My bonus is my word

The reaction to the Libor rigging revelations meant that a sacrifice was needed. The initial offer from Barclays – Bob Diamond giving up his bonus –was not sufficient so Marcus Agius, the chairman, had to fall on his sword.

But even that was not enough. The crowd wanted blood and Mr Diamond’s resignation duly followed. The board’s initial response to the Libor crisis clearly misjudged the mood and extent of the outrage felt. Is that misjudgement also a symptom of the same underlying problem within Barclays itself?

The ‘culture’ inside Barclays was revealed in all its ‘gory’ by the language in the email exchanges set out in the FSA announcement of the fine for rigging Libor. Rightly it provoked shock and condemnation but it has been seen before – the Abacus case involving Goldman Sachs was such an example. The key problem is the conflict of interest between the bank and its clients which is sometimes resolved in the bank’s favour to the detriment of either its clients or other market participants.

The failure to manage these conflicts is a far cry from the old British merchant banks which have largely disappeared and been replaced by or acquired by US-style investment banks. One of those old names is Lazard which is still around and is where Mr Agius began his career.

Founded hundreds of years ago, the merchant banks were paragons of virtue relying on the old City maxim of ‘my word is my bond’. The culture of the old merchant banks was very stiff and starchy and prim and proper. They survived successfully in the world before regulation by maintaining high standards of client service. While there were no rules and no regulator, if you breached the code of what was considered acceptable behaviour, you would be shunned and effectively drummed out of the regiment – your career over. Those standards would have been second nature to Mr Agius and so the culture of Barclays, as is now clear for all to see, would have been in stark contrast.

The original activities of the old merchant banks did not include securities trading – this was carried on by market makers and brokers. Today investment banks combine both merchant banking and securities activities and with such a wide mix, conflicts do arise. The culture of the merchant banks is quite different to the securities business. The events behind the Barings rogue trading scandal illustrate the difference in culture between the old merchant banks and the present day investment banks.

The Barings scandal occurred after the bank’s acquisition of a securities business – a business with its own very different culture. On one occasion, Nick Leeson, the rogue trader from the securities business, was in a bar in Singapore when he decided to ‘moon’ – drop his trousers – at some women. This behaviour, while not unknown in the UK on a Saturday evening after a lot of drinks, is much less common in Singapore. Naturally enough, the women objected and Mr Leeson was arrested and charged. Various legal efforts ensued and he was released but the incident was reported to the Barings’ board. Famously, the chairman of Barings did not know what mooning entailed. After an explanation, the chairman pointed out that the previous individual to represent Barings in Singapore was a former ambassador and not someone who would moon and certainly someone who would know that such behaviour was more than inappropriate. It was pointed out to the chairman that Mr Leeson was making lots of money for the bank – at least that was what they thought – so his behaviour was tolerated.