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DealBook: Report Faults ‘At All Costs’ Attitude at Barclays

Dylan Martinez/ReutersRobert E. Diamond Jr., a former chief executive of Barclays, helped transform the British bank.

LONDON – The push to change Barclays from a predominantly British retail bank to a global financial giant over the last two decades created a culture that put profit before customers, according to a report released on Wednesday.

The independent review, which was ordered by the bank’s top management in the wake of a rate-rigging scandal last year, highlighted an “at all costs” attitude, particularly within the firm’s investment bank, that was reinforced by a bonus system that encouraged taking risks over serving clients.

“Barclays became complex to manage,” said the report, which was overseen by Anthony Salz, former head of the law firm Freshfields Bruckhaus Deringer. “The culture that emerged tended to favor transactions over relationships, the short term over sustainability and financial over other business purposes.”

The conclusions represent a criticism of the strategy of a former chief executive of Barclays, Robert E. Diamond Jr., who helped transform the British firm into one of the world’s largest investment banks.

Mr. Diamond, who stepped down last year in the aftermath of the scandal involving manipulation of the London interbank offered rate, or Libor, ran the bank’s investment banking operations until taking over as chief executive in 2011.

The report released on Wednesday said the push to increase profits across the British bank’s operations led to potentially risky behavior that had a direct effect on the firm’s overall reputation.

Last year, the British bank was the first global financial institution to admit wrongdoing in the rate-rigging scandal.

Barclays agreed to a $450 million settlement with American and British authorities after some of its traders and senior managers were found to have manipulated Libor.

The British bank has also been implicated in the inappropriate sales of complex financial and insurance products to small businesses and retail customers that has led the entire British banking sector to pay out billions of dollars collectively in compensation.

The new chief executive, Antony P. Jenkins, announced a plan this year to improve the bank’s culture and profitability, including the closing of a controversial tax planning division and the elimination of 3,700 jobs, mostly in the firm’s unprofitable European retail and business banking unit.

Justin Thomas/VisualMedia, via Agence France-Presse — Getty ImagesAntony P. Jenkins, chief of Barclays.

Mr. Jenkins also outlined efforts to end aggressive risk-taking at Barclays. In an internal memorandum to employees, he told staff members who were unwilling to buy into the British bank’s push to rebuild its reputation to leave the bank.

Yet despite the move to improve how Barclays operates, it continues to experience cultural problems, particularly related to banker bonuses, according to the independent review released on Wednesday.

“Many senior bankers seemed still to be arguing that they deserved their precrisis levels of pay,” the report said. “A few investment bankers seemed to lose a sense of proportion and humility.”

While total employee compensation at Barclays has fallen as a result of the financial crisis, pay for the bank’s top management has remained above the industry average, the report added.

In 2011, for example, compensation for the bank’s top 70 managers was 17 percent higher than that of peers at rival banks. The disparity was a result, in part, of executives moving from the investment banking unit to less well-paid jobs in the bank’s other operations, without an adjustment in pay to reflect their new positions, according to the independent review.

“The report makes for uncomfortable reading in parts,” the bank’s chairman, David Walker, said in a statement. “We must learn from the findings.”

Article source: http://dealbook.nytimes.com/2013/04/03/report-faults-at-all-costs-attitude-at-barclays/?partner=rss&emc=rss

Economix Blog: How Much Do You Owe? Guess Again

It would appear that Americans don’t even know how much they owe.

Households underreport the magnitude of their credit card debts by at least one-third, according to a new study from the Federal Reserve Bank of New York. The difference for the average household is more than $2,000.

Only 50 percent of households reported any credit card debt, while credit card companies reported that 76 percent of households owed them money.

The paper has the discomfiting consequence of raising questions about the accuracy of the Fed’s Survey of Consumer Finances, widely treated as an authoritative source. The authors compared the debt levels reported by participants in that survey with data that lenders reported to the Equifax credit bureau. They found that consumers gave accurate testimony about most kinds of debt, including mortgages and student loans, but not when asked about credit card debt.

In fact, borrowers reported owing only about 50 cents for each dollar claimed by credit card lenders.

There are plausible explanations for part of the difference. In particular, people who pay the full balance on their cards each month – lenders call such customers “convenience users” or, more colorfully, “deadbeats,” because they do not pay interest and therefore are less profitable — may not regard that balance as “true” debt, and therefore choose not to report it. The industry, however, simply reports the total volume of outstanding loans. (Lenders, after all, have no way to know which loans will be repaid at the end of the month and which loans will stay on the books.)

The authors overcorrect for this possibility by subtracting all transactions made in the last year, as if everyone paid their bills each month. They also make some other adjustments, including subtracting an estimate of the debt that consumers put on their credit cards for business purposes, on the theory that some people may also place this debt in a separate category.

Even with those changes, however, the average household reports credit card debts of $4,700, while lenders report an average balance per household of $7,134.

Why do people underreport the magnitude of their debts?

Embarrassment is an obvious candidate, but there are a couple of problems with that explanation. First, people accurately report other categories of debt, like mortgages and student loans. Of course, those are the kinds of debts people are encouraged to carry. But people also accurately report personal bankruptcies, which would seem more embarrassing. Still, it is possible that embarrassment plays a role; the authors note evidence that people tell small lies more readily than large ones, perhaps explaining why people are less willing to lie about filing for bankruptcy.

Another partial explanation: Individuals report their credit card debts more accurately than households, suggesting that people may be ignorant of debts run up by their partners. This difference, however, does not come close to explaining the magnitude of the discrepancy.

And that leaves ignorance: The possibility that Americans simply don’t know how much they owe.

“Uninformedness,” the paper notes (bringing a new word into existence), “could result from willful ignorance, as large credit card balances are not welcome information, from difficulty understanding the growth of credit card balances,” or from other barriers to knowledge.

Interestingly, there is some evidence that underreporting has declined in recent years, perhaps as a consequence of a crisis that has forced households to pay more attention to their debts.

Article source: http://feeds.nytimes.com/click.phdo?i=d3eac3a5565039b2c8df46202b6b42b8

DealBook: Report Faults ‘At All Costs’ Attitude at Barclays

Economix Blog: How Much Do You Owe? Guess Again

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