“One thing’s for sure, things will never be the same again.”
That was the general tone of punditry after the financial system apparently nearly collapsed back in September last year. And in fact, it’s still the general tone. There seems to be this broad expectation that “something must be done.”
But don’t kid yourself. The time is past. Politicians on both sides of the Atlantic are now too firmly in bed with the banks to let anything happen to them. Just as was the case during Alan Greenspan’s “Great Moderation”, as long as stock markets are rising and house prices are doing likewise, governments don’t care how it’s happening, or what it’ll cost us in the end.
Don’t believe me? Still struggling to accept that the ‘Great Recession’ and crash of 2008 changed absolutely nothing? Then cast your eyes over the latest little deal over at Barclays…
How Barclays got $12.3bn for its dodgy assets
Barclays has just managed to sell a pile of “toxic credit assets”, as the FT puts it, for $12.3bn (£7.5bn). Good news, eh? Well, keep the champagne on ice for now.
The buyer is a new company called Protium. How did the company get $12.3bn to pay for these assets? Simple. Barclays wrote it a cheque. You see, Barclays is lending Protium $12.3bn over ten years to actually buy the assets. The partners in Protium – which is headed by two former Barclays executives – are contributing a relatively miniscule $450m themselves.
So Barclays has sold a load of dodgy assets, but it loaned the buyer the money to buy them. You’re probably now thinking – what on earth is the point of that? But that’s probably because you live in the real world, rather than the financial realm.
Everyone’s keen to point out that this isn’t about getting the assets off Barclays’ balance sheet. The loan that Barclays has made to Protium stays on Barclays’ balance sheet. Therefore, Barclays has to keep a certain amount of capital as a buffer against that loan going bad. So this isn’t about freeing up more money to lend recklessly.
Barclays has bought time
What it’s about is ‘de-risking’ Barclays’ balance sheet. Banks have increasingly become ‘black boxes’ – ie untransparent organisations whereby it’s nigh on impossible to work out where they’re making their money – over the years of the credit bubble. But MoneyWeek regular, chief strategist at Pali International, James Ferguson (who also writes the Model Investor newsletter) seems to have a pretty good idea of what they’re up to.
As James points out in this week’s issue of MoneyWeek (out on Friday – if you’re not already a subscriber, subscribe to MoneyWeek magazine), dodgy securities are a short-term problem for banks. Because every so often, these securities need to be ‘marked-to-market’. In other words, you have to reveal just how much their value has fallen. That means asset writedowns, which hurt your profits, contributing to what analysts like to call ‘earnings volatility’.
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But loans are different. A homeowner can be in negative equity, but as long as they can keep repaying their debt, it makes no difference to the bank. The loan has technically become riskier (because if the borrower defaults, you’ll be left with an asset worth less than the loan) but unless the borrower actually defaults, you don’t have to make any allowance for that on the balance sheet.
So what Barclays has done here, is to turn a set of dodgy securities into a potentially dodgy loan instead. In other words, it has bought time. It’s pushed back the day of reckoning on these assets into the distant future. It may even get paid in the end.
Barclays will now be less keen to lend you and me money
Smart moves, eh? But there’s a catch. If Barclays is busy lending out all its money at very favourable terms to persuade people to buy its dodgy assets, then what does that mean? You’ve got it. The bank will be less keen to lend money to you and me.
The bank is safe – well, safer. But the price the rest of us pay is that credit in general becomes more expensive, and thus the value of assets bought with that credit falls. In other words, the value of any assets you and I own is likely to fall in order to prop up the price of dodgy assets that Barclays stupidly bought during the boom years.
Does that sound fair? Unless you’re a banker, probably not. But this is what’s happening. Rolling Stone writer Matt Taibi described investment banks as “vampire squid”. It’s a nice image. But I think the term ‘leeches’ is more appropriate.
Why you shouldn’t touch banks with a bargepole
There are many ways to prop up a bank. You can relax accounting rules so that they don’t have to own up to past mistakes, you can slash interest rates, and you can hope that one day they’ll be recapitalised via the backdoor. But all of that has a cost. And it’s the population at large that pays for it. Just ask the Japanese.
This is why you shouldn’t touch the banks with a ten-foot bargepole. Barclays went to a great effort to offload these things – I won’t delve into it here, but suffice to say the Protium deal was done on very, very favourable terms for the buyer. Do you think if Barclays had any confidence that these assets were actually ever going to be worth what it paid for them, that the bank would have been so keen to shed them?
Nothing’s changed. But the financial crisis isn’t over yet. Not by a long chalk.
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