Friday, Sep 18, 2009
Barclays' dodgy assets sale shows that banks are still in deep trouble
MoneyWeek: Barclays' dodgy assets sale shows that banks are still in deep trouble
Barclays has offloaded £7.5bn of 'toxic' assets by lending the buyer the money to pay for them. But when it comes down to it, the bill for the deal falls on the rest of us.
Posted by damien @ 09:56 AM (491 views) Add Comment
7 Comments
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1. refusetobuy said...
This is the key
"Protium has been backed by a $450m investment from its partners, thought to be two hedge funds which have not yet been identified. The partners will receive 7pc a year on their investment as well as any excess returns from the assets’ performance."
So Barclays either get a fixed return on their loan (not sure the rate, maybe -7%), or they lose more money. The amount of money they can lose has been reduced by $450m. In return, they've sold all the upside risk.
2. icarus said...
More mirrors than smoke here. The mirrors reflect each other so that you're always moving towards infinity, which you can never quite grasp.
3. bellwether said...
RFB, I can see no upside to Barclays from a risk perspective, as protium do not appear to be a genuine third party. Despite the deal not improving Barclays risk position, Barclays are using the deal to increase liqudity and take on more risk.
4. Tpbeta said...
They get to convert toxic (property) assets into loans, which they then can avoid revaluing mark to market as they decline in value. Makes them look more profitable in the medium term than they really are. Downside is they're now locked into zombie status for the next ten years. They'll appear to be lending a lot, but they won't really be. Japanification.
5. refusetobuy said...
The first $450m of losses are born by the (anonymous) hedge funds. Its a bit like purchasing extra insurance to cover any excess on an insurance policy, without having the original insurance policy.
Of course, If Barclays lent $450m to the two hedge funds in the first place, then there would be no change in the risk/economics. Just the smoke and mirrors.
6. dgj said...
I think that barclays are probably the most clued up people in the game!
7. timmy t said...
Bellwether - I was struggling with this yesterday until Flashman made me see the light!
Protium is a legit 3rd party - only connected to Barclays by the loan.
Basically, there is a risk that the assets will devalue by more than 7.5bn, and Barclays are opting to be sure that they will lose no more than 7.5bn by selling them now, rather than holding onto them and hoping. As Flashman said, investors prefer a big loss to an unknown loss.
If it all goes horribly wrong and the assets become worthless, then Protium folds and Barclays loses the 7.5bn it lent them. If the assets come good, then Barclays get their money back with interest and Protium take a chunk too. In any event, Barclays can lose no more than the 7.5bn, whereas by keeping the assets it risks losing more. Barclays is willing to give up any profit the assets may generate in return for the security of knowing they can lose no more than 7.5bn.
Barclays aren't increasing liquidity. They are reducing their potential upsaide and reducing their potential exposure.
Flashman would be proud of me...