One of the serious misjudgments by Barclays CEO Bob Diamond in the Libor scandal was his belief that regulators’ praise for the bank’s cooperation during the investigation would shield it from criticism. It did not. Diamond should have learned from Ken Lewis that you can’t count on regulators’ goodwill to protect you when things get ugly.
As CEO of Bank of America, Ken Lewis led the charge to acquire Merrill Lynch at the height of the financial crisis in 2008. Merrill was on the brink of ruin because of its toxic mortgage securities, and the Fed and the US Treasury Department, eager for a strong buyer to step in, welcomed the deal. It was sealed at the Fed’s office during the dramatic weekend that Lehman filed for bankruptcy protection and the Federal Reserve rescued a bleeding AIG.
Lewis briefly looked like a national hero for stabilizing the financial system and a master deal-maker for his shareholders. His glory was short-lived. Just weeks after announcing the deal, Merrill reported a $15 billion loss, sparking a fury among shareholders and Congressmen alike.
Regulatory support for the deal did little to help Lewis weather the storm. A few months later, he was forced to give up his role as the bank’s chairman, and in September 2009, a year after the Merrill deal was clinched, Lewis announced his retirement. Today, he continues to battle shareholder lawsuits that allege he failed to disclose Merrill’s worsening condition at the time of the acquisition.
Diamond and the Barclays board need only to have looked at Lewis’s experience to see how little regulators’ support matters when controversy erupts. Instead, it appears they made the same error Lewis did. Worse, their misplaced confidence made Barclays more willing to be the first to reach a settlement, a position that put it front-and-center in a crisis involving a dozen or more banks.
In its press release announcing the Barclays settlement, the CFTC noted the bank’s “significant cooper
ation” during the investigation – a point prominently made in Barclays’ own press release (and later cited by Diamond in his testimony to a Parliamentary panel).
But criticism of Barclays was fierce and swift, and the statements by regulators did little to halt the storm. The reaction caught Barclays off guard, judging by its hasty and ill-considered response, and it ultimately swept away Diamond and other senior executives.
It was foolish to believe that such a gesture by regulators would blunt criticism of the bank. It’s not that regulators are insincere. It’s that their support doesn’t count for much. The public sees these statements as merely negotiating points in a deferred-prosecution deal. And, as the widening Libor scandal demonstrates, the regulators are facing criticism over their own actions, which further erodes the value of what they say.
Perhaps at this very moment a CEO is eyeing a draft of a news release announcing a settlement in a regulatory enforcement action. My advice is to not negotiate too hard on the language about the firm’s cooperation. It won’t help.