Why would you go to Barclays for investment banking services? Like, here is what you know about Barclays:
Hey that’s super. And definitely some of the people who were ripping off customers have been fired, so your odds are … improving?
In my more cynical moods I posit that there are three reasons to do business with a bank, corresponding to three relationships that you can have with the bank:
- Client: You trust them not to rip you off.
- Counterparty: You (think that you) are an eyes-open counterparty; they are trying to rip you off and you are trying to rip them off and you hope that you’re smart enough to survive.
- Co-conspirator: You’re working together to rip someone else off.
Most – not all – of what is scandalous in finance comes from one or both parties misunderstanding which relationship they’re in.1
The co-conspirator model is in some sense the most attractive for the bank. You can make huge profits: if you can do a tax trade with a client that saves them $100 million, they’re not going to begrudge you a $20 million fee. (As opposed to the client model, where you have some fiduciary obligation not to screw them too much, or the counterparty model, where they’re keeping a watchful eye on you.) The profits are relatively sustainable: the client will come back, despite the $20 million fee, because the trade really is win-win for you and them. And especially when the someone else being ripped off is not another client – think Abacus2 – but rather a tax authority (for tax trades) or abstract notions of market integrity (for accounting-shenanigan trades3) – you are relatively light on conflicts of interest.
It worked for Barclays:
At its peak, Barclays’ controversial tax structuring unit, led until 2009 by Roger Jenkins, contributed the bulk of the group’s investment banking revenue.
It’s also in some sense the most attractive for clients. Like, for one thing: free money! (Or: free accounting profits, or whatever.) The situation really is win-win: you win, and the bank wins, and you shake hands and have a nice steak dinner and part amicably and continue to see each other and ask after each others’ kids, because: you both got rich! No one was ripped off! I mean, the tax authorities were ripped off, but they weren’t going to be invited to the closing dinner anyway. So much of investment banking is about expectations, and expectations can be disappointed: you advise a client on a merger and it turns out their acquirer is just a giant scam. Tax trades turn not on predictions of future results, but rather on analysis of present law, and so are more certain of success.
For another thing: it’s, as it were, right-way risk. A difficult issue, in dealing with financial services providers in a variety of contexts, is that you really want smart counterparties, because whatever your bank is doing for you is at least moderately hard and so probably benefits from having some intelligent thought applied to it. On the other hand, the problem being solved is basically “getting money,” and so the smarter your bankers are the more able they will be to get money out of you. The bank that is best able to source bonds for you cheap is the bank that is best able to extract value out of its counterparties; you are a counterparty; you do the math. Jesse Litvak did. This remains true in the tax-advisory business, but you can at least hope that the bank is growing the pie rather than just widening the bid/ask. “Let’s deal with Bank X because they’re the shadiest bank” is not a thing that you say often if you’re, like, looking to get a mortgage, but you might well say it if you’re looking to dodge some taxes.4
But is it, y’know, socially beneficial? Possibly not? The FT says that “the business, which specialised in often aggressive tax avoidance for clients and the bank itself, is now seen as one of the main reasons for the damage done to Barclays’ reputation,” and I guess, but one of, like, ten main reasons. I’m not sure that, if you offered people the choice of “should Barclays shut down its tax avoidance business, or its swaps mis-selling business, or its interest rate manipulating business?,” everyone would choose the tax one.
The real problem is that when you institutionalize sharp practices in your flagship group, they … tend to spread. Once you have a reputation for, um, doing damage to your reputation, it’s hard to get anyone to trust you, at least on anything outside of your tax-avoidance area of expertise. So you gotta get rid of that area of expertise in order to build back your reputation in other, more socially acceptable lines of business. It makes for a tough transition, though: you can’t fix your reputation overnight, and until you do fix your reputation, the business that got you the bad reputation in the first place is the best thing you’ve got.
Barclays plans £2bn cost-cutting [FT]
Barclays closes controversial tax avoidance unit [Guardian]
Earlier: Barclays Just Wants You to Love It Again, OK?
1. E.g.: Jesse Litvak thought he was supposed to rip off his counterparties; they thought he was just executing orders for them and as clients. Every Ponzi, etc., victim thinks that they’re taking advantage of some special market or deal not open to everyone else – that they’re in on ripping someone else off – thus the widespread assumption that Bernie Madoff was front-running. Something like that probably explains today’s Times article on the increasing incidence of people, basically, being talked into stupid investments by scammy brokers.
Incidentally some non-trivial percentage of financial scandals come from the banks and the clients both understanding that they’re in an arm’s-length counterparty relationship on a zero-sum trade, the client losing money, and the client finding some outside observer who does not understand the relationship and who will raise a fuss about the bank betting against its trusting customer in violation of its fiduciary duties.
2. I don’t entirely buy Abacus as a co-conspirator model but, y’know, everyone else does, whatever.
3. Accounting shenanigans are bad for investors so you might in theory think that, like, investors in Monte dei Paschi stock would be mad at Deutsche Bank for helping Monte hide losses. In practice I don’t think that’s how it works; being on the losing side of an actual trade facilitated by DB might make you stop doing business with DB, but being on the losing side of an accounting shenanigan facilitated by DB seems like it wouldn’t. It’s a question of being ripped off by a salesman you talk to versus being ripped off by accounting statements in whose background DB vaguely lurks.
4. So, one, obvs you say “aggressive” rather than “shady,” but we all know what you mean. Two, you might say exactly that if you were looking to get a fraudulent mortgage; thus, Countrywide. I meant if you were going to get a mortgage.