Barclays today announced a fancy new capital plan that illustrates the subtle cultural differences between US and UK banking. When U.S. regulators want banks to raise more capital, they tell them to do it by 2018, and the banks spend the intervening five years whiningabout it. When UK regulators want Barclays to raise more capital, they tell them to do it by June 2014, and Barclays goes out and announces a rights offering pronto. A rights offering! That preferred European way of raising capital has a pleasing symbolism; it’s like, okay you equity holders, you let your management get into this mess, and you’re responsible for fixing it, so cough up some more cash or there’ll be consequences. Bail yourselves out.
The mess, in this case, is that newish leverage-ratio rules require European banks to have assets (measured under IFRS, plus some off-balance-sheet stuff) equal to no more than 33.3 times their capital, and Barclays is at a somewhat astounding-sounding 45.9x,1 so it either needs to chuck around a third of its assets or raise about a third again of its capital or some combination thereof.
Back in May, Barclays named longtime Lehaman Brothers-turned-Barclays employee Hugh “Skip” McGee III Chief Executive Officer of Barclays Americas. Following last summer’s revelations that the bank had been engaging in interest rate manipulation, the resignations of chairman Marcus Agius, CEO Bob Diamond, and COO Jerry del Missier, and the general tarnishing of the Barclays name, the appointment came with the obvious mandate to “improve relations with U.S. regulators,” at a time when the Fed is “preparing to make foreign banks meet higher capital standards” and BARC is writing checks for $488 million to settle charges of energy market manipulation. This, Bloombergwrites today in a profile of HSM3, makes him “a noteworthy choice” as peacemaker. Colleagues “don’t expect contrition or retreat” from the banker (he’s already told the Fed its proposed rules are “not sufficiently nuanced,” “inappropriate,” and “unnecessary”) and, if anything, think he’ll be “an advocate for robust pay and freer capital.”
How do these people know they can count on McGee to 1) get them paid, optics be damned and 2) not roll over and take it from U.S. regulators in an attempt to prove that Barclays is a changed bank? Ol’ Skippy secured their votes four years ago, when he penned his opus to his kid’s school, a sagging institution employing a “gay female coach” and even worse, a history teacher with the audacity to say “hurtful things about bankers” in the presence of his child, not to mention, “humiliating” a group of boys by refusing to allow them to dress in drag for a pep rally (“The Incident”), all clear indications of the fact that the place was going to hell in a handbag. Read more »
Yesterday the Federal Energy Regulatory Commission ordered Barclays and four of its traders to pay $488 million for manipulating energy prices by doing basically this:
(1) Buying electricity with medium-term swaps,
(2) Selling electricity with short-term forward contracts, and
(3) Buying electricity in the spot market.
And vice versa (switching buys and sells). The idea is that since the swaps in step (1) settled based on the spot price in step (3), Barclays can manipulate the value of its swaps arbitrarily high by just overpaying in the spot market. Like, buy 100 whateverowatts of swaps at $1 per WW, then buy 5 WWs physical, pushing up the price to $3/WW, and you’ve spent $15 (5 WW physical x $3/WW) to make $200 (100 WW swap x [$3 - $1]).
This is nonsensical on first principles, though that doesn’t make it wrong; lots of true things are nonsensical on first principles; that’s like a feature of first principles. When you lay it out like that, though, you can see the oddity, which is that FERC thinks step (3) (buying physical) pushed up the price, but thinks step (2) (selling like next-day electricity) did not push down the price. If this worked then you could replicate it in any market, like: Read more »
Yesterday Citi sued Barclays over an indemnity that Barclays gave Citi during the collapse of Lehman Brothers, and while, yes, the lawsuit is boring in the way that only lawsuits over indemnities can be, I’m nonetheless going to tell you about it under the heading “laugh at Citi doing stupid stuff.” The stupid stuff here is roughly:
Citi was the clearing bank for Lehman Brothers FX trades, with gross exposures in the tens of billions of dollars.1
Lehman ran into some trouble in September 2008, as you may have heard.
On September 9, 2008, one week before Lehman’s bankruptcy filing, Citi decided it might be a good idea to get some security for its Lehman FX clearing exposure, in the form of getting set-off rights against $2 billion that Lehman Brothers Holdings (the public parent company) had on deposit at Citi.
On September 15, 2008, after Lehman Brothers Holdings had filed for bankruptcy, Citi decided that it might not be a good idea to continue extending credit to Lehman Brothers Inc. (the non-bankrupt broker-dealer subsidiary) and so terminated its FX clearing arrangement.
Lehman Brothers Inc. begged Citi to reconsider, and Citi agreed to provide basically two more days of clearing (through September 17) in exchange for $1 billion of new collateral posted by Lehman.
Lehman Brothers Inc. continued to not pay Citi amounts that it owed.
So Citi again stopped clearing for Lehman.
This time Barclays, which had agreed to purchase the Lehman U.S. broker-dealer operations, begged Citi to reconsider, and Citi agreed to provide basically two more days of clearing (through September 19) in exchange for $700mm in new collateral posted by Barclays.
Lehman Brothers Inc. again continued to not pay Citi amounts that it owed, and was placed into SIPC liquidation on September 19.
Citi again stopped clearing for Lehman, for real this time, and closed out its positions at a loss of something like $1,260mm.
It set off $1bn of these losses against the collateral posted by Lehman.
Then Barclays called Citi, in October 2008, and asked if it could have its $700mm of collateral back.
Diamond talked the situation through with Jennifer, his wife of 26 years. “What is the best thing right now I can do for the firm?” he asked. His answer: “Step aside and shut up.” His daughter, Nell, a recent graduate of Princeton, wasn’t quite so discreet. The morning after Diamond announced his resignation, she tweeted: “George Osborne and Ed Miliband you can go ahead and #HMD” — referring to a slang term that can’t be reprinted in these pages. (Google it.) She immediately called her father. “ ‘Dad, I think I did something really bad. I think I’m in trouble,’ ” Diamond recalled her saying. He told her: “Sweetie, I love you. That’s so nice. I think we’re probably all in trouble.” [NYT, earlier]
Rich Ricci, the boss of Barclays’ investment bank who collected $26 million in deferred bonuses last month, is leaving the scandal-hit bank as its new chief executive seeks to cut back executive pay and repair its image. The American-born Ricci, a star performer at Barclays known for his love of horse racing, was a key lieutenant of Bob Diamond, the former chief executive who left Britain’s third largest bank last year after a Libor interest rate rigging scandal…Speculation intensified that Ricci, 49, who is estimated to have earned at least 80 million pounds ($122 million) from his 19 years at Barclays, would go after CEO Antony Jenkins failed to publicly back him when he unveiled a new strategy in February. “It’s part of the ongoing cultural revolution at Barclays,” said Simon Maughan, analyst at Olivetree Securities. [Reuters, related]