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| Thursday, 04 December 2008 | |
| On October 10th, Robert Diamond Jr., President of Barclays PLC, spoke to Princeton students about the state of financial markets, government’s response to the crisis, and Barclays’s position as one of the leading financial institutions. On October 10th, Robert Diamond Jr., President of Barclays PLC, spoke to Princeton students about the state of financial markets, government’s response to the crisis, and Barclays’s position as one of the leading financial institutions. Diamond said that over the last four or five weeks, liquidity issues have returned due to the restructuring of Fannie Mae and Freddie Mac and the government’s decision not support a bailout of Lehman Brothers. The preferred stocks of the two government-sponsored enterprises (GSEs) were seen as safe investments and after the government took over the GSEs, the value of those shares went to zero causing investors to panic. When this was followed by the disorderly liquidation of Lehman Brothers, financial markets reached new lows and the spreads of credit default swaps of other financial firms rose drastically. Credit default swaps are derivatives in which the buyer of the instrument pays a premium to the seller and receives a payment in the event that the underlying company defaults on its debt; the cost of buying the swap rises if there is increasing concern that the company will have difficulty fulfilling its debt obligations. The Board of Barclays had been discussing the possibility of acquiring another institution since early in the year after realizing that the distress in the financial markets may offer opportunities to take over other companies at a discount. Executives from several financial institutions, including Barclays, began serious discussions to acquire parts of Lehman Brothers. After failing to reach a deal, Lehman was forced to declare bankruptcy on Monday, September 15th. In the ensuing days, discussions continued and Barclays agreed to take over Lehman’s broker-deal unit and headquarters in Manhattan for $1.75 billion. Barclays’s acquisition of Lehman’s broker-dealer business was the only instance of a non-US bank acquiring a US institution. The deal gave Barclays a top three position in US equity trading, derivatives trading, equity origination, high grade and high yield corporate bond trading, and asset-backed securities trading as well as a top five position in US Mergers and Acquisition Advisory. Analysts have said that the deal was a bargain for Barclays and that the takeover of Lehman Brothers, which was the fourth largest investment bank, gave Barclays substantial market share in many areas that it previously had not been exposed to. Throughout his presentation, Diamond stressed that “the universal banking model is the only model that can succeed” and that “as markets consolidate, it is important to be a leader in Investment Banking, Investment Management, and Wealth Management.” He added that there is a growing overlap between these three divisions and that knowledge of all three fields is needed in order to be successful and properly cater to clients. After J.P. Morgan agreed to acquire Bear Stearns, Bank of America purchased Merrill Lynch (the deal is set to close in early 2009), and Barclays took over parts of Lehman Brothers, the only two investment banks that remained were Goldman Sachs and Morgan Stanley. However, those two institutions filed to become bank-holding companies, effectively ending the era of the free-standing investment banks. Diamond also stated that Barclays continues to concentrate on managing risk and costs as well as staying close to clients during these turbulent times. In one move to reassure its clients, Barclays put its own money into its money-market funds after several money-market funds that broke the buck lost many of their clients. Also, Barclays continues to lend to its corporate clients, while some other banks have halted or cut back loans to many of their customers. Despite predicting that it will continue to be a challenging time for financial markets around the world as the US economy likely enters a recession and commodity prices continue to fluctuate, Diamond sees imminent opportunities for both Barclays and students who are entering the financial sector. While admitting that it will be more difficult to obtain positions in the field of finance, he stated that “industry will be far more entrepreneurial and creative” as the universal banking model becomes the preeminent feature of the finance sector. |
