Leaked document from the New York Fed says Barclays was 'weak' at preventing rogue traders
Ben Moshinsky
Anthony Jenkins
(Image via Barclays) Anthony Jenkins
Barclays was the first bank to settle with authorities over Libor fixing in 2012. But that was just the start of its troubles.
In 2013, less than a year after Anthony Jenkins took over from Bob Diamond as CEO, Barclays' US supervisors at the Federal Reserve Bank of New York excoriated the US unit of the London-listed bank, according to an internal document from the Fed obtained by Business Insider.
Barclays declined to comment.
The New York Fed report, dated June 6, 2013, detailed a series of failures in the bank's US operations, investment-banking controls, and risk-management protocols. The report was the result of an annual assessment.
According to the document, Barclays' US operations:
Didn't implement controls to catch rogue traders.
Had an outdated and fragmented IT infrastructure.
Had to review whether it could "effectively manage" its wealth-management arm.
Had "weaknesses" in its capital-markets underwriting unit.
Suffered a supervisory downgrade for compliance risk management, leaving it liable for fines and legal action.
Jenkins, who was ousted as CEO in July by John McFarlane, who is now the executive chairman, was supposed to shepherd the bank into a new era of compliance and social responsibility. He replaced Diamond in the aftermath of the Libor manipulation scandal in 2012.
The detailed list of issues noted by the New York Fed, just in the US operations, showed the scale of the challenge left by the previous management, under which Barclays' investment-banking activities ballooned.
The report was addressed to Jenkins; Barclays' US CEO at the time, Hugh "Skip" McGee III; and Barclays' former corporate and investment banking co-CEOs, Eric Bommensath and Thomas King.
The first paragraph sets out the tone of the report, saying that Barclays required "more than normal supervisory attention":
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(Business Insider)
King is retiring from Barclays on March 4 after spending the past few years at the top of Barclays' investment bank, based in the US. Bommensath left the bank at the start of this year, while McGee, who joined Barclays at the height of the 2008 crisis, left in 2015.
Barclays was criticized for a lack of controls on rogue trading, which was marked by the regulator as a "Matter Requiring Immediate Attention," and aspects of the bank's use of leverage, or debt, and exposure to hedge funds were identified as concerns. Here's how that looked in the report:
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(Business Insider)
The New York Fed also said management of the bank's US wealth business "should review its capability to effectively manage the business," in the wake of "control environment weaknesses and infrastructure deficiencies."
The big bonuses seen in the Diamond era were a sticking point for the New York Fed. Barclays was told to align its pay structure "with control objectives and evolving supervisory expectations."
The New York Fed said: "Compensation practices should be designed to avoid providing incentives that encourage imprudent risk-taking and processes should be put in place to monitor the effectiveness of incentive compensation arrangements in providing balanced risk-taking incentives."
The bank's compliance function was downgraded to "Marginal" from "Fair" before the review, highlighting how exposed Barclays was to fines and litigation, particularly related to its "deficiencies" in controls against money laundering.
It was a prescient warning. Barclays was fined £72 million ($101 million) by the UK's Financial Conduct Authority last year for lacking controls against money laundering when handling £1.9 billion from a client.
Here's the New York Fed:
Barclays compliance
(Business Insider)
As a whole, the bank's US operations scored a rating of "Fair" under the review, a rating it first received in 2011 after a downgrade from "Satisfactory."
The Fed acknowledged the size of the task that awaited Jenkins, saying, "With such extensive senior level turnover, management must ensure that the team comes together effectively and executes on the firm's strategic and remediation efforts."
The new tone struck by Jenkins as CEO, focusing on improving culture and risk management, helped placate the regulator:
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(Business Insider)
Jenkins was replaced by Jes Staley in October. Staley was a hedge fund manager at the US-based BlueMountain Capital and former CEO of JPMorgan's investment-banking and asset-management unit.
The US business is going through a period of change. King said in a memo in January that the bank would close its Moscow office, shutter stock trading in Asia, and make changes to the US markets business. The bank is streamlining and simplifying its business in response to regulatory and economic changes.
But back to rogue trading, which required the most urgent attention, according to the regulator. Barclays' management had come up with a plan to improve controls on "unauthorized trading" but had failed to implement them:
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(Business Insider)
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(Business Insider)
The issue was classed as a Matter Requiring Immediate Attention, which according to the report "tend to be matters of significant importance and urgency" and include "matters that have the potential to pose significant risk to the safety and soundness of the banking organization."
From a technology point of view, Barclays was a mess in 2013.
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(Business Insider)
The bank was using spreadsheets updated manually to manage risks and had "fragmented systems."
The report ended with a list of the challenges facing Barclays and the banking sector as a whole in 2013, most of which remain relevant almost three years later (apart from rising interest rates):
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(Business Insider)
While the issues raised in the report might be applicable to other banks, it makes for a fascinating insight into the usually secretive world of banking supervision, and the litany of issues that faced management at Barclays as fines for conduct failings began to mount.
