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Barclays, Banks Backed Into Corner


Financials finding fewer options.


The Telegraph is reporting Barclays may have boxed itself into a corner by being so upbeat. See the excerpts below, along with my comments:

"The bank has been relentlessly upbeat about the hit it has taken from the credit crisis. Wrongly so, argues the City.

The main problem, though, has been skepticism about the hits Barclays has taken on its "toxic" treasury assets, such as sub-prime mortgages and collateralised debt obligations. In the words of Citigroup (C) analysts, Barclays (BCS) is "in denial" and needs to write down far more that the £1.7bn taken this year. Dresdner Kleinwort expanded the theme: "We forecast £3bn of writedowns this year. If management does not raise equity then we would expect suspicion to linger that the company has only taken what it can afford rather than what's needed.""

My Comment: This is quite the case of the pot calling the kettle black. If ever there was a bank in denial it would be Citigroup. Citi has been slow to raise capital, has had to go to the well repeatedly, and refuses to cut its dividend and is thus needlessly bleeding capital.

"Trust in management is vital and, as Dresdner's note implies, it is rapidly evaporating at Barclays. One senior Barclays insider even acknowledged that "until we sort out whatever we're going to do on capital and report our earnings, we'll have to live with this scepticism and the shares will suffer".

My Comment: There is no trust anywhere. Nor does anyone deserve any. Things are as bad (if not worse) in Europe as the U.S. I commented on this Sunday in Banks Hoard Cash.

"In addition, the writedowns on its basket of monoline, Alt-A and commercial mortgage exposures have not been disclosed at all - an odd decision in markets crying out for greater transparency and in direct contrast to the approach taken by Citigroup, UBS, Merrill Lynch and RBS. Had Barclays marked all its assets as conservatively as RBS, it would be nursing an additional £8bn of writedowns, according to Citigroup."

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My Comment: This is a case of irony upon irony. Oppenheimer sees more monoline losses for Citi, Merrill. "Oppenheimer analyst Meredith Whitney expects Citigroup, Merrill Lynch (MER) and UBS AG's (UBS) collateral damage against their monoline exposures to be in excess of an additional $10 billion."

Barclays Raises Capital

The telegraph is reporting Barclays lines up £4bn of capital.

"Barclays could this week reveal that it has raised about £4bn in fresh capital from a group of sovereign wealth funds as it becomes the latest UK bank to tap investors in the wake of the global credit crisis.

The high street lender is in talks with up to six sovereign backed investors, including the Chinese Development Bank and Singapore government investment arm Temasek. A deal should be announced in the next fortnight.

Sources close to Barclays have sought to make clear that the lender is not in a similar position to its peers and does not require the capital to shore up its balance sheet.

Barclays is free to express whatever opinion it wants, but investors don't have to believe it.

Strange, Stranger, Opaque

I recently received an Email from John Hempton at the Bronte Capital Blog. John is writing Barclays - strange, stranger and truly opaque. I have not had time to go through all of his analysis but these snips caught my eye.

"In four years our derivative exposure (total face) has gone from 5.9 trillion pounds to 29.2 trillion pounds. Our credit derivative exposures have gone from 43 billion pounds to 2.4 trillion pounds.

It is not just the derivatives that they grew. The on balance sheet exposures grew to astronomical size too. Here is the summary from the Barclays annual report of Barcap.

Click to enlarge

Let's stress how weird this is. You have 3.8 billion pounds of "trading income" and only 42 million pounds of "value at risk". The balance sheet however – and this is ON BALANCE SHEET exposure is a mere 840 billion pounds. That is about the same size as the whole of Citigroup! In the income statement they took a net 795 million pounds of charges against US subprime exposure. That is 19 times their value at risk

Barclays Daily Chart

Click to enlarge

The market doesn't seem to believe Barclays' denial, so why should I?

In the general sense, it's more than Barclays who's boxed in. Citigroup, Washington Mutual (WM), Wachovia (WB), Merrill Lynch, Bank of America (BAC), Countrywide (CFC), Morgan Stanley (MS), JPMorgan (JPM), and Lehman (LEH) are all boxed in to varying degrees.

What have banks boxed in? The need to raise capital, reduce dividends, and honor lending commitments, smack in the face of deteriorating Alt-A, subprime, credit card and commercial real estate conditions. To top things off, interest rates have been rising faster at the short end of the curve vs. 10 years and longer.

The list of problem banks is nearly endless. Is there anyone who is not boxed in?

No positions in stocks mentioned.
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