Thursday, August 28, 2008

Barclays Writes ‘Em Down and Sells ‘Em Off

The UK’s third- biggest bank, Barclays, delivered more bad news to shareholders today, namely that it got crushed in the first half of 2008 as the bank sacrificed profit on the altar of subprime-related write-downs.

Barclays management reported a 34 percent profit crash and said more damage likely lays ahead. The bank said that it wrote down another £2.8B in the first half. Witness:

Barclays Plc, the U.K.’s third- biggest bank, said first-half profit fell 34 percent as securities trading declined and credit writedowns increased. .. While profit exceeded analysts’ estimates, Barclays took credit-related writedowns of 2.8 billion pounds in the first half

Barclays has said it doesn’t need additional capital after raising 4.5 billion pounds in a share sale to investors and sovereign wealth funds last month. The proceeds lifted its so- called equity Tier 1 capital ratio, which measure a bank’s ability to absorb losses, to about 6.3 percent.

We already saw this movie in this first half when the bank low balled its subprime-related write-downs said it would not raise capital. Eventually, Barclays wrote down an amount equal to all of fiscal 2007 credit crunch-related write-downs in the first quarter and they raised £4.5B ($8.75 B) in a share sale to investors and sovereign wealth funds in July.

Hopefully there will be no rerun, but…

After racking up $9.8B in write-downs, Barclays says it has £2.8B in write-downs for the entire first half of 2008. WOW! How’d they do that? Sit down, because this is what Barclays would have you believe:

Barclays has offloaded troubled loans and securities worth £6.3bn during the past few months in a sign that investors have become more willing to buy debt assets affected by the credit crunch.

The disposals are further evidence that banks are more able to shift debt securities, most of which have been stuck on their balance sheets since the credit crisis first struck last summer.

“Risk transfer has begun,” Bob Diamond, Barclays’ president, said on Thursday. “Even difficult assets – even mortgage assets – are moving to new buyers.”

Last month Merrill Lynch sold collateralised debt obligations with a nominal value of more than $30bn (£15bn) to Lone Star, the US private equity group, at about 22 per cent of face value. In May UBS, the Swiss bank, sold mortgage securities with a face value of $22bn to BlackRock, the asset management group. In each case the banks helped finance the purchase.

Hooray Yippie! The worst is past, but doesn’t it kinda suck when the banks loading doing the off loading are doing the financing too? In each case the banks helped finance the purchase. Well, we happen to think so.

OK, so they found suckers for the £6.3B of bad debt, bringing first half write-downs to £2.8. Who bought this garbage is not nearly as interesting as who financed the purchase. There is sure to be more on that, but how about this for now:

The bank’s £2.8bn of credit crunch write downs during the first half have been offset in the accounts with revaluation gains of £852m, to give a net impact of around £2bn. The net figure at the end of the first quarter was £1bn.

OK, so the net breakdown of the write-downs goes something like this: net figure at the end of the first quarter was £1B, leaving the net for second quarter at £2.8B. We did count that correctly, right? WRONG!

Barclays reported it had written down the value of complex debt securities on its balance sheet by £2.8bn in the first half. The writedown, partly offset by an £852m gain from revaluing the bank’s own debt, was largely responsible for the fall in first-half pre-tax profits, down 33 per cent to £2.75bn.

The bank’s own debt? What on earth does that mean, you ask? Well, let’s say you hold a Barclays bond for $1,000 face value. Then, because of downgrades to Barclays, that bond is only worth $700 in the secondary (bond) market. Well sir, a cute little gismo in FAS 157 lets the bank book that $300.00 haircut as a profit, and that’s all that going on here.

It was in July of 2007 when banks first took titanic write-downs on US subprime-backed debt. The markets roiled, and the credit crunch first roared loud enough to blast away six years of market complacency in as many weeks. The best thing Barclays has done since then was lose out to Royal Bank of Scotland in the war over Dutch rival ABN Amro. Today, CEO John Varley said he was gosh awful sorry about that. Let’s hear what he has to say:

“Our shareholders have endured a lot,” Mr Varley admitted as he expressed his personal disappointment at Barclays share price, which has almost halved in value over the last year.

Yea John, that’s pretty steep. It would be steeper still if shareholders had known last year how bad the company really was, but you denied that you needed to raise cash, hid the value of the write-downs until the last possible minute and have booked losses as profit. What a joke.

Barclays stock is down by half, from $60 to $28.51. That’s an expensive year for shareholders, but at least they got the sincere condolences of a lame I’m Sorry from the John. Maybe shareholders could have dumped at $50 or even $40 per share, but that would have depressed prices even further. All this makes me think back to what board members and CEOs base their pay on?

Talk is cheap, and John Varley isn’t putting his money where his mouth is. He’s putting it into credit provisions:

Barclays said excluding sub-prime related charges, its bad debt charges increased 40% during the period. The group’s total for such impairment charges and credit provisions was £2.45 billion during the first half, up from £959 million a year ago.

The reason for the build up is that the credit crunch is just beginning to set in and will be with us for quite some time. How about Barclays though?

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