Banks Begin the Journey Back to Respectability

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

After Barclays (NYSE: BCS  ) received a $430 million fine last year for rigging the LIBOR, the bank decided to do some introspection. Management commissioned an internal investigation in to what went wrong, and what the bank could look out for in the future to avoid a relapse. In summary, "The culture that emerged tended to favor transactions over relationships, the short term over sustainability and financial over other business purposes." 

Making bank
The report concluded that pay was one of the main drivers of the risk-taking attitude that pervaded Barclays throughout the 2000s. During that period, Bob Diamond -- who would go on to become CEO -- was running the investment arm of the bank with a calculating genius that helped Barclays generate 23 billion pounds in revenue during 2007. At that time, the bank employed 140,000 people across the world. It shouldn't come as a surprise that the report faulted the bank for becoming "complex to manage." 

To sustain that size, traders in the investment bank had to make a lot of money. As a result, they expected to be paid large sums. So far, so good. The problem came when the equation reversed itself. Bankers were no longer being paid big bonuses to accomplish the goal of making the bank money, they were making the bank money to accomplish the goal of being paid big bonuses.

The solution
The report is being heralded as a meaningful step in the right direction. From all accounts, the more than 200-page tome doesn't pull any punches, and Barclays has made the whole thing available for the general public. CEO Antony Jenkins has already made big steps toward repairing the bank's reputation. In addition to the report, he has closed the bank's tax avoidance division and trimmed down some of the company's fat. 

The same sorts of moves need to be made across the sector. Recently, companies like HSBC (NYSE: HSBC  ) and Lloyds (NYSE: LYG  ) have been fined for money laundering and insurance mis-selling, respectively. Those banks have yet to win back the public's trust and seem to have done little to address their underlying faults. To Lloyds' credit, it quickly capitulated after it came under scrutiny for mis-selling. HSBC, meanwhile, has admitted to its past failures while insisting that it's now in a very different place. 

The bottom line
There's still more talk than action in the sector, and it will be interesting to see if other banks follow in Barclay's footsteps. The road to winning back the public is a long and arduous one, and ignoring the past isn't going to fix what's wrong. As banks start to bounce back, they need to keep the bad years in mind so they don't come back to haunt investors, or the general public. One step at a time, I suppose. 

Bank of America's stock doubled in 2012. Is there more yet to come? With significant challenges still ahead, it's critical to have a solid understanding of this megabank before adding it to your portfolio. In The Motley Fool's premium research report on B of A, analysts Anand Chokkavelu, CFA, and Matt Koppenheffer, Financials bureau chief, lift the veil on the bank's operations, including detailing three reasons to buy and three reasons to sell. Click here now to claim your copy.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2344755, ~/Articles/ArticleHandler.aspx, 9/29/2016 8:14:03 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 10 hours ago Sponsored by:
DOW 18,339.24 110.94 0.61%
S&P 500 2,171.37 11.44 0.53%
NASD 5,318.55 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/28/2016 4:03 PM
BCS $8.72 Up +0.06 +0.69%
Barclays CAPS Rating: ***
HSBC $37.43 Down -0.16 -0.43%
HSBC Holdings CAPS Rating: **
LYG $2.98 Up +0.06 +2.05%
Lloyds TSB Group CAPS Rating: ***