Investment bankers beginning to rule the roost once more at Barclays

There are some close to the bank who feel that Bob Diamond has become too powerful

A lot has changed since Bob Diamond started his career as an academic, lecturing on management at the University of Connecticut, on America's east coast.

Among his achievements since swapping theory for practice and actually becoming a manager has been building up Barclays Capital into one of the fastest-growing and profitable investment banks in both Europe and the US.

Together with Barclays Global Investors, the asset management business Mr Diamond also runs, Barclays Capital accounted for 35 per cent of the profits of its owner, Britain's Barclays, for the first half of this year and, tellingly, has accounted for as much as half of Barclays' profits growth in the past few years.

As well as running the investment bank, Mr Diamond, a native of Massachusetts who joined the British bank in 1997, was in June elevated to become president of Barclays. He was also asked to take on the task of reviving its wealth management business, which is aimed at well-heeled clients and which analysts think has been underperforming for years.

Such has been Mr Diamond's stellar record that he is exporting his magic formula to the rest of the bank. A string of his key lieutenants has moved over to different roles within the group, with the task of bringing some investment banking zing to fusty areas of Barclays where profits and performance have not been up to scratch.

The development has not been welcomed by all. There are some close to the bank who feel Mr Diamond, who lost out in last year's competition to replace Matt Barrett as chief executive of the whole group to John Varley, is becoming too powerful.

Sceptics add that Barclays is relying too much on Mr Diamond's empire for its profits growth. They observe that it is too difficult to marry a bank which makes steady money, from offering current accounts and savings and loans to individuals and companies, with an unpredictable investment bank, which runs the risk of having to write off millions of dollars if a single trade goes wrong.

Such concerns are particularly sensitive at Barclays, which suffered from bitter internal battles in the 1990s stemming from clashes between its commercial and retail bankers and those at its then investment bank, Barclays de Zoete Wedd.

Mr Diamond - who joined a year before BZW was broken up in 1998 and oversaw its restructuring into a business focusing on the debt markets - strongly rejects these charges.

He emphasises the virtues of Barclays' decision to stick with investment banking. "When I first came there was still some talk about whether Barclays should focus just on its UK retail business with the exclusion of some of the global businesses. People say that is safe and low risk. Actually that's the highest risk strategy you can have. You become a prisoner of one economy and one section of the market and those that have chosen that path have not fared as well," he said.

Mr Diamond added that Barclays Capital, which is based in London but has substantial businesses in New York, other parts of Europe and Asia, is also a different type of investment bank.

The major difference is that it eschews the lucrative and high-octane work of advising on mergers and does not deal in shares. And he points out that Barclays Capital's profits have consistently grown at a higher rate than the risks it has taken on (see chart). He also maintains he has fostered a different kind of culture.

"There is a perception - sometimes accurate, sometimes not - that if you're an investment banker you only care about yourself. I certainly don't think that is the case in the culture in Barclays Capital," Mr Diamond said.

Some of the moves have been at the highest levels. Naguib Kheraj, Barclays' finance director who is seen by some as a likely contender to become the next chief executive, was chief operating officer of Barclays Capital. Roger Davis, the head of the retail bank, also came from the investment banking business.

Below board level, about 30 directors and managing directors have moved from Barclays Capital - known as "BarCap" - to other roles in the bank in the past two years, which Mr Diamond says is "fantastic". He said: "It represents a different bank than it was five or 10 or 15 years ago. It is more of a meritocracy. We're looking for the most talented people at every level."

The latest high profile move - of Paul Idzik, who was head of risk at Barclays Capital - has not inspired warm feelings in the wider bank.

Mr Idzik, who is American, took up a new role last November as chief operating officer for the whole of Barclays. On his first day at Barclays' head office in Canary Wharf, the talk is that he leapt over the turnstile to test the building's security. Since then he has raised eyebrows further with tactics such as snapping an underling's pen because it was branded Royal Bank of Scotland and writing on the window after he had filled the whiteboard.

Some of the unhappiness among Barclays people comes from the fact that it is rumoured that Mr Idzik has been given the task of firing the bottom 10 per cent of managers ever year. Reflecting the unhappiness, one senior person close to the bank said: "The turnover of staff is high and that is costing the bank a lot of money."

There is no indication these misgivings are shared by Mr Varley. To many, that seems justified. Mr Diamond has won praise and envy among rivals for turning the remnants of BZW into a successful investment bank, which has grown to be the biggest player in the debt market last year in Europe. Its annual revenue growth has outstripped all of its chief rivals and its profits in the first half of this year grew more strongly than other investment banks apart from Lehman Brothers. Since taking over at BGI in 2002 Mr Diamond has also turned this San Francisco-based business into a bumper profit machine.

On the investment banking side, Mr Diamond's intention is to go further. Under his "Alpha Plan", which was launched last year, his aim is to double the size of Barclays Capital within four years.

One competitor at a rival bank said: "I am a Bob Diamond fan and the changes that are going on there are noting more than you would expect from an institution which is pushing through a plan for strong growth."

Others are more sceptical. One view is that Barclays could use some of the capital which is currently being sucked up by Barclays Capital to fuel growth in other areas.

Another issue is that, aside from the large but one-off $250m hit in 1998 on Russia's bond default, the business has not really been tested. Therefore the enduring question of whether a retail bank can take the rough with the smooth of owning an investment bank has yet to be tested.

Ed Firth, an analyst at Société Générale, said: "My concern is that it is very difficult to see what drives Barclays Capital. It is not driven by the yield curve or interest rates, yet there is not such a thing as a free lunch. One way we will know what the opportunities are is if we have a downturn in the fixed-income market. That would show how much it is customer-driven business and how much it is riding a wave."