If ever there was any suggestion that Barclays had a good relationship with its regulators, it was laid to rest on Tuesday. As Marcus Agius, the bank’s outgoing chairman came before the Treasury select committee at 10.08am, staying there for two-and-a-half hours, the committee released a damning selection of letter exchanges between the bank and the Financial Services Authority.
Stretching back to 2008, when Barclays came close to failing a stress test of its capital strength, tensions had run high between the two sides. And it emerged last week that the final trigger for Bob Diamond’s resignation as chief executive had come in the form of pressure both from the FSA and Sir Mervyn King, Bank of England governor.
However, Mr Agius’s testimony – and the letters – revealed the full extent of the dysfunctional relationship that had grown up between the bank and regulators, especially since Mr Diamond took over as chief executive 18 months ago.
The tone in the first of the letters published yesterday – from FSA chief executive Hector Sants to Mr Agius in September 2010 – is the most restrained of the selection. It tells Mr Agius that the proposed appointment of Mr Diamond as CEO is approved. “However,” it adds, “an integral part of our approval process is to set out any appropriate issues we expect the board to address in its ongoing governance and oversight of Bob Diamond.”
So far, so mellow. But in the four detailed points outlined later in the letter, there is evidence of unease. Mr Sants talks about a need for Mr Diamond to develop “a close, open and transparent relationship with regulators in the UK and around the world” – something which would “require an increased level of engagement from Bob Diamond”.
There is also scepticism about Mr Diamond’s ability to keep a requisite distance from his two longtime acolytes, Jerry del Missier and Rich Ricci, then co-CEOs of Barclays Capital, the investment banking business.
Mr Sants goes on to stress the need for Mr Diamond to set “the right culture, risk appetite and control framework across the entire organisation”.
The next insight into the relationship comes 18 months later, in April this year, and is far frostier. Lord Turner, FSA chairman, writes to Mr Agius of his multiple concerns around Barclays’ behaviour towards the regulator and more broadly. He highlights his distress over “the cumulative impression created by a pattern of behaviour over the past few years”, during which Barclays overused “complex structures” and took an “aggressive” stance on rules and regulations.
As “old news” illustrating his point, he cites Barclays’ infamous “Protium” structure, designed to shift a vast portfolio of illiquid investments off the bank’s balance sheet, and the “aggressive” price valuation of the bank’s monoline insurance exposures. More recently, concern focused on various massaging of capital needs, in which Barclays was “not fully transparent”, causing “unnecessary friction”. Attempts to cut capital risk-weightings on certain asset hedges had “inefficiently used up our resource and goodwill”, Lord Turner said.
Over stress tests last autumn, he said Barclays had been “confusing and potentially misleading”.
It was against that background of exhausted goodwill and ongoing tension that Sir Mervyn summoned Mr Agius and Sir Michael Rake, Barclays’ senior independent director, to the Bank of England last Monday at 6pm. The governor told them “in no uncertain terms that Mr Diamond no longer enjoyed the support of regulators”, Mr Agius told the committee, confirming suggestions last week that regulators had forced the CEO’s ejection.
In a phone call with non-executive directors soon afterwards, the Barclays board decided they “had no choice” but to call for Mr Diamond’s resignation, Mr Agius told MPs. He reported the board’s decision to Sir Mervyn by phone.
Later that evening, Mr Agius and Sir Michael visited Mr Diamond at his home to relay the message that he should resign. Mr Agius said the chief executive was “not in a good place” and had asked for time to speak with his family. But Mr Agius said he left feeling “confident” Mr Diamond would make “the right decision”.
Mr Agius, who also spoke to FSA officials during the evening, said the push to oust Mr Diamond had come as a shock given that the FSA had not questioned the suitability of Mr Diamond as chief executive when it fined Barclays £290m for rigging Libor rates less than a week earlier.
But in his own reply to Lord Turner’s letter back in April, Mr Agius had acknowledged the “tone from the top” was one of the FSA’s concerns with Barclays. With that “top” – in the form of chairman, chief executive and chief operating officer Mr del Missier – now exiting the bank, it will be up to the board to put in place a new cadre of leaders that can rebuild a workable relationship with regulators.
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