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  1. Wealth
June 16, 2009

The banking barrier, broken

By Spear's

Then someone said Glass-Steagall was anachronistic, just when old snake-oil wanted to do a good turn for his buddies.

Barclays, like its US counterpart Bank of America, is in breach of the US Glass-Steagall Act provisions, but they were repealed in 1999 by the snake-oil salesman from Hope in Arkansas in 1999.

This Act prevented low-risk commercial deposit-taking banks from owning risk-taking investment banks, so as to ring-fence depositors’ money from the high risk investment bankers.

This Act worked well for 63 years. Then someone said it was anachronistic, just when old snake-oil wanted to do a good turn for his buddies in Citibank as they were taken over by Travellers Group, but Glass-Steagall stood in the way, so it was flattened to smooth the way forward for the world’s first all-singing and all-dancing money superstore.

Needless to say, this deal started falling apart on day one and the surviving demerged bank hobbles along with $45 billion of TARP money, its business model under question, and facing a bleak future where it can see no profits amidst the current gloom. That’s why Glass-Steagall was invented and was a “Good Thing”.

Barclays has both types of business and two bosses, both intent on growing their side of this explosive cocktail. John Varley of Barclays Commercial wanted to bid £48 billion for ABN-AMRO which, if successful, would have bankrupted the whole of Barclays. Bob Diamond of Barclays Capital wanted to buy Lehman Bros. which, if successful, would have bankrupted the whole of Barclays.

If both acquisitions had taken place, and they were simultaneous, Barclays would have blown up twice and taken the City of London with it. Luckily, Sir Shredded Wheat of RBS rode to the rescue with a mad bid for ABN-AMRO and Barclays own Articles required a Special Resolution with Notice which prevented the Bank from buying Lehman, before Lehman itself blew up.

The idea that a bank couldn’t buy two other banks before they both blew up and so prevented the first bank from blowing up twice is not the kind of thing that makes depositors sleep well at night, which was why Glass-Steagall was invented in the first place.

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Barclays managed to buy the bits of Lehman it wanted in the US out of bankruptcy at a peanut price, but with $1.875 billion set aside for bonuses for the bankers who had just bankrupted the bank. Barclays then determined to avoid the government rescue plan for UK banks, as if it had accepted it would have curtailed those all-important bonuses in Barclays Capital, and would have been seriously criticised for paying past US bonuses out of UK taxpayers rescue money.

That’s why Glass-Steagall was invented, to stop these cross-business issues that potentially put depositors’ money at unnecessary greater risk. Finally, Barclays’ motive for trying to buy ABN-AMRO may well have been a misguided attempt to strengthen its own balance sheet, which looked like Gruyere cheese when the crisis broke.

The first hole was filled by sovereign wealth funds from Singapore to Timbuktoo and their money is still underwater for over 70%. The second hole was filled by a placing with the Abu Dhabi Sheikh, which broke all the pre-emption rules that are so vital to the City and would have ended in dilutionary disaster if Barclays had needed more capital before 30 June.

And it was a close call, as the third hole is now being filled by the sale of iShares out of Barclays Global Investors, which itself is now being sold to BlackRock for $11.8 billion. These were good growth, low risk, fee-driven businesses that contributed 10% of Barclays Group profits.

They are being sold as Barclays needs the money and hasn’t accepted the government’s asset insurance plan, which would have added further discrete protection for depositors.

Barclays’ core Tier 1 Capital of £30 billion, after the sale of BGI, will be 7.5% compared to around 9.0% of its peers; and its equity to total assets of £1.0 trillion ratio will be x35, compared with RBS at x20, Lloyds at x23 and HSBC at x26. (These are calculations based on historic data and are approximate.)

The plain fact is that Barclays is low on capital and running out of options, and that’s before the current year’s provisions of around £10.0 billion are deducted from the post-BGI profits of around £8.0 billion. Barclays is not out of the woods yet and a massive rights issue is still on the cards, or something far worse.

On reflection, Glass-Steagall does not seem in the slightest anachronistic, but an Act long sold out long before its sell-by date. The brinksmanship employed by the duo at Barclays has luckily paid off so far, but the issue that remains is whether the depositors should ever have been taken for a walk this close to the cliffs. And did the regulators do or say anything?

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