Barclays to create bad bank

Courtesy of The FT:

Barclays will next week announce the creation of a bad bank in a bid to transform its struggling investment banking operations, which were dealt a further blow on Tuesday with the departure of the highly regarded head of its US business.

The move to exit parts of its shrinking fixed income business and its lossmaking European branch network will be announced as part of next week’s strategic update to investors, according to people familiar with the plan. The internal bad bank will be run by Eric Bommensath, the co-head of its investment bank.

The news comes as fears intensify that the departure of Skip McGee as head of Barclays Americas will trigger an exodus of bankers acquired when the UK bank took over Lehman Brothers’ US operations during the financial crisis.

Analysts and rival bankers said his departure was a blow for Antony Jenkins, chief executive, who defended last year’s higher bonus pool in spite of falling profits as necessary to avoid a “death spiral” of bankers quitting to seek a bigger pay cheque.

The bank said Mr McGee’s departure was a result of the vast regulatory burden it faces in the US. The Texas-born dealmaker was part of the Lehman team that negotiated the sale of its US operations to Barclays in 2008 and he has been seen as pivotal in holding together the business.

Mr McGee, 54, is being replaced as head of Barclays Americas on Thursday by Joe Gold, its global head of client capital management, who the UK bank hired out of the ashes of the failed Enron energy trading empire 12 years ago.

Barclays has been under pressure from investors to cut costs and rein in pay levels while coming up with a more coherent strategy for its investment bank, which is failing to generate returns above its cost of capital.

The new non-core unit is likely to house parts of Barclays’ macro products unit, which includes the trading of interest rate-linked products, currencies and commodities. The unit suffered a 23 per cent drop in revenues last year and is facing growing pressure from new regulation that forces the bank to hold more capital against it.

It is expected to include some or all of Barclays’ retail banking businesses in France, Italy, Spain and Portugal, which it has been attempting to sell for several years. Losses from its 572 branches in continental Europe widened from £277m to £964m last year.

The bank is also expected to add the £54.4bn of assets left in businesses already identified as non-core, including leveraged loans and European corporate loans.

Mr McGee said: “My focus has always been on clients, but given the need for Barclays’ leadership to focus on regulatory issues for the foreseeable future, I have decided that it is time for me to move on to new challenges.”

Ian Gordon, analyst at Investec, said: “This is likely to be at best a precursor to musical chairs at Barclays and at worst the start of more bloodletting of senior executives in the bank.”

At its heated annual meeting last week, more than a third of investors refused to back Barclays’ remuneration report, reflecting widespread anger over its decision to increase bonuses in a year when the bank’s profits fell by more than a third.

Mr McGee, who is understood to be considering several options of what to do next, received 3.81m shares worth almost £8.9m this year from deferred bonus schemes – the highest amount received of all the senior executives at the bank.

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