and was now at one of the UK’s most prestigious financial institutions, where was given targets to meet and financial incentives to do so. If she did well, she could earn sums of money that paid for the lifestyle she craved, and she knew what happened to colleagues who failed to deliver. Her response was at least understandable; the failure of more senior management to anticipate the impact of the incentive structures they put in place was not.
Barclays became not only too big to fail, but too big to manage. Today, Barclays is still one of the biggest banks in the UK and one of the world’s largest investment banks. Augar’s book reveals the secret conversations at the top echelons of Barclays and others around it at pivotal moments in its history. Often, the book relishes a bit too much in the details of first class travel, luxury hotel suites, expensive suits, and British private school upbringings.
Public disgrace finally befell Barclays. In the past 10 years, Barclays has been fined billions for a wide range of misdeeds. This year, a $2 billion fine by the US Department of Justice was announced for selling dodgy mortgage securities before the crisis. Previously, the bank was hit with penalties for currency manipulation, several Barclays traders were sentenced to jail for Libor-rigging, and four former executives, including former CEO John Varley, are going on trial next year for the way they raised money in Qatar during the crisis to avoid a state bailout.
[Bob] Diamond’s career had blossomed since he first travelled to Wall Street on the downtown train back in 1979. Chauffer-driven cars were now his preferred means of travel. He had a wardrobe full of suits and his Church’s shoes were highly polished. He was already a wealthy man, with a reputation as one of the world’s best managers of a fixed income business but surprisingly Diamond was currently out of work and at a career crossroads. After a long run of uninterrupted success, he had found his way blocked by two Wall Street titans, and if he was to make it to the summit of investment banking, his next move was crucial… Then he got a break. Early in 1982, a senior trader announced that she was taking maternity leave. Her job required her to take a view on longer-term interest rates, which was the kind of trading that Diamond wanted to do… Over the next few years he proved to be a very good trader and leader. He saw things from other people’s point of view. He joined in the banter, stood his ground in the pub, but never got stupidly drunk or went on to the girlie bars. He was hard but fair and people wanted to work for him.
To get a sense of just how quickly and comprehensively banking changed in the UK, take a look how rapidly Barclays’ trading assets grew:
The group’s report and accounts – 48 pages in [Tom] Camoy’s time [1980s], 166 pages in [Martin] Talyor’s [chief executive 1994-98] – numbered 303 pages in 2006. Assets (loans of customers and securities held for trading) had grown from £65 billion in 1983, to 235 billion in 1997 and £996 billion in 2006. This growth was due not simply to a linear increase in the old buisnesses but also to the creation of a baffling array of new financial instruments in different currencies, interest rates and assets. This was the world of derivatives, the business that was still in its infancy when Camoys founded BZW but that now underpinned Barclays’ profits.
This chart isn’t in the book, but curious readers might want to know how Barclays has fared against its main British rivals before and after the crisis. The answer is, “middling.”