Q1062 Jesse Norman: The FSA followed up your appearance on 9 February with a letter which was sent to Marcus Agius on the 10th. Now, you’ve suggested to us that just Mr Agius’s characterisation of the relationship as, as it were, normal cut and thrust, or some concerns about Jerry at the top, was actually misleading. Is that right, Mr Bailey?
Andrew Bailey: Well, I think that, as the board minutes suggest, this is a wholly different magnitude of issue to the sort of things-we normally discuss big issues, but this was a wholly different magnitude.
Q1063 Jesse Norman: Right. It’s a different scale.
Andrew Bailey: Yes.
Q1064 Jesse Norman: You’re going in there and you’re giving them a bollocking.
Andrew Bailey: Yes.
Q1065 Jesse Norman: Because a whole series of things have gone wrong and you’re angry about it.
Andrew Bailey: I’m angry about it and I’m also very clear that we had to grasp this nettle. This pattern of behaviour had been going on. You look at the cases in Adair’s letter to Marcus Agius: they go back over a period of time. We had to grasp this issue.
Q1066 Jesse Norman: Why hadn’t the FSA grasped it before? These things had been going on for several years. It was obvious to someone taking a view of the whole that Barclays was a mare’s nest of acts of malfeasance of different kinds, which you were in the process of unpicking. We’ll come to you in a second, Lord Turner. but why, Andrew Bailey, had that not happened before, do you think?
Andrew Bailey: I think the issues had been tackled what I might call individually, rather than sort of as a collection. So there had, prior to my time, been a very big issue around the Protium transaction-a well-known case that appeared in the press. Barclays had been forced essentially to unwind that transaction by a combination of action from the FSA and the financial reporting body. So it wasn’t that action wasn’t taken; it was taken. There had been a series of other issues, where action-
Q1067 Jesse Norman: Just to be clear, this was a transaction that was conducted with no economic benefit in order to avoid tax, in which senior Barclays people personally stood to gain.
Andrew Bailey: Well, it wasn’t tax, so much-
Q1068 Jesse Norman: Or to protect the balance sheet of the bank.
Andrew Bailey: Yes, that’s the gist of it, actually. It was a transaction designed to rearrange the balance sheet, to lower the capital requirement, which had no economic substance. So you didn’t have risk transfer actually.
Q1069 Jesse Norman: And your concern is focused on those aspects, but also on the personal enrichments aspects of people self-dealing in the Barclays staff.
Andrew Bailey: Well, yes, because it was a series of Barclays’ own staff who were on the other side of this transaction. All this pre-dates me, but I know the history of it.
Q1070 Jesse Norman: There were Barclays’ staff on both sides of the Protium transaction.
Andrew Bailey: Absolutely, yes. So action had been taken, but I think what hadn’t taken place up until this point was to pull it together and say, "Look, take all this together. This can’t go on."
Q1071 Jesse Norman: Okay. So it is not actually increasing the clarity of the message, Lord Turner, it is giving a different message. It is saying, "We are not nitpicking on small issues and giving you the benefit of the doubt. We are looking at the whole thing and we are going to give you a proper rocket."
Lord Turner: Yes, I think that is right. It was basically saying, "As you know, there has been a set of issues which we have argued with you on an individual, case-by-case basis and in all of them we have made sure that we got our way"-because we do ultimately get our way. Let us be clear, on the Protium structure we said, "No you cannot have a favourable capital treatment for this." On the monoline CVA positions we said, "We are not happy with your positions and you have got to, over a period of time, put this right." So we had dealt with these on a case-by-case basis but we got to the stage of saying, "These keep on happening and it is the accumulation of this that means that we have to send a message." It is in the first paragraph of my letter; I said, "Look, normally, if it was just one at a time, I would not get involved. I would leave that to the supervisory team and to the head of banking supervision to deal with it. But is it the accumulation that makes us believe that we have to draw this to the attention, from the chairman, to the chairman level."
Q1072 Jesse Norman: In other words, it is a problem with the culture and the leadership of the whole institution?
Lord Turner: That is what we were beginning to think. There was a cultural tendency to be always on one side and always to be pushing the limits.
Q1073 Jesse Norman: Thank you for that. Mr Bailey, did you report back to the Governor of the Bank of England on the experience you had with Barclays?
Andrew Bailey: No, that was an FSA conversation. I reported back to Adair. I said to Adair, "I think this is of a sufficient severity that it requires following up."
Q1074 Jesse Norman: And the Governor then raised his eyebrow, in part based on-
Lord Turner: This is later.
Jesse Norman: No, I understand, but when the eyebrow-raising took place, the Governor had a proper briefing because a pattern of events had been built up through briefings that originated-
Lord Turner: It is true that back sometime in about April, in the course of another conversation that I had with the Governor, I said, "I think it would be useful if you were aware of the letter that I have written to the Chairman of Barclays" and I therefore copied my letter over to Mervyn at that stage.
Q1075 Jesse Norman: Okay. Thank you. Mr Bailey, how often have you had these kind of conversations with other big four banks since you have come into place?
Andrew Bailey: As I said earlier, I aim to see the boards of the banks roughly once a year but I have never had a conversation of this type with a board-
Q1076 Jesse Norman: So Barclays is an outlier in terms of the severity of the bollocking you are giving them?
Andrew Bailey: Yes.
Q1077 Jesse Norman: Even though these other institutions are involved in, for example, the fixing of LIBOR, or in the swaps or in PPI?
Andrew Bailey: Barclays was an outlier.
Q1078 Jesse Norman: Okay. What were your specific concerns, Mr Bailey, about Mr Diamond?
Andrew Bailey: My specific concern was exactly this point about the tone from the top. Although I could not find the evidence that he personally had his hands on these things, you really could not escape the fact that the culture of this institution was coming from the top. Frankly although, interestingly, the relationship with Bob Diamond was not antagonistic, this was not something where he would come in and shout at me-or indeed, I think Hector Sants-and he would often say, "I hear what you are saying", I could not see a pattern where that was leading to the action that we needed.
Q1079 Jesse Norman: In your view, was the FSA tough enough before you came in, Mr Bailey?
Andrew Bailey: You have to put this in the context of the change in approach to supervision over the last year since the crisis. This is exactly where we are taking it to now. This is the most dramatic intervention but it is consistent with-Adair and Hector were very much on side with this-what we are doing with supervision, to respond to the identified problems of the past.
Lord Turner: I think the honest answer, Mr Norman, is that we would never have done this back in ’07 and ’08. We have been on a journey towards a tougher style of supervision in all sorts of ways. That has a tougher style in relation to issues of substance like capital liquidity asset quality. But more recently and, indeed, Hector Sants signalled that in 2010 when he made a speech about culture, we have been saying, "Do we have to reinforce those tougher messages on the specific quantitative issues of capital liquidity asset quality with tougher messages on culture as well? It is the accumulation of a change in the style of FSA supervision which really began six months before I joined the FSA. I joined in September 2008 but a change had been launched initially in about April 2008 but it takes time to drive those changes through.
Q1080 Jesse Norman: Thank you. Mr Bailey, based on your experience of Mr Diamond’s testimony, do you think it is correct when he says that describing that as less than candid has had a "terribly unfair impact upon my reputation"?
Andrew Bailey: I am afraid that this is a process, in the sense of telling the story of what has happened and drawing the conclusions from it. On his reputation, conclusions must be drawn from it. I don’t think I can offer any more of a view on it than that.
Q1081 Jesse Norman: A quick final question. Have you written, or has the FSA sent, any similar letters indicating some of these concerns on anything like this scale to any of the other major banks?
Lord Turner: This is the only letter of this sort that I have sent in my time as chairman of the FSA.
