Barclays is to pay tens of millions of pounds to its investment bankers who have made huge profits from trading in government debt, derivatives and foreign exchange.
Some of the biggest payouts are expected to go to former Lehman Brothers traders hired by the British bank after it took over Lehman’s US operations at a knockdown price in September. Some Lehman staff were granted guaranteed bonuses to ensure they stayed with Barclays rather than jump ship and sign up with rivals.
OUTRAGE EXPECTED
The bonuses are expected to cause outrage among Barclays UK employees, who are being balloted by the Unite trade union on strike action over the scrapping of the firm’s final-salary pension scheme. Barclays has cut hundreds of jobs since the financial crisis erupted in 2007.
Protests are also expected from Lehman creditors, who are fighting in the courts on both sides of the Atlantic for money that was owed by the US bank before it went bust. Barclays stepped in to buy Lehman’s US business for US$250 million, while its European arm was sold to Nomura.
The Barclays deal was viewed as a coup for the UK clearing bank led by chairman Marcus Agius and chief executive John Varley. The Lehman acquisition has allowed the British institution to become a major player in investment banking, competing for mandates along with giants of the industry such as Goldman Sachs and JP Morgan.
LION’S SHARE
Analysts say that Barclays Capital, the bank’s investment arm, has become so profitable that it could account for the lion’s share of the £3 billion (US$4.9 billion) of interim profit that the institution is expected to report in the first week of August.
BarCap’s income is expected to more than make up for write-offs that Barclays is forecast to make against its domestic and commercial lending books.
Brokers say that BarCap’s contribution to this year’s pre-tax profit should rise from 30 percent of the total last year to more than two-thirds.
Q2 PROFITS
Goldman and Morgan reported a surge in second-quarter profit last week, setting the stage for lavish bonuses at the end of the year.
The return of bonuses — Goldman’s remuneration bill will top US$20 billion — has caused a political outcry, as big payouts were deemed to have helped cause the credit crunch by encouraging excessive risk-taking and irresponsible lending.
Last week, opposition Liberal Democrat party Treasury spokesman Vince Cable said that it “shouldn’t be back to business as usual” for financial institutions. But investment banks have been able to take advantage of the explosion of activity in the bond markets, where governments are raising billions to cover increased expenditure.
The banks left standing after the financial turmoil are also benefiting from a reduction of competition following the collapse of firms such as Bear Stearns and Lehman last year.
HEDGING DEALS
Other profitable areas of activity are hedging deals, where financial institutions seek to profit by predicting the future price of currencies, equities or commodities such as oil.
Barclays has pleased investors by avoiding the need for a government bailout, unlike RBS and Lloyds. But it has been criticized on various fronts: shareholder activists have questioned the huge payouts to staff at its fund management arm, BGI, following the sale of the business to BlackRock for US$13.5 billion. Bob Diamond, BarCap chief and chairman of BGI, is in line for a payout of £22 million from the sale, while the arm’s chief executive, Blake Grossman, will collect about £55 million.
The ballot over strike action at Barclays will be held this summer. The scrapping of the final salary pension scheme — even for existing members — has been labeled “a betrayal” by the trade union Unite.
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