Barclays’ big stumble: It’s time for some damage control

May 9, 2014, 3:59 PM UTC

FORTUNE — Talk of the demise of Barclays as a major player on Wall Street may be a bit premature.

While the bank announced on Thursday that it was gutting divisions, firing thousands of employees, and selling off billions of dollars in assets, it doesn’t appear to have totally given up on investment banking and trading — at least not yet. And despite the so-called “exodus” of certain “key” bankers, Lehman, err, Barclays (BCS), still has a deep bench of quality people to keep the bank in the game.

But if Barclays truly wants to remain a player on the Street, management in London needs to do a better job calming down and incentivizing its skittish staff, especially in the investment bank. The recent rapid-fire departures of their superiors, most of whom were well-liked, has been demoralizing enough for the staff. To now hear that 7,000 investment banking employees will get the axe at some point between now and 2016 has sent the anxiety level through the roof.

While the damage caused by the departures to the bank at this point remains minimal, it could quickly snowball, leading to waves of mass defections, ultimately forcing Barclays’ management to throw in the towel by default.

On Thursday, Barclays finally revealed its much-anticipated reorganization plan. Like so many banks on Wall Street, Barclays said it would be slimming down, cutting costs and refocusing on its “core” businesses. The whole thing felt very post-financial crisis when banks like Citigroup (C), UBS (UBS), and others announced major overhauls to boost profitability and exit loss-making divisions.

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Among the various goals and changes Barclays announced was a commitment to cut some 1.7 billion pounds ($2.8 billion) in annual expenses. To do that, it will be laying off some 14,000 people by December — 10% of its workforce. It will then cut another 5,000 people by the end of 2016. Barclays also said it will be taking assets it no longer wants to own and placing them in a “bad bank,” where they will be “unwound” (sold off) over several years.

Unfortunately, Barclays wasn’t very forthcoming with details. For example, the bank announced all this carnage and yet left its employees in the dark as to whether or not they would be targeted for deletion. Whole divisions were left in limbo as employees speculated as to whether they would be shoved in the bad bank or if they would be saved.

To make matters worse, the bank chose to make the announcement in the morning, London time, which is the middle of the night in New York. That meant Barclays’ U.S. employees awoke to scary headlines from British tabloids saying that they could all be fired when they go to work that morning. The mood at Barclays headquarters in midtown Manhattan was glum to say the least. As one employee told Fortune, “the day really sucked.”

How could all this be happening? After all, Barclays has been considered one of the few “winners” of the 2008 financial crisis. While other banks were forced to scale down their operations, Barclays expanded, most notably when it picked up the North American and European operations of Lehman Brothers for a song. Integration among the Barclays and Lehman staff was difficult, but the transition was seen, for the most part, as successful.

But in the years that followed, Barclays stumbled — ethically and financially. Some issues were beyond its control, such as heightened government interference in the banking sector, forcing Barclays to exit certain profitable businesses and boost its capital reserves. But others were clearly a result of its own bungling, such as the bank’s disastrous and embarrassing involvement in the Libor rate-rigging scandal, which ultimately forced the bank to pay $450 million in fines.

The Libor scandal led to the untimely resignation of Bob Diamond, Barclays’ ambitious American chief executive who was responsible for rebuilding and expanding Barclays investment banking franchise. When he left, there was a notable shift in priorities at the bank. Diamond’s ultimate goal of turning Barclays into the biggest and baddest firm on Wall Street no longer was the bank’s mantra. This was further enforced by the appointment of Antony Jenkins as Diamond’s successor. Jenkins didn’t come from the investment bank; rather, he came from the firm’s sleepy retail bank.

In New York, Lehman alumni have felt increasingly alienated as power shifted from Wall Street to Canary Wharf. Change was coming, but no one knew what was in store or when it would happen. Barclays employees tell Fortune a degree of angst blanketed headquarters, affecting everyone from the traders to the bankers to even the staff in the cafeteria.

Management tried to calm the situation down by paying out healthy bonuses to key employees. It didn’t work.

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Whatever they paid out apparently wasn’t enough. Indeed, in the last two weeks, several key senior executives in the investment bank announced they were leaving the firm. Barclays claims the departures aren’t related to the changes it announced yesterday. It’s hard to believe, but, to be fair, this is the “revolving door” season on Wall Street — after bonuses are paid, people usually jump ship.

Among those who announced their departure include: Skip McGee, the head of the firm’s U.S. investment banking practice in New York (and Houston); Paul G. Parker, the global head of mergers and acquisitions; J. Stuart Francis, the head of technology banking (he’s moving to the boutique IB firm Evercore); Ros Stephenson, the global head of investment banking and probably the firm’s most senior female executive (she’s headed to UBS, odd given how UBS has gutted its investment banking division); and Robert Morrice, the head of Barclays’ Asia business (he said he’s retiring).

One departure near and dear to the hearts of journalists was Michael O’Looney, who led the bank’s public relations division in the United States. He’s apparently leaving to go work at Elliott Management, the hedge fund.

Most of these execs had been with Barclays or Lehman Brothers for decades. The fear is that their departure could hurt the firm’s ability to get business.

So why did these big wigs all jump ship at the same time at such a precarious time for the firm? Did management tell them that investment banking was finished? No more bonuses, ever?

Probably not. It all seems to come down to uncertainty. Senior level executives have known for months that change was coming to the investment bank, and change is hard. Uncertainty breeds fear, leading people to leave their comfort zones to find stability. But management has no one to blame for this uncertainty other than themselves.

To be fair, while management wasn’t as clear or as sensitive as they could have been in their announcement on Thursday, they did manage to hint at what the new investment bank would look like. It will probably be focused on the “old school” investment banking business: mergers and acquisitions, debt capital markets, and equity capital markets.

Barclays management noted that there will be some cuts in the investment banks’ FICC (fixed income, currency and commodities) business. This has traditionally been the unit where investment banks have made (and lost) the most money.

But this doesn’t mean the firm is giving up on trading; it’s just taking a pass on trading it considers too risky. For example, the bank will probably stop trading anything it considered to be “illiquid.” That means if it can’t be sold quickly, then it’s probably a no-go.

One can surmise that if it trades on an exchange, it’s probably safe. So any kind of bespoke or “physical” deal — like trading spot cargo of crude sailing this second, for example — is out, while trading interest rate futures is probably in.

A Barclays employee in the firm’s risk department in New York told Fortune that the firm will probably be “trimming down” to “plain vanilla products only,” meaning the firm won’t be “holding long dated positions on [its] balance sheet for clients,” any longer. Meanwhile, an asset manager who trades with Barclays in Switzerland believes that the firm will probably halt a lot of their “macro” trading, such as any trades dealing with emerging markets. On the other hand, a Barclays trader in London tells Fortune that he was assured “by a senior executive at the firm” that much of Barclays’ credit team in London is safe and that the firm would still trade credit default swaps.

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So far, we have yet to see the sort of mass defections that gutted some investment banks in the years immediately following the crisis. Back then, whole divisions, dozens of people — from the senior bankers down to the junior analysts — would just pick up and move in a package deal to a crosstown rival. Such defections caused irrevocable damage to a number of investment banking franchises.

Barclays CEO Jenkins is well aware of this risk. When he was criticized earlier this year for increasing bonus payouts, he said that the move was necessary to avoid a possible “death spiral” in which defections would lead to more defections. Luckily, a number of strong bankers and traders are still at the firm, many of whom are Lehman alumni, including: Eric Felder, the head of markets; Joe Corcoran, the head of equities and credit; and John Miller, the head of the bank’s Americas investment banking division.

With so many strong players, Barclays is still a true player on the Street. The key going is for management to make clear to both senior and junior employees its commitment to the core parts of the investment bank. Strong pay is one way to do it, but so is showing strong commitment. If bankers know that their position and their division is safe and sound, they will be less likely to jump ship. Barclays management knows what it needs to do here — it just needs to do it.

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