A Bad Time to Bet Against Barclays Traders

Edward Bramson, the activist investor who targeted Barclays Plc, has said that business isn’t a science. But his three-year attempt to force through change at the British bank didn’t show much art either, hence his capitulation on Friday. More skillful maneuvering is needed when you’re taking on a complex and heavily regulated finance firm.

Bramson’s Sherborne Investors Management LP has sold its entire 6% stake in Barclays. Financially this was a very bad bet. Sherborne lost about 15% on the wager, according to my Bloomberg News colleagues, even though it used equity derivatives to limit its losses.

In fairness, the pandemic has changed the dynamics of the banking industry in a way no one could have predicted. Trading revenue was in decline when Bramson bought in and demanded that Barclays shrink its investment bank, and the firm was making more profit from commercial and consumer lending. But the massive central bank stimulus of the past year means the financial markets have been on a tear — Barclays traders have gone from being a problem to being the biggest earners.  

Bramson made strategic errors, too. This wasn’t just bad luck. How he structured the Barclays stake purchase was the first mistake. The use of a so-called “funded equity collar” — an option that protects the investor from big adverse movements in a stock price — didn’t win him many friends among the other shareholders. It’s harder to argue that interests are aligned when you’re protecting your downside by using a derivative funded by a rival bank (Bank of America Corp., in this case).

By challenging the Barclays boss’s pledge to keep expanding the investment bank, Bramson also pitted himself against British regulators who weren’t keen on any more instability at the lender.

Bramson’s investment in early 2018 came at the end of a difficult period for Chief Executive Officer Jes Staley. The U.K. finance watchdog had stopped just short of accusing the CEO of acting with a lack of integrity when he tried to unmask a corporate whistleblower. By slapping him on the wrist with just a fine, regulators had given a clear signal that Staley — then only two years into his job — still had their backing.

Perhaps Bramson’s biggest error was thinking he could devise a better plan for Barclays from the outside. He wanted the bank to slim down the securities unit by taking less risk, but providing detailed suggestions on how to create more value is almost impossible without knowing exactly where that risk lies. Bramson himself described the investment bank as a “black box.” It was too easy for Barclays to dismiss his proposals as vague.

Staley will be relieved that he’s officially won this battle, especially as he still faces a probe by the U.K. Financial Conduct Authority over his disclosures on interactions with the disgraced financier Jeffrey Epstein.

But shareholders have no cause to rejoice. That these businesses are so impenetrable to outsiders should worry them. Bramson argued that Barclays was too focused on hedge fund clients, which can be enticed easily with generous loans. Barclays may have dodged the losses from Archegos Capital’s implosion, but having a motivated investor poring over the numbers isn’t a bad thing.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

©2021 Bloomberg L.P.

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