Bob Diamond is no quitter.
The American-born bond trader took a job as head of global markets at Barclays’s floundering investment banking arm, BZW, back in 1996. Barely a year later the British bank sold BZW’s equity and corporate finance business to rival Credit Suisse First Boston for a pittance. Equity markets were soaring at the time, and the City of London was booming, but Barclays didn’t have the stomach — or the capital — to compete in the investment banking business against the giants of Wall Street and continental Europe.
Far from giving up, however, Diamond dedicated himself to building up his rump markets business, renamed Barclays Capital, insisting that the firm could thrive as a niche fixed-income player. He spent aggressively to recruit a cadre of bond specialists from bulge-bracket firms and quickly made Barcap the dominant player in sterling bonds. Then he methodically built the bank’s presence in Europe, betting — correctly, as it turned out — that the 1999 launch of the euro would spur a financing spree in the single currency. Earlier this decade he turned his attention to the U.S., hiring hundreds of bond traders, salespeople and analysts in a bold bid to take on Wall Street’s behemoths on their home turf. Against the odds, Diamond succeeded every step of the way. By the end of 2007, Barclays Capital ranked an impressive sixth in revenue as a global debt underwriter, just behind Lehman Brothers and ahead of traditional powerhouses such as Morgan Stanley and Goldman, Sachs & Co.
Having prospered by focusing narrowly and building organically, Diamond changed form abruptly when the global financial crisis exploded in September 2008. He persuaded Barclays’s board to make a daring bid for Lehman; then, when U.S. and U.K. regulators failed to backstop the offer and Lehman Brothers Holdings filed for bankruptcy, he arranged the £1 billion ($1.7 billion) purchase of its U.S. broker-dealer subsidiary and its Times Square headquarters.
At a stroke, Diamond added 10,000 bankers and traders to his U.S. staff of 4,000. More than that, he transformed Barcap into something he had once pooh-poohed — an all-singing, all-dancing investment bank providing everything from bond and equity trading and underwriting to M&A advisory services. And he had done so in the midst of the worst financial turmoil since the Great Depression.
Today, Diamond, 58, can’t suppress his glee as he surveys Barclays Capital’s fixed-income trading room from his glass-walled office on the second floor of the bank’s Seventh Avenue building (much closer to the action than former Lehman CEO Dick Fuld’s old 31st-floor redoubt, he notes). After spending most of the past 20 years in London and Tokyo, he is excited to be back in New York and convinced that the once-derided Barclays is set to break into the top tier of global banks, rivaling the likes of JPMorgan Chase & Co., Goldman Sachs, Credit Suisse and Deutsche Bank for investment banking supremacy.
“I still can’t believe, and I never expected to have the opportunity to buy a U.S. bulge-bracket firm,” he says. The Lehman deal “gives us scale in the U.S., which is as good or better than anyone for all of our products — for commodities, for fixed income, it’s improved everything. It’s also given us an opportunity to build a cash equity business.” Diamond confidently predicts that Barcap will be a top-three player in every major investment banking category in three to five years. “This has been transformational,” he contends.
Diamond’s personal journey is emblematic of broader changes in the industry. This son of Concord, Massachusetts, rose rapidly as a bond trader at Morgan Stanley in the 1980s before going overseas to export the U.S. investment banking model to London and Tokyo, part of a generation of American bankers who revolutionized global finance. Today, however, the crisis has undermined the unquestioned supremacy of U.S. financial institutions. The stand-alone investment bank is dead, and once-proud institutions such as Citigroup and Bank of America–Merrill Lynch are hobbled by bad debts and, in the former’s case, big government shareholdings. With European firms rivaling Wall Street’s dwindling ranks of champions and Asian firms starting to flex their muscles, it seems fitting that this Yankee banker has come home carrying the torch of Britain’s Barclays.
Yet even in his hour of triumph, Diamond faces some stiff challenges. Universal banks haven’t exactly crowned themselves in glory during the crisis — witness the enormous losses registered by Bank of America, Citigroup, Royal Bank of Scotland and UBS. Regulators around the world are determined to end the culture of “too big to fail.” Most regulators resist drastic solutions, such as separating commercial and investment banking activities, an idea advocated recently by Bank of England governor Mervyn King. But they are proposing sharply higher capital requirements for the largest, most complex institutions, something that would increase the cost of business and decrease returns for banks like Barclays.
Diamond dismisses the suggestion that the days of the big universal bank are over. For every big bank disaster, he points to a JPMorgan, a Deutsche Bank — or a Barclays — that avoided balance-sheet blowups. Narrow banking, or focusing on one major business line, didn’t save Washington Mutual or Northern Rock, or prevent the disappearance of Lehman Brothers and the stand-alone investment bank. “The failures of Citi and UBS weren’t about the model, they were about management,” says Diamond. “To have healthy and strong banks willing to take risks, particularly cross-border risks in support of free trade and the global economy, that’s the best model.”
Now, it’s up to Diamond and his team to prove that his model works. There have been plenty of rocky moments since Barclays closed the Lehman deal. Diamond’s top executives struggled for several months to shed some 3,500 people from their enlarged U.S. staff without undermining morale, and to persuade Lehman’s wary corporate and institutional clients that Barcap could service their needs. And in London, Marcus Agius and John Varley, Barclays’s chairman and CEO, respectively, lobbied furiously to convince U.K. regulators and investors that the bank didn’t need an injection of government capital, even as its share price tumbled to a low of 47 pence (78 cents). To keep the state at bay, they had to raise £5.3 billion in capital in late 2009 from Qatar Holding, the Gulf state’s sovereign wealth fund, and from members of the ruling families of Qatar and the United Arab Emirates. In December 2009 the bank completed the sale of one of its crown jewels, the $1.7 trillion-in-assets fund manager Barclays Global Investors, to Blackrock for $15.2 billion.
Today, Barclays — and Diamond — are rapidly winning over the skeptics. Barclays Capital’s revenues nearly doubled in the first nine months of 2009, to £14.2 billion, and the unit generated 31 percent of the bank’s pretax profit of £4.5 billion. Barcap’s core fixed-income, commodities and currency division, buttressed by the addition of Lehman, cleaned up amid a surge in capital markets activity and a reduction in competition. The firm ranked first among U.S. fixed-income dealers, with a market share of 14.8 percent, just ahead of JPMorgan, according to an August survey by financial consulting firm Greenwich Associates. The firm had ranked seventh a year earlier, when Lehman held the top spot. Barcap also moved deeper into the corporate market, serving as a book runner on a notable $4 billion, 30-year bond issue for GE Capital in January 2009 — the first bond issued by a U.S. financial company without a federal guarantee since Lehman’s collapse — as well as another $4 billion bond issue, for IBM Corp.
Barclays Capital’s equity and M&A efforts are still in their formative stages, but the firm has notched a few early wins. Barcap got an advisory role on drugmaker Pfizer’s $68 billion acquisition of Wyeth, the largest deal of 2009, by helping to finance the offer, and it was the sole adviser to Abbott Laboratories on its €4.8 billion ($7.1 billion) acquisition of the pharmaceuticals division of Belgium’s Solvay in September. Abbott began working with a senior Lehman banker, J. Stuart Francis, to identify targets before the firm’s collapse last year, then stuck with him at Barclays Capital to do the Solvay deal. “It was pretty seamless to us when the Lehman people went over to Barclays,” says Abbott CFO Thomas Freyman. He regards Barclays’s acquisition “as positive because of the balance sheet they bring.”
Hugh (Skip) McGee, the Barcap investment banking chief who used to hold the same position at Lehman, says the recent turmoil in the industry should help the bank win business: “Client relationships are looser than they have ever been. There’s just more opportunities to go and make inroads.”
Diamond’s outfit still lags outside the top tier in global investment banking revenues, not surprising given that equities and M&A generate about 60 percent of industry revenues, whereas bonds account for just a third. The firm ranked ninth with $1.7 billion in revenue from January to mid-November, well behind top-ranked JPMorgan’s $4.8 billion, according to data provider Dealogic. In debt capital markets, Barclays Capital ranked fifth with $988 million in revenue, about equal to Deutsche but trailing JPMorgan’s $1.3 billion. Still, Diamond believes that his firm is poised to leapfrog over weakened rivals like Citigroup, Bank of America–Merrill Lynch and UBS to become an industry leader. Many observers say he may very well succeed.
The Lehman acquisition gives Barclays the heft to break into the global bulge bracket, says Davide Serra, founding partner of Algebris Investments, a $1.5 billion hedge fund firm specializing in financial institutions that has an overweight position in Barclays. “They got some of the best people on the Street, and they have the extra motivation of people who want to prove that the ex-Lehman franchise, aside from real estate and bad management, was actually pretty good,” he notes.
The idea that Barclays might contend for leadership in investment banking would have been laughable not so long ago. When Britain deregulated its securities industry in the late 1980s, Barclays assembled the elements of an investment bank by acquiring de Zoete & Bevan, a corporate broker, and Wedd Durlacher Mordaunt, a market maker in U.K. stocks. But Barclays’s commercial bankers never embraced the risk-taking culture of investment banking, and BZW failed to develop a global platform to compete with big German, Swiss and U.S. banks. The plight of Barclays and other British firms prompted wags to talk of the Wimbledon effect: The City of London might be a booming center of deal making, but the Brits could only play host to the game, never hoist the trophy. In 1997, with BZW’s losses mounting, then-CEO Martin Taylor sold the firm’s equity and advisory business to Credit Suisse First Boston for £100 million.
Crucially, Barclays did retain BZW’s fixed-income business, which it relabeled Barclays Capital. At the time, it was little more than a glorified treasury operation, but executives realized the bank would need a bond underwriting capability to avoid being marginalized. “We were very clear that there would come a time when a large amount of the financing and risk management needs of corporate clients around the world would be very dependent on capital markets service,” Varley says. “We absolutely had to have a capital markets capability.”
Diamond, a highflier at Morgan Stanley and CSFB who had been recruited in 1996 to run BZW’s global markets operations (essentially bond and currency trading), was put in charge of developing that capability. By experience and temperament he proved more than equal to the task.
Robert Diamond Jr., whom everyone knows simply as Bob, grew up in the Boston suburb of Concord, one of seven children. His parents were both teachers, with his father finishing his career as principal at Nantucket High School, on the exclusive island where Diamond owns a home. He calls his father his hero for nurturing a fiercely competitive streak that enabled Diamond to become an All-State linebacker in high school. “He taught me that attitude was everything,” Diamond said in a May 2008 commencement address at his alma mater, Maine’s Colby College. “He taught me that you never, ever, ever quit just because something is difficult.”
Diamond obtained a BA in economics at Colby in 1974 and an MBA at the University of Connecticut Business School in 1977 before taking a job with a small medical supply company. When his boss was recruited by Morgan Stanley to help ramp up its information technology department in New York, Diamond joined him in 1979 and quickly set his sights on becoming a trader. Three years later he began trading on the repo desk, then graduated to the bond desk before rising to head up the firm’s government bond desk in London. But Diamond clashed with John Mack, the fixed-income head who would later run Morgan Stanley, and jumped ship to CSFB in 1992.
At CSFB, Diamond burnished his reputation by going to Tokyo and turning around the bank’s Asian business before moving back to New York in 1994 as head of fixed income, currencies and commodities and becoming the youngest member of the bank’s executive committee. “He was someone who was straightforward, who put his finger on problems in an open way,” says Hans-Jörg Rudloff, a former CEO at CSFB who now serves as chairman of Barclays Capital’s executive committee. At the time, CSFB was a hotbed of political infighting and management instability, though. So when the offer came to be sole head of markets at Barclays, Diamond didn’t hesitate to jump.
He moved quickly to put his stamp on Barclays Capital. He recruited a handful of highly regarded bankers to run key units, such as Thomas Kalaris, whom he lured from JPMorgan to run Barclays’s North American securities business, and Jerry del Missier, whom he poached from Bankers Trust Co. to take charge of derivatives. Equally important to someone who had fallen afoul of Wall Street turf battles, Diamond instilled a culture of teamwork, firm loyalty and putting the customer first. He instituted what he calls a “no asshole rule” to weed out excessive egos. “I had been in a place that was all about product,” del Missier says of BT, a firm that faced lawsuits for its aggressive sales of derivatives in the mid-’90s. “If you want to build a business for the long haul, you do need a business that’s built around servicing clients and taking a long view.”
Diamond and his team succeeded in putting Barcap back on the map, but the firm remained a second-tier challenger. So in 2003, at a time when many rival banks were still retrenching from the dot-com bust and the 2001 recession in the U.S., Barclays Capital went on a hiring binge aimed at doubling revenue within four years and making the bank a serious player in the U.S. market. Diamond more than doubled the firm’s U.S. head count, to just under 3,000, and hit his revenue target a year early.
Barcap’s growth was part of a wider revival at Barclays under Matthew Barrett, a Canadian drafted as CEO in 1999 to lead a turnaround after years of management turmoil and weak profits. Barrett whipped Barclays’s retail and commercial banking business into shape, invested heavily in Barcap and BGI and turned Barclays from an oft-rumored acquisition target into a buyer with the purchases of British mortgage lender Woolich and Spain’s Banco Zaragozano.
When Barrett stepped up to the chairman’s office in 2004, the board chose Varley, who had risen through the ranks as head of asset management, retail banking and CFO, to become CEO rather than Diamond. The press speculated about bad blood, but the two men in fact struck up a surprisingly effective partnership. Far from seeking to neuter a rival, Varley made it clear that his success depended very much on Diamond’s. One of his first moves was to elevate Diamond to president of Barclays plc and extend his remit to overseeing wealth management and BGI.
“I can’t imaging having had a better boss over the last five or six years than John,” says Diamond. “He’s challenging, he’s principled, he’s supportive, he’s got integrity. And once we make a decision, there’s no second-guessing each other.”
With Barcap growing strongly and Barclays expanding its retail and commercial banking business (Varley snapped up South Africa’s Absa Bank in 2005), the two executives began looking for a strategic move that could catapult Barclays into the big leagues of global banking. How they went about it says volumes about the bank’s disciplined approach to risk.
In March 2007, Barclays made a bold €65 billion all-share bid for ABN Amro, attracted by the Dutch bank’s investment banking arm as well as its retail and commercial banking subsidiaries in Brazil, Italy and the U.S. When a consortium of Royal Bank of Scotland, Fortis and Banco Santander countered with a higher cash offer, Barclays stuck to its guns and refused to offer cash of its own. In October the consortium won the battle but lost the war by paying top dollar just as the financial crisis was erupting. Today the overextended RBS is controlled by the U.K. government and Fortis has been broken up. Varley has regrets about losing ABN, but none about Barclays’s tactics. “We’ve never been interested in pursuing a strategy unless the economics were interesting,” he says.
With the financial crisis worsening in late 2007, the Barclays duo looked for other opportunities. Barclays held preliminary talks about acquiring some of the investment banking operations of UBS, which was reeling from write-downs on U.S. subprime mortgage securities, but the talks never went anywhere, sources say. Then when JPMorgan stepped in to salvage Bear Stearns, Varley and Diamond began thinking about the chances of picking up cheap U.S. assets.
At the U.S. Treasury then-undersecretary for domestic finance Robert Steel was having similar thoughts. Steel, a former senior Goldman executive who had been pulled into the Treasury by Secretary Henry (Hank) Paulson Jr., knew Varley and Diamond from a stint on the Barclays board from June 2005 to October 2006. He was impressed at how Diamond had built up Barcap virtually from scratch. Looking for potential saviors in case of another run on an investment bank, Steel called Diamond in April and asked him an “unofficial” question: Was there a price at which Barclays would have an interest in acquiring Lehman? “I could close my eyes and imagine him being a leader who could get this done,” Steel tells II.
An initially skeptical Diamond had his executives examine Lehman, and was quickly persuaded that a deal would make sense — at a distressed price. When Lehman entered its death spiral several months later, Diamond — before boarding the last flight from London to New York on Thursday evening, September 11 — got assurances from Paulson and Timothy Geithner, then president of the Federal Reserve Bank of New York, that the government would be receptive to a Barclays offer. Three days of round-the-clock negotiations ensued at the New York Fed and at the offices of Lehman’s lawyers, Simpson Thacher & Bartlett, involving Diamond and his top lieutenants, del Missier and Barcap COO Rich Ricci, before the deal collapsed on Sunday after U.S. and U.K. authorities failed to guarantee interim funding for Lehman. A dejected and exhausted Diamond was heading to dinner on Sunday evening with his wife and his daughter, a student at Princeton University and one of his three children, when his mobile rang: Herbert (Bart) McDade, Lehman’s president and COO, wanted to know if Barclays would consider buying Lehman’s U.S. broker-dealer subsidiary, which could possibly be separated from the bankruptcy filing intended for the following morning.
Diamond and his team resumed work at dawn on Monday, and by Tuesday afternoon he was able to walk onto Lehman’s equity trading floor and announce the deal. Lehman employees, who had been on an emotional roller coaster for months and had seen much of their wealth evaporate (they owned a third of the firm), burst into applause. One equity trader downloaded “God Save the Queen” from the Internet and broadcast it over the firm’s squawk box. On Friday the U.S. Bankruptcy Court sanctioned the deal.
The estate of the bankrupt Lehman and its creditors sued Barclays in September 2009 for $8.2 billion, claiming that the bank had reaped a windfall profit by negotiating an undisclosed discount for some of Lehman’s assets and persuading Lehman executives to deliver additional assets in the deal. Barclays did report a £2.3 billion gain on the acquisition in 2008, but executives dismiss the claim and point out that no other bank was willing to step up and buy the firm. The U.S. Bankruptcy Court, Southern District of New York, is due to hear the case in March.
The annals of investment banking offer few examples of successful acquisitions. Most buyers either overpay (think Dresdner Bank–Wasserstein, Perella & Co.), acquire a deteriorating franchise (Deutsche Bank–Bankers Trust) or watch talent — the real value — walk out the door (Credit Suisse–Donaldson, Lufkin & Jenrette). To acquire the core of a bankrupt firm in the midst of a historic market meltdown was unprecedented and highly risky.
To minimize those risks, Diamond and company worked at lightning speed to eliminate overlap in the two firms’ staffs and reassure clients. The biggest duplication was in fixed income, where Lehman and Barclays were both large players. Fixed-income boss Eric Bommensath, a Frenchman whom del Missier helped recruit from Bankers Trust back in 1997, sat down with the respective desk heads from Barcap and Lehman and examined their staffs in detail to determine who was strongest, giving a nod to Lehman in credit, for example, and to Barcap in rates and mortgage-backed securities. He gave them two weeks to decide who would stay and what their compensation would be, then spent the following two weeks trying to finds jobs with Barcap’s global operations for employees that didn’t make the cut. “I didn’t sleep for a month,” Bommensath recalls. The quick decision making was vital to avoiding turmoil, he says: “Employees knew who was the boss, and there was leadership.”
By contrast, Barclays spent three months merging the two firms’ big research staffs. Both firms had emphasized research as a way to build client loyalty, with Barclays hiring analysts aggressively as part of its U.S. expansion and Lehman topping Institutional Investor’s All-America equity and fixed-income research teams for five and nine years running, respectively, before the latter firm’s demise. Barclays research chief Larry Kantor brought together sector leaders from both banks’ analyst ranks and laid down the meritocratic line: “We are going to hire the best people — and some of them are going to be Lehman people,” he says. Today, Barclays employs nearly 750 people in its research and index department. It topped II’s latest equity and fixed-income research teams last fall. The firm is still hiring to fill gaps in Europe and Asia (it hired a European banking team led by Simon Samuels, a perennially ranked group on II’s All-Europe Research Team, from Citigroup earlier this year). “We need to establish our brand,” Kantor says. “Research is something that’s very public, that’s very client-facing. We want to be the must-see, must-read research house.”
In equities, Diamond has left the former Lehman staff, led by Gerald Donini, to get on with the business of restoring Lehman’s franchise. That hasn’t been easy. It took Barclays two weeks to get the equity desk operating again and several more months to win back business from clients, many of whom had assets lost or frozen in the Lehman bankruptcy. Donini recalls an early rebuff from one client who told him: “Nobody’s going to stay with you guys. Why should I direct my resources to you?” But patient stroking and a few discounts gradually rebuilt order flow. All but one of Lehman’s old institutional clients are trading stocks with Barclays Capital today, Donini claims.
For Donini and his team, the chance to prove themselves anew under the Barclays brand is a powerful motivation. Two big flags hang in the middle of the equity floor: the Stars and Stripes, which was first hung in Lehman’s makeshift trading floor in Jersey City after its offices were damaged in the September 11, 2001, terrorist attacks, and a Union Jack, which was hoisted after the Barclays acquisition. “We’ve had the autonomy and empowerment to do our jobs,” he says. “That commitment’s been unwavering.”
With his U.S. business running smoothly again, Donini is extending Barcap’s equity platform into Europe and Asia, hiring some 425 people in 2009. The firm began trading European equities in early November, with Diamond ringing the ceremonial opening bell at the London Stock Exchange alongside LSE CEO Xavier Rolet, himself a former Lehman banker (see story, page 40). Japan is due to come onstream in January, followed by Hong Kong in April and India and South Korea by the end of the first half.
Investment banking boss McGee is similarly busy building the bank’s advisory business. Although a few senior Lehman bankers departed, including Mark Shafir, the former co-head of global M&A who went to Citi, defections have been few, reflecting a camaraderie among ex-Lehman bankers and a similar emphasis on teamwork at Barclays. “The two cultures were pretty similar,” notes McGee.
McGee took advantage of turmoil in the investment banking industry to hire 240 bankers in 2009, including a number of marquee names from top-tier rivals. In Europe he nabbed Jim Renwick, formerly vice chairman of investment banking at UBS, to run Barcap’s U.K. equity and corporate brokerage businesses; recruited Matthew Ponsonby and Mark Warham — veterans of Citigroup and Morgan Stanley, respectively — to co-head European M&A; and lured Rothschild’s co-head of European investment banking, Stefano Marsaglia, to head up Barcap’s global Financial Institutions Group. In Asia, McGee made waves in September by hiring away Morgan Stanley’s head of Asia-Pacific investment banking, Matthew Ginsburg, to spearhead Barclays Capital’s efforts in the region.
Having assembled the pieces of a global investment bank, it’s time for Diamond to deliver. Barclays Capital has won some big mandates, but the firm still has a ways to go to achieve his “top three” ambition.
Revenue growth slowed noticeably in the third quarter. The bank doesn’t report detailed quarterly results, but revenue was £3.7 billion in the quarter, compared with £10.5 billion in the first half. Although most investment banks reported some slowdown from the industry’s blowout second-quarter pace, the figures suggest that Diamond may find it difficult to achieve the growth targets he has set. Mike Trippitt, a partner and banking analyst at Oriel Securities, an independent London-based research firm, predicts flat revenue for Barclays Capital in 2010.
The Lehman deal meanwhile has inflated Barcap’s cost base; expenses jumped by 52 percent in the first half from a year earlier, to £3.1 billion. Moreover, regulators are likely to push up costs even further for big universal banks like Barclays. The Basel Committee on Banking Supervision has revised its rules on securities positions; these changes are expected to increase capital requirements for banks’ trading books by two to three times current levels. The U.K.’s Financial Services Authority, meanwhile, issued new liquidity rules in October that will require banks to hold much greater amounts of government bonds and other liquid instruments. These regulatory changes “will affect the valuation argument, will affect return on equity” for banks like Barclays, says Trippitt.
Tighter regulations don’t concern Diamond as long as there is a level playing field around the world. Like other banks, Barclays, he points out, has been raising capital in anticipation of the rule changes, which won’t start to bite until later in 2010 and beyond. Thanks to the injection of capital from Gulf investors and the sale of BGI, Barclays has raised its core tier-1 capital ratio to a relatively healthy 9.2 percent.
Can Barclays Capital make it to the top?
To Diamond the answer is obvious. Just look how far the firm has come since 1997, when it wasn’t top three in anything. Now victory is within his sights, and he has no intention of coming up short.
“This organization knows how to build businesses and make them pay as you go,” he says. “We’re doing more business with more clients than we’ve ever done before. We’re very confident.”