The Barclibor scandal doesn’t seem to be going away, so it might be productive to try to figure out how much outrage is the right amount of outrage and express it in dollars. You can be all “what a bunch of crooks, with the emails, and whatnot” and sure, but there are lots of crooks in the world and for you to expend your energy being mad about particular crooks should require a considered judgment as to whether they are petty crooks or massive, massive crooks. And despite the $800 trillion notional size of the market they were monkeying with, the range of answers given to this question is unusually broad, from a dismissive “it’s still not clear just what the big harm was in the Libor scandal” to a mouth-foaming “this is the mega-scandal of mega-scandals.”
So start with the question of who got hurt by the basic horse-trading fixing where Barclays increased its fixings to make money on its contracts: derivative trader called submitter, said “hey [raise | lower] me some Libor because I have some contracts fixing today,” and the submitter did in exchange for champagne or just a manly pat on the ass. Here who got hurt is sort of messy and boring: you got hurt if you borrowed floating-rate money, or paid floating on a swap, and Barclays pushed your relevant Libor up on a fixing date for your contract; and you got hurt if you lent floating-rate money, or paid fixed on a swap, and Barclays pushed your relevant Libor down on a fixing date for your contract. And in expectation probably neither happened, for you personally.
More relevantly, you get the very strong sense from the Barclays emails that the traders manipulating Libor often thought they were shooting against other banks doing equal and opposite manipulations, so it’s not clear that it worked. In fact in some sense you have to hope that they were right and this was a systemic problem: if it was just Barclays then they actually manipulated rates,* while if it was everyone then probably no one managed to manipulate rates for their own advantage – unless there was some systemic reason for the Libor submitter banks to manipulate Libor in one direction prior to the financial crisis, on which more later.
The second question is who got hurt by more systemic fixing where Barclays – and maybe others – and maybe at the BoE’s oblique suggestion – systematically pushed their Libor submissions down to make themselves appear healthier than they were. This struck me as potentially a bigger deal (dollarswise) yet somehow more forgivable, and The Economist is with me: Read more »
When you run a bank and things get tough one thing you might do is say “things aren’t tough, they’re great!” This is always sort of a lie, with a wide range around how much of a lie it is, but it can also be self-fulfilling. A bank is basically a big pile of stuff built on a thin foundation of confidence, so if you convincingly say “things are great” then the confidence thickens and things are great.* If you go on CNBC and say “honestly, we have no idea how we’ll make it through the week,” you won’t.
There is a small deep hole here because most of the time when you need to go on CNBC and say “things are great, we have enough liquidity to last us until 2045,” you are lying in some sense, because if everyone pulls their repos etc. etc. then you actually have enough liquidity to last you until 4:45, and if you don’t convince everyone of the former then the latter happens. And if you tell everyone a thing that rapidly turns out to be wildly inaccurate, you look … well, “bad” is one word, “guilty of securities fraud” is another four. One component of the wage premium paid to bank CEOs is probably for this small deep hole risk, though so far the hole is smaller than it is deep.
I don’t know if that has anything to do with Bob Diamond. After spending several years overseeing an operation that on a near-daily basis manipulated interest rates, and that was then caught red-handed sending dozens of emails about it, he sort of had to resign didn’t he?** It’s unclear what Diamond knew when – and it’s hard to care that much; another part of the comp premium for bank CEOs really ought to be that if it turns out you were supervising a massive criminal enterprise, even unawares, you gotta go – but there’s some evidence he had an inkling. Here is DealBook: Read more »
Barclays said today that in spite of writedowns due to subprime, etc., it predicts that 2007 will exceed last year’s profit, though just barely. Everyone (traders especially) thinks this is good news, and if we were talking about Citi it definitely would be, but making a pound more that least year means that Barclays earnings will have moved an insignificant 4 percent, compared to the gigantic growth seen in the last four years. Barclays’s estimate is “broadly in line with” analysts’ average estimate of about $14.7 billion (7.1 billion pounds), news which move the stock as much as 6.2 percent in London trading. Interesting. What I’m getting at is that Barclays is trying to cover up a record 75 percent increase in profit for 2007, so that whenever that actual numbers come out, they can say they “beat” analysts’ expectations, and continue to recover from a 7-week losing streak. That or they’re just trying to cushion the blow for the inevitable admission that those rumors about a $10 billion writedown were true. I can’t decide which. Barclays says on track for 4 pct 2007 profit rise [Reuters] Barclays May Match 2006 Profit This Year [Bloomberg]
Barclays was not lying last week when it categorically shot down scurrilous reports that it was about to take a $10 billion writedown, a denial the bank backed up this morning when it announced a writedown of only $2.7 billion on investments related to the subprime mortgage market. Of course, when they said there was “absolutely no substance to those rumors,” they meant to say “those rumors are only 27 percent correct,” but whatever: details. How do you like Barclays now? Probably not as much as Barclays likes itself. “Today’s extensive disclosure demonstrates the strength and resilience of our performance during the year and in particular during the turbulent month of October,” chief executive John Varley said in a statement.
Incidentally: You should watch this
Following a nine percent decline on its stock price, Barclays said today that “there is absolutely no substance to those rumors [about us taking a gigantic writedown]” and denied plans to force chief executive John Varley and/or investment bank head Robert Diamond into early retirement and we totally believe them. Disclosure: we believed Citigroup when it said its losses were only around $3 billion, John Mack when he said Morgan Stanley wouldn’t take a $3.7 billion charge from its debt trading operation, Bear Stearns when it said there was still value left in those two hedge funds, and Jimmy Cayne, when he swore it was a ten pound bag of oregano in the bottom drawer of his desk. B-Clays wouldn’t say whether or not the bank will issue an emergency statement, so maybe it will, even if it didn’t lose a bunch of money, provided the Journal doesn’t get cold feet about running its exposé on Varley’s inability to conquer his smack habit*.
Barclays Rejects Talk It Faces $10 Bln Writedown [Reuters via NYT]
*prove me wrong.
Barclays gave up its six-month battle to buy ABN Amro Holdings NV today after too few investors agreed to back the bid. The withdrawal clears the way and more or less rolls out a red carpet for Royal Bank of Scotland Group Plc, with Banco Santander and Fortis, to complete the biggest banking takeover ever. Barclays, which bid documents show had been working on creating the world’s sixth biggest bank for several years, is apparently unconcerned about being a potential target itself. Chief Executive Officer John Varley claimed to have full “confidence” in “an independent future” for the company.
And since no one posed an actual question regarding the difference in size between the two bids at the increasingly irrelevant—as far as the ABN Amro deal goes—British bank, Varley asked (and answered) one himself: “Do I think they’ve overpaid? My answer to that is yes. It is impossible to think that ABN has not been affected in terms of intrinsic value. The explicit purpose of us having a share-based offer was to ensure that we did not overpay…We were not prepared to purse victory at any price.” And when you put it like that, it’s *almost* as though they *were* victorious, isn’t it? (Of course, analysts said Varley’s comment might have bit a “little revisionist,” considering that Barclays, you know, was never actually able to get the cash together in order to take on the consortium’s offer but whatever–details. Let him have this one thing.) Barclays boss says RBS has overpaid for ABN [Telegraph]
Barclays formally launched its 65 billion euro ($89 billion) bid for ABN Amro today. The British bank offered 2.13 ordinary shares and 13.15 euros per share for each ordinary share of the Amsterdam-based bank, the soaring eagles said in a statement today, and the acceptance period runs from tomorrow until October 4. The bid, as the ABN Amro aficionados in the audience well know, is part of Barclays’ attempt to beat a takeover by a Royal Bank of Scotland-captained team of RBS, Banco Santander SA, and Fortis (who just this morning won initial shareholder approval for the deal).
Let’s discuss that rival proposition for a second. The consortium is offering 71 billion euros (of which about 93% is in cash) to Barclays’ 65. I’ll say it again, for the Rain Men in the group—71 versus 65. On July 30, ABN withdrew its recommendation for the Barclays bid, rocket-scientifically noting that it’s inferior to the Royal Bank’s offer. But the very next day, its chief executive, Rijkman Groenink, said “We continue to support the Barclays offer because we believe overall it is to the benefit of shareholders and stakeholders,” and noted that the Dutch bank would probably formally recommend it to shareholders later. They like Barclays, they want Barclays, they just want more money from Barclays, or at least something on par with what the Royal Bank is offering. I get that, you get that, why doesn’t Barclays, who just came up with an offer of 65 billion euros (not >71 billion euros) get that? They’ve been told by ABN Amro, “We prefer you, just bring up those numbers and we’ll endorse it,” but for some reason are all “Nah. We’re good.” They’ve been told “71” and they’re saying “No. 65.”
Maybe it’s because it’s Monday, maybe it’s because some of us have a gaping hole in our foot from stepping on the prong of an errant belt buckle Sunday morning, but I’m flat-out asking you to either confirm that this is a matter of Barclays not getting the embarrassingly overt message or me not getting what the hell is going on (“they’re playing hardball” is not an acceptable answer unless you elaborate, btw). You were already planning on trying to correct/humiliate me in the comments section for failing to understand the inner-workings of this deal (other than the SS implications), or for an improperly-placed apostrophe,* anyway, and now you have my blessing.
Earlier: ABN Amro Playing Horrible Game of Hard-To-Get With Barclays Barclays launches $89 bln ABN takeover offer [Reuters] Barclays Makes Formal Offer to Investors for ABN Amro [Bloomberg] Fortis shareholders give initial OK to ABN deal [MarketWatch]