Barclays Lays Out Financial Reform Challenges

Yes, Barclays did not receive any direct cash infusions from the U.S. Treasury as other banks did. But had Uncle Sam walked away and allowed AIG to fail, things would have been a lot different for their counterparties, would they not? And the counterparties received 100 cents on the dollar in these deals, correct? No haircuts for these gentlemen!

In addition, Mr. Diamond raised the bogeyman of public debt loads, discussed in my blog just yesterday (and already drawing lively retorts from readers).

The economy is "clearly in recovery mode," he said, calling the quick rebound a "testament to the economy's tremendous resiliency."

However, he warned, the "enormous fiscal challenges" we face thanks to government stimulus spending is jeopardizing the financial system's long-term health. "This resilience cannot sustain economic growth with this dramatically increased public spending and debt," he said.

"Here's the rub," he added. "Economic growth and job creation will not be generated by the public sector–it has got to come from the private sector. Therefore, it is extremely important that we get our fiscal house in order."

He praised the United Kingdom for the severe austerity measures announced yesterday, implying the U.S. government might want to take similar steps if we don't want a repeat of the nightmare scenarios haunting debt-ridden European nations such as Greece.

I had hoped to challenge Mr. Diamond in person about these assertions, but unfortunately he left the podium immediately after his lively speech, and did not take any questions.

There is no doubt that in the long term, the ratios of debt and budget deficits to GDP must be lowered to more historically acceptable levels. But to move toward that goal now could stall whatever hope the U.S. has of achieving even a medium-term recovery, and could doom this country to repeat Japan's decade-long economic dead zone experience.

I would have liked to have asked Mr. Diamond what he thought about the theory that if the government cuts back now on public spending, with the economy still mired on recession, won't hundreds of thousands if not millions more lose their jobs, thus reducing tax revenue and widening the deficits he decries? We might balance our budget sooner, or come closer to doing so faster, but we risk leaving behind a wreck of an economy that might not fully recover for years, if not decades.

A couple of other points of interest from Mr. Diamond's speech involved corporate governance and regulatory reform.

I agree wholeheartedly with Mr. Diamond's assertion that Barclays' management structure–featuring a non-executive chairman leading a board of directors removed from the firm's day-to-day operations–is a far superior model to the typical U.S. trait of having a chair double as CEO, which leaves true oversight lacking. A big reform would be to mandate that all publicly-traded firms establish such distance between their boards and their day-to-day managers.

"We have what I call positive confrontation" between the board and its operating executives, which helps Barclays better vet decisions, he believes. Indeed, Mr. Diamond said that the move to acquire Lehman was a tough sell to the board at first blush, and required substantial debate before any green light was given. That's how boards should work.

However, another point stuck in Mr. Diamond's craw. "It is an absolute myth that drives me crazy that banks supposedly don't want strong regulation," he said. "No one is more upset with banks that failed than are those that did not fail. Failed banks threatened to drag us all down with them. We don't want that scenario to happen again."

Thus, he added, Barclays is "extremely impatient to get financial reform through Congress, preferably before July 4."

Why the rush?  "Uncertainty is not doing the banks or the economy any good," he explained. "We need regulatory certainty so we can effectively manage our capital and clients."

Mr. Diamond asserted that "we're very, very close to a positive outcome" on crafting a final regulatory reform bill. He said Barclays is working closely with the White House, Congress and the Treasury Department to iron out kinks and get the legislation to President Barack Obama's desk as soon as possible.

The sticking points, he noted, were disputes over how far to go in regulating derivatives trading, as well as the limits over the "model and size" of financial institutions like his. "Banks like Barclays are not big because it's cool to be really big, but because our clients are big, and so are their needs," he said.

Ultimately, however, he argued that while "banks have been on the hot seat, banks get it. They are much better capitalized. And they are eager to finalize the new regulatory structure to get the uncertainty about the rules behind us."

What do you folks make of Mr. Diamond's observations?