Former Barclays CEO: I Too Fell for the Diamond Myth
Managing Digital Editor, CNBC International
Former Barclays CEO Martin Taylor says he had asked Bob Diamond to stay on as head of Barclays Capital back in 1998 after the latter offered to resign following losses of hundreds of millions of pounds from Russia's debt default. According to Taylor those losses were the result of Diamond's unit failing to adhere to trading limits set by the firm.
In a column in the Financial Times, Taylor says Diamond asked the credit committee for higher trading limits. But when the division didn't get the limits it was looking for, it "falsely marked some Russian banking counterparties as Swiss or American" and "blasted through the ceiling."
"The traders were fired. Their leader maintained that he had known nothing about what was going on. He felt terrible. He loved Barclays. He offered to go," Taylor said about Diamond.
"I concluded that the embryonic business that BarCap then was would fall apart without him, and that he should stay."
According to Taylor, all international banks took losses on Russia in 1998, but Barclays’ experience was especially worse because of the failure of Diamond's division to respect internal controls.
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"It was a close call," Taylor says of his decision to retain Diamond as head of Barclays Capital.
"I suspect the subsequent history of the business would have been very different had I asked him to go. I deserve blame for being among the first to succumb to the myth of Diamond’s indispensability, to which some in Barclays were still in thrall only a matter of days ago."
According to Taylor, the breach of internal trading limits was not made public though regulators were aware of it.
Diamond resigned as Barclays CEO last week after a scandal over the manipulation of the London inter-bank offered rate or Liborby traders at the firm. Speaking before a parliamentary committee, Diamond said he only found out that traders were submitting "lowball" Libor rates recently, suggesting he didn't have prior knowledge of the traders' illegal actions.
If Taylor's version of events is true, it could increase pressure on the bank to claw back the nearly 20 million pounds in long-term incentive plans and salary over the next two years that Diamond is believed to be entitled to.
Taylor is a member of the Vickers committee, which has recommended "ring-fencing" risk-taking in investment banking divisions from the commercial lending and deposit-taking operations of banks. His words could increase pressure on regulators to step up oversight of large financial institutions.
"The board decided, unsurprisingly, that controls should be tightened up," Taylor wrote about the aftermath of the 1998 crisis for Barclays.
"I drew a different conclusion. I had observed similar things going on elsewhere, and I decided that it was neither safe nor sensible to have trading businesses mixed up in a retail and commercial banking group."