Think of Wall Street without JPMorgan Chase & Co. or try to imagine Bay Street without RBC Dominion Securities Inc. It is unthinkable that the muscle dominating America's financial marketplace should not carry a U.S. passport. But in London, the British are once again getting used to the idea that in the City of London, the world's premier financial marketplace, no U.K. bank will be making the big moves. Barclays PLC has signalled its retreat, sacking 7,000 investment banking staff and withdrawing from big, expensive bond and commodity trading activities. Barclays Capital, the last remaining British contender for the title of Master of the Universe, has thrown in the towel; the fight to win the biggest slice of the tiny margins in managing global money flows is now mainly a struggle between Americans, a German and a Swiss. The question is whether it matters.
Or, to be more specific, the question is whether Britain can be the greatest place to do banking without having the biggest investment banks. Barclays Capital was only in this game because its former (American) chief executive, Bob Diamond, wanted to take on the Wall Street bulge bracket banks. He saw his chance to break into the "top tier" when Lehman Brothers collapsed and, having escaped financial Armageddon in 2008 thanks to a cash injection from Qatar, Barcays was able to cheaply buy Lehman's team and annex its market share. The true cost of that lucky break may only now be emerging, as we learn that Britain's Serious Fraud Office is to question Mr. Diamond and his former colleagues over allegations of corruption related to the Qatari cash call.
His successor, Anthony Jenkins, cited two reasons for his decision to withdraw from the trading businesses: the weak returns due to both low interest rates and high volatility, and the changed regulatory environment. The latter reason is undoubtedly the more important. Also, to the regulatory straitjacket, he might have added the waves of public loathing that greeted Barclays every year when the bank revealed the bonus award to BarCap executives. Quitting a business at what may be the end of a cyclical downturn is not smart unless some dominant external factor is pushing the bank inexorably in that direction. That factor is certainly public opinion, not least a political establishment which unanimously calls for less proprietary trading and more lending to British businesses.
Antipathy towards investment banking excess is by no means unique to Britain, but there is a sense that the culture of Wall Street may be alien. Writing in the Financial Times, Philip Augar, author of The Death of Gentlemanly Capitalism: the Rise and Fall of London's Investment Banks, suggests that American bankers simply have a drive to succeed lacking in their British counterparts. "They [the Americans] display a hard-edged, winner-takes-all approach to business."
This chimes with my own impression of how the U.S. investment banks operate and why their British cousins never fully made the transition from the old merchant banks that once dominated the City of London to integrated securities trading and lending institutions. Rather than be advisers to their clients, U.S. investment banks see themselves as principals, the main actors in the deal, often willing to play on both sides of a transaction. It is a highly dangerous occupation of dubious ethics. It has led to some notorious outcomes, notably the Abacus mortgage fraud scandal in 2010 when Goldman Sachs was accused of misleading one of its clients into thinking a hedge fund manager involved in the deal was betting on sub-prime mortgage securities, when in fact he was betting against them. Goldman agreed to pay $550-million (U.S.), a record sum, to settle the SEC's allegation, leaving a former French employee, Fabrice Tourre, writhing in public with a fraud trial, conviction and $825,000 fine.
The Barclays retreat might be better regarded as the final chapter of a slow-motion capitulation to foreign capital that began in 1985 with London's "Big Bang," when the stock exchange was deregulated and opened to foreign bank competition. American, French, German and Swiss institutions first acquired brokerages and then took over the merchant banks. Firms, such as SG Warburg, Kleinwort Benson and Robert Fleming were swallowed up but their names tell the truth about the foreign origin of British banking. Lombard Street, at the heart of the City, was named after the Italian goldsmiths who settled in London in the 13th century. They were followed by Dutch and German wool traders, Jewish money lenders and in the late 20th century, American, Asian and European banks.
Does British capitulation matter? Probably not. What matters is how the culture of the City changes, whether it continues to attract capital and whether it remains a trusted place to do business. In that respect, the public opprobrium that led to tighter regulations and the withdrawal of Barclays may be salutary rather than a sign of decline.