Is this the man who sold Barclays down the river?

Chris Blackhurst
22.01.09

BACK in November, there was much cause for celebration inside Barclays. Roger Jenkins, the former international athlete turned the bank's Middle East fixer, and Amanda Staveley, the ex-model and now a financial power-broker with the Middle Eastern Gulf rulers, had concluded a remarkable deal.

While Barclays' main British rivals, Royal Bank of Scotland, HBOS and Lloyds TSB, were forced to go begging to the British Government for assistance, the bank had persuaded the royal families of Abu Dhabi and Qatar, and the sovereign wealth fund of Qatar, to stump up £7 billion.

It was a triumph for Staveley. The former girlfriend of Prince Andrew collected £40 million for brokering the coup. Internally, at Barclays, there were congratulations, too, for Jenkins and for John Varley, Barclays' CEO. For Varley, the injection of Arab cash at such a difficult time in the markets was a personal vindication. A dry, somewhat ascetic figure, connected by marriage to one of the Quaker families that played a part in Barclays' rise, he had always had to work that bit harder to prove himself to a sceptical City.

The comparison was forever being made between Varley, who looks like an English country parson and talks in hushed tones, and the go-getting American, Bob Diamond, who runs Barclays investment banking side. Repeated reports of the perceived rivalry between the pair - denied by them both - continually niggled.

This shock Arab support was a victory for Varley, throwing up the possibility of Barclays forming strategic relationships in the richest region of the world. It was a slap in the face for the banks' competitors, for the Government that was trying to bring its own influence to bear on Barclays, and to Varley's critics.

Almost three months later and Barclays' shares are at their lowest level since 1985. For days now, the shares have been falling. Speculation is rife in the City that the bank, which did not require an injection of government capital, may now have to swallow its pride and seek help.

But for Varley and his colleagues, there is a worse realisation. Under the terms of the Arab injection, they are in danger of ceding control of the bank to their new Gulf friends. In return for their money, Sheikh Mansour Bin Zayed Al Nahyan from Abu Dhabi and his coinvestors received convertible notes, which are exchanged for shares.

They agreed to wait seven months for conversion to shares at a price of 153p. However, if at any time before 30 June, Barclays raises more money at a lower price, the Arabs can exchange their notes. As Barclays shares have since slumped to 66p, they could almost triple their holding - which would give them around 55 per cent of the British bank.

The Government is livid. It wants to bail out the banks, to get them lending again but in Barclays' case that could mean a major British household name falling into foreign ownership automatically. Other investors, who had already seen their holdings diluted by the Arabs' arrival, are unhappy, too.

There are also questions being asked in the markets, where short-sellers, those who bet on a share price falling, are suspected of pushing down the Barclays' price. The ban on short-selling of financial stocks was lifted only recently - since when Barclays shares have been dropping in value.

Ironically, Staveley is thought to have insisted on the clause as a way of protecting her clients' interests. It may now deliver them the entire bank. The Financial Services Authority is thought to be keenly watching events.

Varley's reputation is on the line. Once the terms of the Arab money were revealed in November, shareholders voiced their displeasure. Their holdings were being weakened by the new investors and, crucially, the banks bailed out by the Government were paying less for their cash than Barclays.

Gordon Brown and his ministers also made it plain their object was to hold the banks' shares for as short a period as possible. Barclays, meanwhile, had found itself with new, possibly permanent, part-owners. The price of independence was regarded as too high. "I feel like we've all been invited to a game of Russian roulette. The only difference is that all the chambers are loaded," said one private shareholder, Trevor White, at a special meeting.

To be fair to Varley, the crisis that Barclays finds itself in, is not entirely his fault. It's now becoming obvious that the Prime Minister, while presenting himself as the saviour of the financial world, is proving to be anything but. Yes, he cloaked himself in glory after the banks' rescue but it's increasingly clear he did not go far enough. Peter Hahn, a fellow at the Cass Business School and previously a banker with Citigroup, says that Brown should have completely nationalised the two weakest banks, RBS and HBOS. By not doing so, he has allowed them to pollute the system and to bring down the rest.

"The real solution was to have taken over the two Scottish banks," said Hahn. RBS was critically wounded by having paid well over the odds for ABN-Amro, the Dutch bank, in cash, at a point when the markets were starting to crash. It is also severely exposed to the recession in the US.

HBOS has enormous UK commercial property and private equity liabilities, which have simply worsened as the weeks, have passed.

Brown's remedy for HBOS - to weld it together with Lloyds TSB, something that both Sir Victor Blank and Eric Daniels, that bank's chairman and chief executive, both wanted - has merely succeeded in infecting what until then was a relatively insulated, well-run institution.

The RBS loss announced earlier this week has proved to be a hammer blow. "It's a mind-boggling amount," said Hahn. "It's the same as £500 for every man, woman and child in this country. It's the equivalent in the UK of a bank in the US announcing a $150 million hit in one swipe - it is really beyond the imagination."

Much of this could have been avoided if Brown had pressed for full state ownership. As it is, the banks' woes have multiplied and affected others in the sector.

Brown made another mistake, which was to not attempt to differentiate between the best and worst banks. Barclays had not behaved anything like as recklessly as RBS, yet it was being bracketed alongside it.

Varley's solution, aided by Jenkins and helped by a keen and willing Staveley, was to find their own money - at a cost. Arguably, though, he was keeping the bank out of the Government's hands and maintaining its independence. "They took on the most expensive money they could get," said Hahn. "It was too smart by half and is now locked into a bad deal."

Barclays has not helped itself either by choosing to account for its toxic debt differently from some other banks. It hasn't "marked to market" - in other words written them down to the value the instruments would fetch if they were sold on the open market. It has argued successfully that it doesn't have to do that because it has no intention of redeeming them now but will hold them until maturity.

All banks used to estimate this way but more recently they have chosen to mark to market. The City has accepted Barclays' reasoning but the rumours abound that the bank is hiding something. Barclays could probably have been firmer with the Government and made the claim more forcibly that it was not in such a weak state as its competitors and should be treated differently. As it is, in its haste to avoid even part-nationalisation, it has ended up paying higher price.

The bank's lack of overseas business has also harmed its position. The two main British banks that have been least damaged by the crisis are Standard Chartered and HSBC. They are also the two that are less reliant upon the UK. Standard Chartered has virtually zero activity here and for HSBC, the US and UK combined account for about a third of its income.

For Barclays, the UK provides more than 50 per cent of its earnings. The rapidly weakening UK economy has made its condition even more fragile.

Then there is the continuing problem posed by the personalities at the top of the bank. While Varley is the CEO, he is not out on his own, at the summit of the organisation. He shares prominence with Diamond, the boss of Barclays Capital, its aggressive and until recently, enormously successful investment banking arm. And there are those who put the higher-paid Diamond above Varley in terms of importance and influence.

In good times, this double-header situation did not matter so much. But when investors are asking about the bank's strength and future direction, they wonder to which one they should turn.

There is also little sign of a succession plan for Diamond. If the charismatic American was to quit suddenly, the bank could be left with a dangerous vacuum.

What also seemed to matter less when the bank was breaking profits records was the character of Varley. Tall, ascetic-looking, with a penchant for round, wire-framed glasses, three-piece suits, high-waisted trousers kept up with braces and shirts with stiff collars, he's quietly spoken. In company, he is charming and intelligent, very quick and sharp. He's always courteous.

In fact, compared with many bank bosses, he is a breath of fresh air, enjoyable and different. But that is the point. While his staff say he is as tough as the next chief, his image is one of civility and thoughtfulness - not necessarily the characteristics the City is looking for when fighting a fire-storm.

Varley's cause is not enhanced by the fact that his wife, Carolyn, is a Pease of the Pease family of Quakers whose bank was bought by Barclays in 1902. Such connections stand for little in the modern City and the truth is that Varley would not have reached the pinnacle of the bank and stayed there since 2004, if he had not been properly qualified to the task.

Unfortunately, the sniping has never gone away. He has to run that bit harder in order to prove himself and his background is something his critics like to mutter at moments like this.

The reality, that it's unfair, is beside the point - it's a stick, however harsh, with which to beat him.

Varley is no Sir Fred Goodwin. In truth, he could not be further away from the ex-RBS boss in style. He has not allowed a cult of personality to build up around him at Barclays - far from it.

But he now finds himself vulnerable to the charge that his natural caution for once deserted him. In his wish to avoid being answerable to the Government he allowed himself to be persuaded of the attractions of billionaire Arabs. It's a decision he may now regret.

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