A lament for the bank I loved

After the sudden departure of its chief executive last week, Barclays Bank is in a parlous state. A former director of its investment arm - whose father was the bank's deputy chairman - describes what's gone wrong and why

Twenty years ago, the Barclays eagle was recognised everywhere from San Francisco to Monte Carlo to Nairobi as a symbol of financial might and British commercial vigour. Today it is a bedraggled creature, pecked at by rivals, barely capable of flight. Like Marks & Spencer, it is a story of an institution which, in trying to escape from its past, has somehow lost touch with its fundamental strengths.

The sudden departure of Barclays' chief executive, Martin Taylor, 46, combined with the forthcoming scheduled retirements of its chairman, Andrew Buxton, and finance director, Oliver Stocken, leaves what was once one of the world's most prestigious companies in a state of leaderless paralysis. The next bet is whether Barclays can survive the winter at all. Will it pass, like so many other great City names, into foreign ownership, or will it be humbled by a domestic merger - with NatWest or Halifax or one of the other ex-building societies - in which it may not even be the senior partner?

The crisis in Lombard Street has been provoked by this year's global market turmoil, but its roots go much deeper. To understand the decline of Barclays in the Buxton-Taylor era we must briefly look back to before either of them came to power. Mr Taylor really represented the end of an era for Barclays rather than, as has so often been said of him, the beginning of a new one. It is a passage of history which has special resonance for me, because I was a director until 1992 of BZW, the now defunct investment banking arm of the group, and because my late father, Derek Vander Weyer, spent his working life at Barclays, rising to deputy chairman. It is a story I tell with sadness more than Schadenfreude.

Mr Taylor was appointed chief executive in 1993 - the first outsider to take such a senior job in Barclays - because the City was unhappy with Mr Buxton in the dual role of chairman and chief executive. Mr Buxton was a scion of one of the grand East Anglian families which merged their private banking businesses to create the modern Barclays in the late 19th century. Until the mid-1980s, long after their ownership had reduced to a tiny fraction of the bank's shares, those families kept control of the chairmanship and senior appointments. Men such as my father, a grammar- school boy who rose on merit and pushed for reform and modernisation, were denied ultimate power in the bank. During a crucial period of market change in the early 1980s, Barclays stood still. When it finally decided to catch up, it went too far, too fast, losing touch with its roots and its real skills.

MR BUXTON was the last prince of the founding families. In his youth he was regarded as outstandingly able and impeccably connected; by 1988 he was managing director in charge of all corporate business. Then his star began to wane. The bank indulged in an orgy of bad lending in the late-1980s boom, particularly to property companies. Mr Buxton's boss, Sir John Quinton (the bank's first non-family chairman), carried the can and was hustled out in 1992, to be replaced, at the instigation of an inner group of directors, by Mr Buxton. Institutional investors in the City were not happy: Mr Buxton was too closely associated with what had gone before, and there were suspicions that family allegiance had played a part in securing him the chair. There were calls, at the very least, for his dual role to be split.

In the fashion of the times, the institutions wanted a new chief executive to come from outside, with a new broom and no historical Barclays baggage. So Mr Buxton bowed to pressure and recruited Martin Taylor, whose arrival was greeted with relief and widespread applause, the more so when it became apparent that Mr Buxton was willing thenceforth to take a back seat.

Mr Taylor was already recognised as one of the brightest people of his generation. The Old Etonian with cold blue eyes and an Oxford degree in Mandarin Chinese had moved effortlessly from his position as a Lex columnist on the Financial Times (when I first met him 20 years ago) to running part of Courtaulds, the textiles giant. At Barclays he did not think or look like a conventional banker - he wore the wrong kind of suits and pastel-shaded button-down shirts - but he quickly won City confidence with his articulate, analytical approach and his willingness to take tough decisions.

His first challenge was to restore faith in the bank, both externally and internally, after the turmoils of the recession, when so much bad lending had been exposed and so many business customers had been driven to the wall. In that he was successful, helped by a recovering economy and by Barclays' most basic asset, its corps of loyal, well-trained managers. His star rose even higher when he emerged as one of New Labour's favourite businessmen, a friend and adviser to Blair and Brown. His salary package reached pounds 975,000.

But a more intractable challenge was lurking in the background at Barclays. It involved the volatile risks of global securities markets combined with particularly ferocious internal politics; it was the problem of what to do with BZW. It defeated him, and has caused him to walk the plank.

BZW - Barclays de Zoete Wedd - was formed at the time of the City's Big Bang reforms in 1986, which allowed banks for the first time to own share- trading businesses. This was supposed to be the sexy side of finance, while high-street lending to personal customers and smaller businesses - the area in which Barclays had real expertise in depth - was an unglamorous poor relation.

BZW was one of numerous ambitious projects under the ownership of deep- pocketed commercial banks which shared the same delusion. As the others gradually gave up the race, BZW emerged as the one great hope for a British- owned investment house to challenge the giants of Wall Street, Goldman Sachs and Merrill Lynch. "We have it within our grasp," the BZW founder- chairman Sir Martin Jacomb used to tell us in the late 1980s.

But by the mid-1990s, solid success for BZW was still out of reach. Salary costs for traders and corporate financiers were huge and never seemed to diminish, however poor the profits they generated. Personnel turnover was so high that the average length of service within the firm was less than two years, creating permanent instability. Volatile markets, and colossal overheads in overseas centres such as Tokyo and New York, meant that businesses that looked promising in one quarter could become bottomless pits of cost in the next. Having set up several of its overseas operations in the late 1980s, I know at first hand that the only way to grow a business such as BZW was to keep feeding it huge amounts of capital. In the end, Mr Taylor lost patience. "It's people like you that make me want to get shot of BZW," he is said to have snapped at one top broker who asked for the umpteenth bonus. And get shot of it he did.

But what might have been seen by the City as a cool, courageous decision turned into humiliation for Mr Taylor. It turned out that no one wanted to pay good money for BZW; the sale of its equity and corporate-finance divisions to Credit Suisse First Boston took place on terms which, insiders say, equated to Barclays paying CSFB to take them away. The net loss on the disposal and restructuring amounted to pounds 688m. Barclays' share price plunged, and institutional shareholders began to wonder whether Mr Taylor was fit for the job after all. Top ex-BZW men such as Simon de Zoete and Jonathan Davie settled comfortably into CSFB and continued to do good business. But the government-bond and corporate-debt side of BZW - which Mr Taylor retained, under the new brand-name of Barclays Capital - turned into a disaster.

Earlier this year, Barclays Capital's chief, Bob Diamond, put up a proposal to punt pounds 340m in Russian rouble bonds, and Mr Taylor chaired the committee that approved it. The deal turned into a pounds 250m write-off. Then came the crash of Long-Term Capital Management, the Connecticut-based hedge fund which threatened to bring down Wall Street. Barclays Capital was a major lender to LTCM and contributed $300m to the rescue deal.

Not only had the sexy side of the business consistently failed to produce acceptable returns on the shareholders' capital and failed to keep Barclays' name in the first rank of international banks, it had also revealed catastrophic errors of judgement which threw its entire raison d'etre into doubt.

MEANWHILE, Barclays' traditional competitors have left it behind. Lloyds TSB (which also owns Cheltenham & Gloucester) long ago turned its back on international securities trading to concentrate very successfully on mortgage and business lending. Midland, owned by HSBC, has recovered from its near-death experience of a decade ago. Even Halifax has a bigger market capitalisation than Barclays. And NatWest, which has had massive problems in its trading division, is sufficiently far along the road to recovery to regard the possibility of a defensive merger with Barclays as a deeply unattractive option.

Mr Taylor is said to have favoured finding a merger partner for Barclays' retail business and demerging it from the corporate side, but the old guard in Lombard Street had closed ranks against him, reinforced by doubts about his competence after the BZW/Barclays Capital debacle.

The seeds of Martin Tayor's downfall at Barclays, however, were sown long ago, in the days when, as a financial journalist, he was writing commentaries on the future of British banks. Barclays was burdened by the structures and attitudes which had made it into a great institution. In the 1980s it strove to change its nature, to take on the new financial world in the way that it had once dominated the old.

In doing so it deracinated itself, and created, in BZW and Barclays Capital, a monster which it could never quite control. Even a clever and dispassionate manager such as Mr Taylor could not tame it. In the end, it seems, he has only succeeded in making matters worse. For sentiment and old times' sake I hope Barclays can sort itself out and return to glory. But at present, I'm afraid, I wouldn't bet on it.