4 The Sunday Times April 3, 2022
BUSINESS
Barclays has earned a reputation
for being accident-prone. Now its
new boss is in another fine mess
The City’s
Mr Bump
does it
again
W
hen Jes Staley
addressed sharehold-
ers at Barclays’ annual
meeting five years ago,
he knew he had to
make an apology. For
months the bank boss
had faced criticism
about his efforts to
unmask a whistleblow-
er who had been making allegations
about one of his new hires. The American
told the 400 investors at London’s Royal
Festival Hall that he realised he had made
a mistake and apologised for his error.
That drama in May 2017 overshad-
owed a statement issued by US regulators
the same day. Their intervention has just
had repercussions for Staley’s successor
— and friend — CS Venkatakrishnan.
The Securities and Exchange Commis-
sion announced a settlement with Bar-
clays over violations that led to thou-
sands of the bank’s customers being
overcharged. The $97 million (£74 mil-
lion) settlement contributed to ending
the bank’s ability to issue limitless
amounts of “structured” products,
which were ultimately sold to retail inves-
tors to help them profit from anything
from the price of oil to market volatility.
Last week, the legacy of that restric-
tion came back to bite. Barclays admitted
it had sold $15 billion more of these struc-
tured products than allowed. To put it
right, the bank faces a £450 million cost
and the risk of lengthy regulatory investi-
gations on both sides of the Atlantic. More
immediately, it has had to delay its much-
anticipated £1 billion share buyback and
commissioned an independent legal
review of the events at its New York mar-
kets division, where the errors occurred.
On top of that, as investors were digest-
ing the implications of the announce-
ment on Monday, the share price crum-
bled after Goldman Sachs sold a 3.4 per
cent stake in the bank for a client — likely
to be the powerful US investment house
Capital or even the Qatar Investment
Authority — worth £900 million.
For investors in Barclays, it feels all too
familiar. The bank, which employs nearly
90,000 people — half of them in Britain —
has spent the past decade trying to rid
itself of its reputation of being accident-
prone. It is tough. Last week its Frankfurt
offices were raided by authorities investi-
gating a protracted tax evasion scandal.
One investor said: “The bank is like an
alcoholic who’s just had a good run and
then they’ve started drinking again.”
In 2012, Barclays became the first bank
to be fined for rigging the benchmark
interest rate Libor; among other misde-
meanours, its traders were exposed for
offering bottles of Bollinger champagne
as payment for favours. The furore forced
out chief executive Bob Diamond and led
to the installation of the steady-as-he-
goes retail banker Antony Jenkins, who
was in turn ousted by chairman John
McFarlane three years later after losing
the confidence of the board.
Staley’s own tenure, which began in
late 2015, ended suddenly last November
when he quit — not over the whistleblow-
ing incident that caused such early diffi-
culty, but over his relationship with the
convicted sex offender Jeffery Epstein.
Specifically, to contest the findings of a
regulatory inquiry into how he described
the relationship to the Barclays board.
Barclays seems to be a bank that
employs gregarious, go-getting charac-
ters, but is constantly tripped up by its
investment bank. Bulked up by the take-
over of chunks of burnt-out Lehman
Brothers in the financial crisis, the invest-
ment division can generate healthy prof-
its — but carries with it greater risk.
The promotion of Venkatakrishnan —
known as Venkat — had gone smoothly.
Only a month ago the Indian-born banker,
steeped in investment banking after a
career at JP Morgan, presented record
profits of £8.4 billion. Investors hoped he
heralded the dawn of a less turbulent
period for one of Britain’s big four banks.
Last week’s events ended that. “They
were just about in rehabilitation mode —
and this comes out of the blue,” said a
Barclays investor.
It means that less than six months after
taking the helm of Barclays, Venkata-
krishnan, 56, faces the same problem as
his predecessors: how to convince share-
holders he can avoid more banana skins
and restore confidence in the shares,
which were the biggest fallers in the FTSE
100 last week, losing 12.1 per cent.
JILL
TREANORA SIMPLE MISTAKE
While the current problem originates
from that SEC settlement in 2017, the
cause is a regulatory filing in 2019. Bar-
clays sought permission from US regula-
tors to issue structured products. At the
time, it said it expected to issue $20.8 bil-
lion of these sophisticated instruments.
Signs that something was amiss
emerged on March 14, when Barclays
announced it was suspending the issu-
ance of two exchange-traded notes
(ETNs). These pay a return to investors
based on an underlying market. In this
case, they tracked crude oil and VIX, an
index that gauges market volatility.
Though it did not say so, this appears
to be the first sign that Barclays realised it
had breached its $20.8 billion limit. It was
not regarded as an event that needed a
disclosure to the stock market, just a busi-
ness update. On Monday, when it did tell
the stock market about the situation, it
was more likely because of the need to
delay the share buyback — and update the
market about the potential £450 million
bill. The scale of the breach — $15 billion —
stunned Wall Street. Adding to the aston-
ishment was Barclays’ admission that it
breached the limit a year ago.
How this happened is the subject of a
formal investigation by Barclays. At first
glance, it seems an oddly simple mistake.
“You’re only supposed to write so
much business, so, [presumably] an
alarm goes off somewhere and somebody
tells you to stop. So either the alarm’s not
in place properly, or somebody’s not lis-
tened to the alarm, or someone’s chosen
to ignore it. It’s one of those three, isn’t
it?” said Gary Greenwood, banking ana-
lyst at Shore Capital.
One possibility is that it is an oversight— albeit an expensive and embarrassing
one. The war in Ukraine has roiled mar-
kets and led banks to scrutinise their
positions, line by line, for exposure to the
turmoil. That might explain why Barclays
uncovered the over-issuance in March.
Keeping a tally of issuance is a mun-
dane task that ordinarily a bank would
not be expected to do. Usually, when
banks issue structured notes, the limit
automatically increases as they go along,
through a status with the SEC known as
“well-known seasoned issuer” — or Wksi.
But the regulator had not returned the
trusted Wksi status to Barclays since the
2017 debacle. Did its lawyers and risk
experts simply forget?
In calculating the cost of the error, Bar-
clays has attempted to work out how
many of the securities it needs to cancel.
Only those issued since it breached the
$20.8 billion cap are affected, and Bar-
clays has to buy them back at the price it
sold them to make good any losses.
Some analysts fear this could create a
flood of claims from other investors who
made losses on the products wanting to
be paid out too.
One, Benjamin Toms at Royal Bank of
Canada, said: “Could a £450 million
problem turn into a much bigger prob-
lem [if others demand compensation or
the issue pre-dated 2019]?”
There are other questions for inves-
tors, he said. “Does this lead to a regula-
tory fine... Will other things come out of
the woodwork? How long will the inde-
pendent review take? Is there any claw-
back [of bonuses] for this issue?”BONUS THREAT
Barclays has tried to contain its losses by
taking out a hedge — a type of insurance
policy — to protect it against market
movements. But it has admitted that the
£450 million is its “best estimate” of the
losses and that it might have to reassess
results filed by the affected division.
It is embarrassing for Venkatakrishnan
as he was head of risk when he was hired
by Staley in 2016. He then ran the division
at the centre of the problem — the mar-
kets division in New York — for a year until
he was promoted to chief executive.
Venkatakrishnan’s eye for detail was
apparent in his first five months in charge
when he peppered staff with questions
rather than make big decisions. He went
down well with investors, particularly at
a conference run by Morgan Stanley.
“A number of investors I’ve spoken to
said he was particularly impressive
because of his in-depth knowledge
around the modelling of risk,” said Toms.
Hence why the current problem is par-
ticularly difficult. “He is a man of detail,
which is awkward because Barclays has
now been tripped up on something that is
a very much detail issue,” said Toms.
Frustrated investors demand to know
how the situation arose and already want
bonuses clawed back or withheld from
executives. The £5 million package due to
the outgoing finance director Tushar
Morzaria is in their sights. Staley’s bonus
has been withheld because of the Epstein
investigation. Venkatakrishnan will have
received millions in his previous roles.
Before Venkatakrishnan ran the mar-
kets division for a year from November
2020, it was led by Stephen Dainton, who
is now the co-head, with Adeel Khan.
How Venkatakrishnan reacts will be a
guide to his tenure for investors. One top-
ten shareholder, Artemis, with a 1.4 per
cent stake, said it was a supportive — but
acknowledged the pressure on the man-
agement. Ambrose Faulks, co-manager
of the Artemis UK Select Fund, called the
structured note problem a “disappoint-
ing own goal”.
“The financial cost to shareholders,
including any fine, is manageable. The
promised £1 billion share buyback will be
postponed but there is no suggestion that
the decision will be reversed: Barclays
has plenty of capital,” said Faulks, who
pointed out that the bank is still forecast
to deliver acceptable returns to share-
holders. But he added: “No doubt man-
agement will be under closer scrutiny.”
No one will be aware of that more than
Venkatakrishnan. In a missive to staff last
week, seen by The Sunday Times, he
reminded staff to have their wits about
them. “The situation was entirely avoida-
ble and we must do better,” he said.
“The necessity of a strong controls cul-
ture has never been clearer to me. Know
your risks, be alert to their manifestation,
and take personal initiative and responsi-
bility for identifying and fixing weak-
nesses,” Venkatakrishnan added.
He added that there was no evidence
of “improper behaviour or of this being
anything other than an isolated mistake”.
Investors will hope he is right. But just
as they have before, they will expect an
apology at next month’s annual meeting
for another costly, embarrassing error.It’s like an
alcoholic
who’s had a
good run then
fallen off the
wagon again
12.1%
Fall in share price last week£450m
Size of lossCS Venkatakrishnan was
regarded as a “details man”AFTER ROGER HARGREAVES