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The real Barclays difference

Barclays has replaced most of its C-suite, hired expensive bankers and traders from top firms, recommitted balance sheet to fixed income trading, and proclaimed its commitment to a still-underpowered investment bank. But the effects of all this are still dwarfed by the UK bank’s approach to litigation.

The UK firm has spent the past two years revving up its investment bank, in accordance with chief executive Jes Staley’s instincts and history, but in defiance of some of its shareholders who question the logic of allocating more resources to a division delivering a 6% return on equity, while the credit card business routinely manages 20%.

2016 saw a revamp in group management, with Tim Throsby joining to run Barclays International and the investment bank, Paul Crompton joining as chief operating officer, and CS Venkatakrishnan joining as chief risk officer.

Last year, though, saw tooling up at the revenue generation level, with hires like Stephen Dainton in equities, Filippo Zorzoli in macro sales, Kristen Macleod in FX sales, Chris Leonard in rates trading, Paolo Minerva in distressed debt, Matt Weir in ABS trading and Cecile Hillary in asset finance, as well as some of the old guard moving on. Several long-time Barclays bankers that did not move on last year could leave during 2018, with senior bankers such as Charlie Berman, Philip Shelley, and Mike Moravec placed at risk of redundancy.

A smoothly running investment bank and a macro division ready to take advantage of the re-emergence of volatility would be a fine thing, but the real difference between Barclays and its peers is in its attitude to litigation.

Most banks want to engage with regulators and prosecutors alike, settle and move on. Litigation charges have often been provisioned and will certainly be taken account of in the share price.

Management teams from the bad old days have mostly moved on as well. Blaming John Cryan for Deutsche Bank’s pre-crisis RMBS misdeeds makes little sense, for example, while a quick settlement lets shareholders see the strength of the underlying business.

Not Barclays. While Deutsche Bank and Credit Suisse settled their RMBS suits with the US Department of Justice in December 2016, Barclays decided to fight, despite a trawl of seemingly damning emails released by the prosecutors. It’s a big risk. Deutsche settled for $3.1bn in cash, and Credit Suisse for $2.48bn. Both added at least the same again in “customer relief” on top — and these figures reflect discounts for coming to a settlement.

Crunch case

If Barclays loses big when it comes to court, we could easily be talking about figures of well over $5bn in cash — not far off two full years’ of profit for the whole of the corporate and investment bank.

But, conversely, it could end up dodging the costs which have hurt its competitors. Deutsche and Credit Suisse both returned to shareholders, caps in hands, for multi-billion rights issues in 2017, partly driven by the settlements. If the patience of Barclays shareholders is wearing thin, how much more so those investors which have had to throw more money into the pot to fund yet more fines at its competitors?

On Monday, Barclays hit another legal challenge, this time with the UK’s Serious Fraud Office (SFO). The SFO charged the firm’s holding company and several senior bankers last year, over loans to Qatar in connection with Barclays’ 2008 rights issue.

Now it has added the operating company, Barclays Bank plc, as well — a charge which the firm also plans to defend vigorously.

The switch from the holdco to the opco is probably just a technicality. The SFO has a wide discretion to choose which corporate entity to go after, and it is unlikely that it will actually push for Barclays to be shut down if it manages to get a guilty verdict.

Barclays may not have had the option to pay this one off quietly. There’s still a thirst for the blood of senior bankers in quarters of UK politics and a sense that the banks have been getting away with bad actions. Fred Goodwin, who ran RBS before the 2008 crisis, may have lost his knighthood but he’s not in jail. Meanwhile, deferred prosecution agreements have been falling out of favour.

But Barclays’ pugnacious determination to fight rather than run still ramps up risks. The SFO is probably under pressure to deliver some banker heads on spikes and has to clear formidable obstacles to do so.

As a criminal charge, rather than regulatory settlement, it has to prove its case beyond reasonable doubt. “Unlawful financial assistance”, the offence the SFO is charging Barclays with, is not an easy one to nail down. In particular, there’s a defence to it, that runs “the giving of the assistance for that purpose is only an incidental part of some larger purpose of the company” — something that might have seemed very plausible in the autumn of 2008.

Nonetheless, if it makes it stick, it could be serious money and serious damage to the bank at stake.

As much as Barclays’ investment bank might have turned a corner and gone back on the offensive, the best numbers it can possibly deliver will be small change compared to the legal challenges facing the firm. But if it is right about its capacity to win in court, that will be the real difference for its shareholders.

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