Thursday, Sep 17, 2009
"smoke and mirrors" trickery
Borsaitaliana: Barclays Sells $12.3 Billion Credit Assets To New Fund
Barclays PLC Wednesday sought to cut its exposure to volatile credit markets by selling $12.3 billion in risky assets to a new fund managed by two former Barclays executives.
The sale means Barclays will no longer have to record market moves in the value of a portfolio of securities backed by U.S. subprime mortgages and other poorly performing loans that already wiped more than a billion pounds off its profits in 2008. But it won't free up any capital because Barclays is extending the new owner, Protium Finance LP, a $12.6 billion loan to finance the sale, and will keep the securities on its balance sheet for regulatory purposes.
Posted by devo @ 06:38 AM (1009 views) Add Comment
29 Comments
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1. devo said...
That's one helluva Liar Loan.
2. devo said...
Daily Telegraph: Protium hopes to repeat the deal with other banks.
I'll bet it does!
3. Stepoir said...
How long before this company then sells on chunks of debt to smaller companies that go bust one by one writing off less obvious debts and hell maybe weedling a few that do perform out, the whole chain of limited liability rewarded and run by friends of friends.
4. flashman said...
I don’t think this Barclays thing is a big deal. Protium is a high-risk venture with potentially high reward. Barclays makes interest and fees and hopefully gets on with running a more secure business model. The dodgy assets are still listed as their assets for tier 1 purposes so there is no capital requirements con
Devo, you often hint at an apocalyptic ending for us all but stop short of defining what you mean. Is there something specific behind the cryptic comments, or do you just have a general feeling that ‘no good will come of it’?
What is your version of the future and when is it likely to happen?
I apologise if this comes across as aggressive. I am genuinely curious
5. flashman said...
devo: For the record, I think there will be further falls in house prices but I also believe that Great Depression 2 is an unlikely outcome.
6. rumble said...
Flash, if Barclays is lending Protium the cash for the "assets", surely the risk still lies with Barclays in the end, so this would therefore be a pointless exercise, unless there is some other benefit, such as getting the "assets" off some area of Barclays books for the benefit of some type of valuation.
7. mark said...
Not totally sure what this deal will offer in the end, but the stock market is a bubble waiting to explode, some shares are shooting up for no real reason, it looks like speculation gone mad, to me this is a serious bubble which will pop soon, I would expect a double dip and market crash..
8. bellwether said...
Flash not sure what Devo means but suspiscion around what banks are doing is understandable, although I guess a knee jerk reaction to everything is difficult to justify.
Also tend to agree with you on outcomes, although that's maybe just because in my lifetime really bad outcomes (eg nuclear war in the early 1980's) never happened. A contrarian view would be that makes them more likely.
Certainly if we look over longer time periods it seems unarguable that at some point something catastrophic will happen, there will be a complete break down in the way we live or even a war, and that might in some way be inevitable for us to continue. But then again I guess you have to think of yourself as a very special person indeed to imagine that this might happen in ones own own short life span. It seems counter intuitive but being optimistic is partly about not being too inisistent on your own specialness.
9. flashman said...
rumble: It's just a way of separating these assets from their earnings. It is kind of pointless but they want investors to see the fruit of their current labour without constantly having to obscure the picture with adjustments to the value of these assets. The exact value of these assets is always open to debate so they always cast a doubt on their current earnings. They lent the money to Protium, so if the assets go belly up, they will not get the money back. Ultimately they prefer to have a defined loan amount on their books to an undefined value of toxic assets. There is a good chance that protium will make a bundle eventually
Protium is a drug that treats indigestion, which is quite witty of Barclays
10. bellwether said...
Rumble I guess the key point is whether Protium are likely to have the wherewithall to pay the loan back in the event of the assets falling in price. Barlcays are only getting rid of the risk in that scenario, otherwise they still carry full risk but with limited upside ie the move would only serve to make there accounts look temporarily better
Mark there are some stocks which are well priced in the market, and others which are, as you suggest, mispriced. It is not however a one size fits all. My suspicsion is that there is more mispricing than not but overall I don't think the mispricing is as wild as some suggest.
11. flashman said...
bellwether @7 : Well put
Banks are not cosy institutions. They are rapacious money machines, so I do understand the reaction they are causing.
I have done my best to work out what will happen next but obviously I do not have absolute confidence in my predictions. Maybe this is why I struggle with doomster predictions. How can they be so sure, when I have to work so hard just to be 55% confident?
I am not sure about your comment "nuclear war in the early 1980's never happened. A contrarian view would be that makes them more likely".
It reminds me of the tossing a coin conundrum. It is natural to believe that if the first 5 throws are 'tails', then the next one will more likely be 'heads'. Obviously the outcome is always 50:50 but it’s not intuitive. I think I am saying that past events do not justify either a ‘trend continues’ or a contrarian argument. It’s hard to do but where applicable, I try to discount the past
For what it's worth I think that with every passing quarter without mishap, there is a greater chance of an actual economic boom (in the next 2 or 3 years). Whether Britain can join in, is another matter
12. rumble said...
Thanks chaps. So it's a case of sweeping it under the carpet - looks neater, with the stink slightly suppressed, but not really any better.
Re the stock prices, the printed money has to inflate something?
13. mark wadsworth said...
I read this in CityAM and the phrase "smoke and mirrors trickery" sums it up perfectly.
14. flashman said...
rumble: The BOE has specifically targeted credit spreads as opposed to stock prices. The stock price increases are incidental. The BOJ on the other hand once made stock prices a high priority with their QE. There is a growing school of thought amongst economists that the best QE is to directly buy stocks
In a way this illustrates the ludicrous nature of QE. If the BOE, FED, ECB and BOJ bought stocks it would cause an economic boom because companies would be capitalised instead of banks and pensions and savings would rocket. All well and good but when the QE stops the stocks would tumble like a mo fo.
It’s a useful example because the stock-buying version of QE makes it easier to see just how transient the effects of QE will be. The credit spreads version of makes it seem more complicated and prevents people understanding the ramifications
15. stillthinking said...
They did it for the free cash I think.
But on the regulations...How far do the regulations go? I mean, if Barclays still have to list the assets because Protium has a loan secured on them then that is one step away. But if Protium repeated the same step as Barclays, then they would become two loans away, and presumably in the end you can move them so far away that they are no longer listed as a risk for Barclays.
Barclays wouldn't have done this if they thought these assets would increase in value, because that would flatter their results. I am sure they have done this to ultimately to "hide" losses.
Mainly though, banks are capable of creating credit. This move allows Barclays to create 12.6billion and keep it. They have created their own cash. This extra credit immediately and falsely flatters the amount of money they hold.
Comparing the situation before and after, Barclays have the same income(roughly) from these assets as before, but now they also have conjured up 12.6 billion. In other words, the credit creation gone wild which caused all our problems is now being repeated by just a single bank creating artificial separate entities. The money they lent is actually sitting as a deposit with Barclays after all, but the loan is offset by future payments. More money than existed before.
16. stillthinking said...
Let me put it another way, suppose I lent 100 pounds to Mr.Smith to buy a house, but Mr.Smith has lost his job and the house is only worth 50 pounds. Then my loan book looks pretty dicey because I am sitting on 50% expected losses.
Imagine though that I am a bank without reserve capital requirements and capable of creating artificial entities and extending loans. Then I can sell that non-performing loan for 50 pounds i.e. fair value, and extend a loan for the purchase.
Suddenly my loan book looks like 150 due, 100 expected. My expected losses as a percent have been reduced. If I do this many many times then I can reduce my percent of expected losses down to 1%.
But this is ficitional accounting, so Barclays are cooking their books.
17. flashman said...
stillthinking: It doesn't alter Barclays tier 1 capital in any way and they have not created free cash. I think people overplay all this stuff about banks conjuring up magic money. They sold some stuff that does not fit their new risk profile. Protium has a high-risk profile so they bought it. There is no more to it than that. Barclays do think that there is a good chance that the assets will increase in value. They sold them to Protium because they want to draw a line under the past and leave their investors with a clearer picture of their business model and strategy going forward. Like I said earlier, it doesn’t matter to Barclays that the stuff might make Protium rich… it doesn’t fit their new business model
The only way Protium could sell these assets on, is if they paid the loan to Barclays in full. What's wrong with that? It would genuinely have moved away from Barclays with a 100% honest transaction. This is not a new type of transaction. Companies have been set up to buy distressed assets during every crisis. Their record of making money is pretty good so far, so there is no reason to suspect high jinks
Investors are not so thick that they can be tricked by a slight of hand. This is a sensible and transparent transaction
18. flashman said...
It is quite common for a bank to lend money to a company who in turn uses the money to buy a business unit or assets from them. Quite often, the borrowers default on the loan a few years down the line because the loan terms were too expensive. The banks then gets the business unit/assets back intact and keeps the repayments, fees and interest they collected for a few years. Barclays did it a few months ago.
19. timmy t said...
10 years ago, the man on the street would have thought this was just clever bankers doing some clever deal to line the pockets of their shareholders. Now the assumption is that this is clever bankers doing some clever deal because they'll earn an almighty bonus out of it and don't give a sh1t if it goes belly up. I supect reality is it's a bit of both.
20. rumble said...
The accounting equivalent of fine print. Our books are in great shape... until you look in that book over there.
21. stillthinking said...
But they aren't investors, they are former Barclays employees who have put no money down. The whole thing is conjured up purely by Barclays and there is no third party.
Where are the investors in Protium? What meaning does foreclosure to recover assets have when you have made the loan to yourself?
I don't personally agree that the banks ability to create credit is overplayed at all, I think this is a determining aspect of banking and society in general. If they lent money to Protium, and there are no other investors, then the money, like all money, is credit.
Now that loan exists Barclays have presumably have an offsetting credit and loan. They could go further and sell their loan to Protium for example. Or more likely they could make use of the credit to facilitate some other operation.
Either of which, boils down to credit creation without any fresh underlying asset.
22. flashman said...
stillthinking: It is a straight business transaction. Barclays sold something to a third party. The third party paid them for it. The accounts are not any more complicated that that. Protium will not buy the loan and Barclays will not have an offsetting credit and loan. The idea that Barclays would use this deal to leverage up is madness. The whole point of the deal is to deleverage as soon as possible
Do not get hung up on the fact that Barclays loaned them the cash to make the purchase. That does not stop them being a third party. The idea is that they will one day pay off the loan and then they will be a separate entity that is not even linked to Barclays by a loan.
btw: I didn't say that the creation of credit is overplayed. I said that the creation of magic money is overplayed.
23. timmy t said...
Flashman - educate us...
You said "They sold some stuff that does not fit their new risk profile. Protium has a high-risk profile so they bought it."
But Protium borrowed the money from Barclays and used the assets as security. So if the assets are too risky for Barclays risk profile, then why accept them as security? Surely all they are doing is putting another legal entity beween themselves and the underlying asset. If the assets go bad they go bad and Barclays lose - doesn't matter whether they own them or Protium does.
I only started posting on here to see whats happening with house prices - you need a friggin economics degree to keep up now.
24. flashman said...
timmy: I don't think I'm the best person to educate anyone. I struggle just like everyone else to get a handle on things.
To answer your question: "So if the assets are too risky for Barclays risk profile, then why accept them as security?" They already had the assets so there was no extra risk involved in accepting them as security.
For a further explanation of why they did it, see my post @ 8.
Another reason they did it is because investors don't like uncertainty. Now everyone knows exactly how much Barclays will lose if these dodgy assets go belly up (the loan amount). Investors always prefer a bad loss to an unknown loss.
One caveat: This deal had better be honestly intentioned because if Protium go belly up, then their liabilities will theoretically die with them (leaving Barclays in the clear minus the loan). If there is even a hint that Barclays knew the liabilities would far exceed the loan amount, there could be prosecutions
25. timmy t said...
Flash - I don't think my brain is big enough. I don't intend this to become a long boring lecture so don't feel the need to reply but...
I know there was no additional risk in off-loading these assets, but saying that they are getting shot because they don't fit Barclays risk profile implies that by selling them they are reducing their risk - I just don't see how they are.
Re the uncertainty - I don't get this either - what Barclays get back will depend on what happens to the value of the assets - just like it would if they retained them themselves.
Re your post in 8 - I don't believe anyone would make a loan of $12Bn just so they don't have to monitor valuations and justify earnings statements.
I just don't see any way in which Barclays comes out of this in a better position than they would by retaining the assets. If the assets go bad they lose - but they would have anyway. If the assets come good then Barclays get everything they would have less the (no doubt) massive margin that Protium will take in the process.
26. flashman said...
Ok... I'll give it a go:
"saying that they are getting shot because they don't fit Barclays risk profile implies that by selling them they are reducing their risk - I just don't see how they are".
Answer: because they are now limited to only losing the loan amount. Before this transaction they could have theoretically lost more if the asets sunk catastrophically below their current valuation (by more than the loan amount)
"what Barclays get back will depend on what happens to the value of the assets - just like it would if they retained them themselves".
Answer: No matter what happens to the assets, they only get back the loan repayments. If the assets soar in value, Protium gets the benefit. If the assets go belly up, then Protium goes belly up and Barclays don't get any more loan repayments (but they avoid taking a bigger hit than the value of the loan)
"I don't believe anyone would make a loan of $12Bn just so they don't have to monitor valuations and justify earnings statements"
Answer: see above two answers.
I think you might be getting confused by the relationship between Barclays and Protium. They are separate companies.
27. timmy t said...
Thanks Flash - no i'm clear on the company bit, it was the asset valuation bit that was messing with my head!
The sentence in the report "He declined to say what the face value of the securities is and exactly how much of that total Barclays has already written off" is key for me.
I get it now. I'll shut up.
But I reckon those assets ain't worth Jack!
28. shipbuilder said...
It sounds like Barclays are just creating their own 'bad bank' in a way and not really a big deal.
29. iguana said...
Interesting comments, but whenever such a transaction seems 'superfluous' you need to look at the place of belonging of the parties, bet you a pound to a penny, that as well as a convenient transferral of toxic waste, it is also a part of a tax avoidance scheme, hence the asset valuation.