Time to put Barclays botch into perspective

Click to follow
Now Barclays chief Martin Taylor has been ritually humiliated over the botched sale of BZW, the City has a choice. It can look for some other high-flier to drag down to earth or it can consider what happened at the world's fifth most profitable bank.

On the understanding that ritual humiliation is the game of choice in the City, and there is only a tiny minority interested in analysis, we gingerly offer one version of how Barclays tripped over BZW.

In the early 1980s Barclays, like a lot of other banks, bought into two concepts - or, more accurately, buzzwords dressed up as concepts.

The first buzzword-as-concept, "globalisation", turned out to be valid. Over the past 15 years the term has jumped from 24-hour trading floors onto the street where most of the world's 5 billion citizens now bandy it about when discussing current affairs.

The second, "securitisation", was a dud and vanished into the ether where all dated buzzwords go. Nevertheless, to understand how Barclays stumbled into the BZW quagmire, the term needs to be disinterred for a quick post- mortem.

Securitisation as generally understood 15 years ago was shorthand for an intricate sequence of propositions. Proposition A was that the world's big companies were increasingly able to raise money cheaply because "globalisation" meant they could sell stocks and bonds to investors around the world.

Proposition B was that this was terrible news for banks such as Barclays which made their money giving loans to large corporations. Loans were out. Stock and bond issues were in.

Proposition C was that if the corporate lending business was in decline, the best thing commercial banks could do was buy or build merchant banking arms putting them in a position to jump on the securitisation bandwagon, a la BZW.

As the financial world anticipated the merger of commercial and investment banking, another notion became popular. Global finance would eventually be dominated by 25 super-banks providing every service to everyone everywhere. A favourite parlour game of the time was making lists of the 25 winners. Most included Barclays because it was pre-eminent in the UK.

Scroll to the present. There's no question Barclays squandered its chance to make BZW a competitor to Merrill Lynch, Goldman Sachs, and other first- tier securities houses. But the question this botch raises is: So what? How much does Barclays lose by having failed to develop BZW into a clone of Merrill?

Answer: It would be nice if BZW had turned into another Merrill. Its failure to do so is embarrassing. But this is by no means a disaster.

Reason: "securitisation" as a concept is dead and buried. Making loans to large companies has not faded as a business. It has simply evolved. Meanwhile, many of even the biggest banks have discovered the most profitable way forward is not to be all things to all men, but to look for selective competitive advantages.

The selective competitive advantage game is predicated on the notion that banks are ultimately competing for the best return on equity. In this new game Barclays still looks strong. In 1996 its return on equity was 22.5 per cent, according to the bank rating agency IBCA. The role of Deutsche Bank - which is still pursuing the 1980s holy grail of being all things to all men - was 7.8 per cent.

Even allowing for the fact that German banks hide their capital strength rather than flaunt it, that's quite a gap. Then there's Union Bank of Switzerland, another universal bank. UBS's return on equity in 1996 was -4.6 per cent.

Lord Simon says...

It's amazing how profitable pursuing the cause of peace in Northern Ireland can be. Last Wednesday, 75 businessmen met over breakfast at Simpsons- In-The-Strand to promote "Co-operation Ireland", a charity bringing Catholic and Protestant children together, and for their pains got to hear Lord Simon, the Minister for Trade and Competitiveness in Europe, in unbuttoned mode.

"Frankly," Lord Simon began tackling the EMU question head on, "we have big problems in bringing all sorts of constituencies along toward the idea of a single currency." Then he explained what the Government is going to do about this while it holds the EU presidency next year.

New Labour's argument will be that Europhobia is overdone. Take EU waste and corruption. EU funds equal only 1.3 per cent of Europe's wealth-creating capacity, Lord Simon said, while the funds under the control of national governments equal more than 40 per cent.

Looking homeward, Lord Simon suggested that, despite the current economic high, Britain's standard of living compared to the rest of Europe remains about where it was in 1979.

Belgian in the frame

ON WHOM should you be placing your money in the contest for the top job at the European Central Bank? Forget Banque de France chief Jean-Claude Trichet. No-one will forgive France for turning what should have been a smooth appointment into a public Eurospat. Only the Germans want a German. The Germans could never trust an Italian. The UK won't be in EMU when the most important job in Europe comes into being. So expect a compromise candidate.

The avuncular Belgian central banker Alfons Verplaetse is an unlikely choice because of his penchant for talking too much. Finance Minister Philippe Maystadt stands a better chance. The silver-haired, soft-spoken Walloon is the longest standing EU finance minister and is quietly credited with having saved the European Exchange Rate Mechanism in 1993.And the Belgians are owed a top job following John Major's veto of Prime Minister Jean-Luc Dehaene as European Commission President back in 1994.

Comments