What triggered Barclays panic selling?
This correspondent, writing from London, is fast running out of adjectives with which to describe the unrelenting flow of dreadful news here in the United Kingdom.
In the corridors of power we detect a frightening cocktail of chaos and panic, expressed publicly through confused private briefings to journalists, which in turn invite a manic reaction from the markets. Witness share trading in Barclays during the final hour of stock market business in London on Friday – down 25 per cent with no apparent newsflow. It capped a week when shares in Barclays fell 55 per cent.
That was evidence of capitulation – of solid, conservative money managers shouting "SELL… Get me out of the stock at any price available."
Yet Barclays is one of our most prestigious financial institutions, a pillar of the City of London whose history spans 300 years. This is a bank that operates in over 50 countries, employing 150,000 people to serve more than 40 million customers. And yet the markets are quite literally questioning whether it is insolvent.
Now, events are moving rather quickly. It may well be that as this newspaper is served up at your breakfast table the British Government is in the process of unveiling a fresh sector-wide bailout for our beleaguered banks. Or the markets may simply be left to stagger on a little longer as the politicians dither.
Right now it is quite impossible to tell.
Barclays, I should quickly add, insists that it is simply the victim of an illogical market panic, with traders acting like a suicidal herd, without reference to the facts.
The bank responded to Friday's events in an unprecedented fashion – it "pre-announced" its year-end figures, which was not due until the second half of next month. The statement is worth reading in full:
"The Board of Barclays knows no justification for the fall in the share price. Barclays will announce full results for the year ended December 31, 2008, on February 17, 2009. The Board of Barclays expects to report profit before tax for the year, after reflecting all costs, impairment and market valuations, well ahead of the £5.3 billion (Dh28.6bn) consensus estimate of sell-side analysts. Further, Barclays expects to report a year-end equity tier one capital ratio and tier one capital ratio, on a pro forma basis reflecting the conversion of the Mandatorily Convertible Notes, of approximately 6.5 per cent and 9.5 per cent respectively."
At first glance that statement should come as a huge relief. The bank remains impressively profitable. Even after allowing for all the inevitable write-downs and provisions against bad debts, Barclays is going to report better headline figures than all investment banking analysts are expecting.
There is a chance, however, the statement might backfire because of two words that are missing: "negative goodwill". In short, the year-end "profits" have been inflated by Barclays' decision to take over Lehman Brother's US brokerage in October.
Negative goodwill is a funny concept. Usually, when a company takes over another company, the price it pays over and above the net value of the assets (the goodwill bit) is written down in its accounts, often over a number of years. But if the price paid is less than the net value of the assets this negative goodwill is written "up" in the accounts.
It's not cash, of course – but it flatters the accounts. Unfortunately, in the current climate, it also reminds outsiders that the numbers in the accounts are really only just as good as the auditors will allow.
All of which brings us to what I suspect is the real reason for the plunge in Barclays' shares on Friday.
Back in September and October, when the British authorities decided to recapitalise Britain's banks, regulators did not factor in the full repercussions of a global recession. So the authorities under-shot in terms of the capital required to bolster banks' balance sheets.
That, in itself, is utterly scandalous and should claim senior scalps – but let's not let it distract us here.
Instead, over recent weeks, as auditors have crawled over the banks' books in preparation for the traditional year-end reporting season in February, a painful process of awareness has been taking place. Likely default rates and plummeting asset values are being faced up to with an honesty that was previously missing. The books of British banks – not just Barclays – are not simply being marked to market, they are being marked to grim reality.
Now, it is almost certainly the case that Barclays' financial situation is nowhere near as bad as some of its rivals, such as RBS and HBOS, which is now part of the enlarged Lloyds Banking Group. The same goes for HSBC and Standard Chartered.
But here's the rub. The financial authorities – the tripartite grouping of Britain's Treasury, Bank of England and the Financial Services Authority – want a sector-wide solution that draws a firm line under the finances of the banking system as a whole. They want to be seen to be taking firm action – something that stops the rot, once and for all.
That is likely to mean a combination of capital injections, the forced purchase of problematic assets by the state (the creation of which is known as a "bad bank") and then a series of state guarantees for new loans to companies. And the authorities will be insisting that all British-based banks participate in this sector-wide bailout.
Barclays, for one, will be resisting this move in furious fashion. The bank does not want politicians meddling in its business – that is why it tapped non-British shareholders back in October, most notably Abu Dhabi and Qatar, rather than taking government money.
And that is why the Barclays share price collapsed on Friday. Certain shrewd investors would have taken the view that there is or was a very real danger of the row over a new sector-wide bailout escalating to the point where Barclays was effectively nationalised by force.
That would be a calamity for Barclays investors – and I dare say would have repercussions for Britain's relations with the Gulf states. So hopefully, by the time you read this column, a compromise would have been reached. Fingers crossed.
- Paul Murphy is associate editor of the Financial Times
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