By Neil Lancastle
Would you unconditionally invest billions more in Barclays, knowing your equity was at risk and your loan would not be re-paid if the bank got into trouble? Since you get all of the downside, what return would you be looking for? 5%? 8%? Would you want the 14% that was given to Abu Dhabi and Qatar investors in 2008… a deal that is apparently under investigation by both the Serious Fraud Office and the Financial Conduct Authority? Or would you ask for the kind of conditions that the rest of the country has to accept, in particular pay restraint?
I should declare my link to Barclays: I worked at Barclays Global Investors (BGI) until 2007. Then, we were doubling in size every year and the culture had been risk averse. After all, we were playing with someone else’s money.
But my last project was different: it had Bob Diamond and ‘casino banking’ written all over it. We were going to replace the tiny bit of cash in your pension with ‘synthetic cash’ that was made up of unintelligible, but AAA, bonds. When I questioned it, I was told that everything was going to be fine and this really did matter more than anything else. We were told to do similar things with ‘synthetic ETFs‘ backed, not with real assets, but with a promise to pay from an investment bank.
So I resigned. To be fair, it was messy and we spent some time seeing if we could sort things out, but like any failed marriage neither of us was going to change. A former colleague told me those unintelligible AAA bonds lost BGI around £200 million and, after a bit of soul searching, they lost their enthusiasm for ‘synthetic ETFs’. By then, Bob Diamond had sold BGI for £8.2 billion. The jewel in the Barclays crown, so to speak, had been sold.
That left Barclays dominated even more by the investment bank. You might think that £8.2 billion from Blackrock and £4.75 billion from Qatar would plug a pretty big hole in the balance sheet. Yet the annual bonus pool is up to £2 billion and there has been one provision after another: £1.5 billion for mis-selling interest rate derivatives, £2.6 billion for mis-selling PPI and £290 million fine for manipulating LIBOR.
So would you lend more money to Barclays? If they were a relative, and every time you lent them money they spent it, wouldn’t you be a little bit more strict? OK, so Bob Diamond has left, but is it really sensible to lend to the current management team without any conditions?
There’s a double moral hazard in banking. First, the central bank steps in as ‘lender of last resort’. Second, the industry turns to itself for funding via the capital markets. Yet there’s a real economy outside London that needs investment but is constantly being told to minimise pay rises, accept less favourable employment contracts, find new markets and learn new skills. With other bankers and investment managers making the decisions, will those same conditions apply to Barclays?
This article is cross-posted from Neil Lancastle’s website where it is headed “Should Barclays borrow more without conditions?” Neil teaches accounting and finance at the University of Leicester, where he is also completing a PhD on ‘should we regulate the carry trade?’ From 2000-07 he was at Barclays Global Investors where he managed various technology projects for their index-tracking and exchange traded funds.
An unconditional loan to Barclays should, in the present climate, be considered a test for insanity,whatever the coupon rate. Barclays, like other banks knew that capital adequacy ratios were going to increased and yet did nothing presuming they could work the usual ‘flanker’ by printing more money via a share dilution AKA rights issue.
The best result would be for the large pension funds and other bond and equity holders to make it known they are not going to have a bar of this prestidigitation and sit back and watch the fireworks. Buying into the rights issue merely endorses the managerial malfeasance (LIBOR, PII etc etc). Send them a message – DON’T BUY.
I have little doubt that Barclays will benefit from the delay in raising capital. With lots of small rights issues, pension managers are not forced to take part. The passive managers will always be there, but active managers have some leeway. At this scale, though, active managers are forced to take part because they tend to take lots of small bets to avoid under-performing the benchmark… so far better for Barclays to wait until they need lots of capital. What I don’t understand is why the regulator doesn’t intervene and require them to raise capital in tranches and raise funds internally (eg: by cutting the bonus pool).
“Would you unconditionally invest in Barclays?” No, but I would CONDITIONALLY invest in them.
Under full reserve banking (at least as proposed by Positive Money, Laurence Kotlikoff and others), depositors specify what’s done with their money, plus they carry the risk if they specify anything faintly risky (i.e. they in effect become shareholders).
So I’d invest in mortgages where the mortgagor had a minimum 20% equity stake. Plus, as long as I got a higher return I might put something into British SMEs. As for “synthetic ETFs”, forget it.
As for those who don’t like full reserve, a “specify” system as above would be possible without adopting full reserve lock stock and barrel.