THE BLOG
04/03/2013 02:13 pm ET | Updated Jun 03, 2013

Barclays Libor Report Shows Too Big To Fail Is Also Too Big To Manage

A post mortem on how Barclays Capital ended up in its Libor mess is the latest proof that banks that are too big to fail are also too big to manage.

The report, by the lawyer Anthony Salz, focuses on how exorbitant pay at Barclays made bankers behave badly. Understandably, much of the press accounts focus on that angle, too. It's an important part of the story, for sure.

But there is also a revealing passage in the report that sets the stage for how Barclays got itself into this pickle in the first place, and it involves the bank willfully swelling itself up to unmanageable size (emphasis mine):

In the years prior to the crisis in 2008, Barclays pursued a bold growth strategy.... About ten years ago, its ambition was to become a top-five global bank, with one third of Group profits coming from investment banking and two thirds from global retail and commercial banking (including Barclaycard). The strategy also envisaged the bank having more international scale. The investment bank planned to double in size in four years and it exceeded these plans. In addition, the retail and commercial bank expanded rapidly in Spain, India, Russia and elsewhere. By 2008 the bank's growth had resulted in leverage (ratio of assets to equity) of 43, higher than the other UK banks. With the acquisition of parts of Lehman Brothers in September 2008, the investment bank grew to represent rather more than half of Barclays' profits and three-quarters of its assets.

Barclays arguably achieved overall much of what it set out to do. ...

However, it is our view that this rapid journey, from a primarily domestic retail bank to a global universal bank twenty or so years later, gave rise to cultural and other growth challenges. The result of this growth was that Barclays became complex to manage, tending to develop silos with different values and cultures.

The bank's relentless quest to get bigger and make more money affected its culture, the report says, one that "tended to favour transactions over relationships, the short term over sustainability, and financial over other business purposes." That paved the way for all of the bad stuff that came after, including the embarrassment of the Libor scandal. Similarly, being huge has contributed to the many, many, many regulatory headaches at JPMorgan Chase and other ginormous banks.

The Salz report offers a lot of advice about how to fix Barclays. That includes several recommendations about curbing banker pay. It also includes lots of stuff about codes of conduct and making sure everybody in the bank understands just what its values and culture are supposed to be.

What is not recommended, curiously, is any effort to make the bank smaller and more manageable.

Saner paychecks and coffee mugs that say "I Heart Customers" are all well and good, but do nothing of addressing the bank's original sin: its size.