Investment Markets » Banking and Finance
Rumblings Over Barclays Borrowings
Barclays bosses came out fighting amid rumours of cash flow problems.
What's going on at Barclays? For a bank that urgently needs to give its share price a boost if it wants to get back on terms with RBS in the takeover battle for Dutch bank ABN Amro, Barclays has been strangely accident-prone of late.
First there was the embarrassing departure of Edward Cahill, who quit after his specialist area – complex, highly geared debt vehicles know as SIV-lites – crashed and burned as the credit market dried up. Then came the bizarre case of £1.6bn emergency borrowing from the Bank of England – blamed on a technical glitch in a back-office clearing system, but a PR mess – followed by rumours that Barclays was about to issue a profit warning. At the same time, news broke that Barclays was pumping £700m into restructuring a SIV-lite vehicle it created for hedge fund Cairn Capital.
None of this means that Barclays is facing a solvency problem, but the bank does appear to have lost its compass. BarCap, the investment banking division, made £1.6bn profit in the first half of this year, more than its personal and business banking put together. That suggests that Barclays has become obsessed with chasing profits by gambling in the global casino. Now that the casino is grinding to a halt, Barclay's growth will inevitably slow down.
But not if BarCap boss Bob diamond has anything to do with it. In a combative interview, Diamond made clear his frustration with the Bank of England on two counts; first, for the lack of clarity over the emergency borrowing which let the market think Barclays was in trouble, and second, for refusing to intervene in the credit markets to boost short term liquidity.
It's easy to see why the banks are jittery. The London interbank offering rate (Libor) for three month sterling (the cost to UK banks of borrowing from each other) reached 6.74%, which is the highest rate since the Long-Term Capital Management hedge fund crash of 1998, and the widening gap between the Bank of England base rate and the Libor is a sure sign that liquidity is drying up.
The banks worry that if the central bank doesn't inject capital into the money markets, then the credit crunch will spiral into the wider economy. For it's part, the Bank of England isn't keen on bailing out excessive risk takers; indeed Mervyn King specifically warned City grandees back in June against taking on too much debt.
Many banks will have ignored King's warnings, and they are now paying the price. Too bad.
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