Breaking Away: Bob Diamond Saw an Opportunity to Remake an Investment Bank around Risk Management, Minus the Usual Equity Trading and M&A Units. His Hunch Proved Right for Barclays

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After taking a $250+ million loss in the 1998 Russian bond default, the executive leadership of Barclays PLC might have been excused for avoiding new forays into the former Soviet bloc. Yet when asked about the bank's current expansion in Russia, President Robert E. Diamond, Jr., takes a pragmatic view: "It's part of the world," he says. Barclays Capital completed five deals there in the first half of 2005.

It's not unusual for Bob Diamond to take bold strategic moves. His strategy for Barclays Capital after the crushing Russian hit was reminiscent of the rebuilding techniques of successful professional sports franchises. Like his favorite success stories, the Boston Red Sox and the Chelsea Blues of English Premiere League soccer, Diamond rebuilt the investment banking franchise within Barclays PLC by releasing aging underperformers and going after the stars in the financial free agent markets. Bonuses were cut and managers were let go from shattered proprietary trading desks, as experts were signed for the newly-targeted risk and credit sectors. With a new team of pros behind him, Diamond is now looking to bring in younger talent as part of a major expansion drive for Barclays. But not everyone is a believer.

Some banking analysts are concerned that the bank's growth is too heavily dependent on recruitment, as well as on revenues from its capital market businesses. Diamond concedes that capital markets are traditionally cyclical businesses, but says his modular strategy takes that into account. He's ready for the critics.

Diamond points out that at Barclays, alone among the ten largest banks in the world, growth has been fueled "organically," not through strategic mergers with new partners. On the other hand, it's clear that much of this organic growth has come from the selective acquisition of talent from its competitors. So, in a sense, Barclays' form of organic growth, if not purely strategic, was a close relation, in that it was a series of tactical mergers among small teams of experts in the bank's sector units.

Criticized by some as too costly at the salary level, Barclays has nonetheless been able to avoid the risk of wide scale culture shock in a strategic merger, while developing its products and technology to fit closely with its own, unique business model. Diamond has been the principal architect of that growth, as well as the model. He comes by his modeling skills naturally, following "his parents' academic leanings and starting out as a teacher at the University of Connecticut's business school.

Barclays has often been questioned for its rejection of equity-based trading and M&A legs for its business model, in the fashion of the U.S. "bulge bracket" firms. It wasn't an oversight, says Diamond, a native of Concord, Mass., who came to Barclays Capital in 1997, just before the Russian bond default, after graduating from the Morgan Stanley and CS First Boston trading desks. The 54-year-old American is just not convinced that traditional equity underwriting and advisory services are needed by investment bankers within a modern, post Glass-Steagall financial services franchise.

Diamond has the results to prove his theories. Barclays Capital has earned better than 20% return on equity for seven consecutive years. The bank has moved from an also-ran in the league tables to leadership among its global peers. For his success, Diamond was rewarded in June, 2005, with a promotion to president of Barclays PLC with responsibility for Barclays Capital, Barclays Global Investors (asset management), and Barclays Private Clients.

In late August, contributing editor Ed Blount spoke with Diamond in the New York offices of Barclays Capital about his strategy for sustaining an enviable record.

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