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Ballox To Barclays - Sells $12.3bn Of Toxic Loans To Former Employees

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There was a thread on it yesterday.

$40m a year for 10 years plus he gets to keep any rise in asset values.



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Barclays' opaque asset deal - The bank has sold $12.3bn of toxic loans to some of its own former employees – and lent them the money to buy it

This ties very neatly into the discussions about mark to market versus accrual accounting and loan impairment timing that took place on the thread about banks selling propoerties into self sponsored SPVs.

Transactions like this serve no economic purpose other than changing the way that income is recognised and reported and ought to be collpased by the FSA and put back onto the sponsoring banks' books.

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Barclays' dodgy assets sale shows that banks are still in deep trouble


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, get your first three issues free here), 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'.

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.

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.

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And it isn't accountancy fraud.

Bonus all round I think.

FIN 46R requires accountants to see through the structure and look at economic purpose and true economic risk. If all of the assets default, the SPV won't be able to repay the loan so Barclays are in the same position before and after the transaction even though they have massaged the timing of the reporting of losses.

I do not believe that these types of transactions pass the non-consolidation tests.

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