Private Investor: Is Barclays a bargain or a basket case?

I'm in a bit of a quandary, to be honest. I don't know what to do with my Barclays Bank shares. Allow me to share the full shame of this investment decision with you. It's therapeutic, for me at least.

I bought them on 5 October at 660p. In the brief time since then they've dropped 27 per cent. Admittedly, in absolute terms, I'm doing better than the Barclays director who bought 127,000 shares at an average price of 548p last week and is now sitting on a paper loss of about £80,000. The shares, at the time of writing, are below £5, and at three-year lows. Sad, eh?

The problem, of course, is that no one knows how much Barclays (and all their British and international peers, for that matter) will have to write down as a result of the credit crunch. I suspect that not even Barclays knows – and, indeed, it is impossible to know.

After all, the credit crunch is a process rather than an event, and it is not over. Thus even if the banks "owned up" to the losses they're facing now, you cannot be at all sure that things won't be in an even worse state in, say, six months' time. This is because the credit squeeze tends to feed on itself. Defaults in the US sub-prime market go up and the banks are forced to make more provisions and are even less willing to lend to each other.

This credit squeeze then trickles down to the consumer end of things, where the poor, benighted sub-prime borrower attempts to refix his or her mortgage and finds the door slammed in their face. Then they default, the banks have to write off even more bad debts, lend even less to each other, see credit tightened to sub-prime borrowers even more... and so the vicious circle goes on. Who knows when all that is going to end?

The banks are in a very difficult position. If they say they don't know how much the losses will be – because no one knows how many turns of this vicious circle there will be before things stabilise – then they're damned for being clueless. If, on the other hand, they come up with some large but "final" numbers to satisfy the doomsters, then they're at risk of not telling the full truth – and will be duly damned for not being open enough.

I'm sure Donald Rumsfeld had a category for this sort of problem – unknown unknown, perhaps – but whatever the philosophical aspects of it, it is certainly doing the markets and investors like me no good at all. The best guess seems to have emerged in a broker's note last week that has gained a certain amount of notoriety, as it has prompted a fair amount of panicky selling. On the back of huge write-downs in the US – Citigroup on $11bn (£5.2m), Merrill Lynch on $8bn – Antony Broadbent of Sanford Bernstein has done some number-crunching: "Using the aggregate results from US and European peers to create a realistic downside write-down and revenue reduction scenario for Barclays and Royal Bank of Scotland, we estimate a potential value reduction of £4.6bn and £4bn."

However, he kept his "outperform" stance on both banks. Thus, even with the two banks losing a combined £27.6bn of market value so far this year, (and even more since he put this note out), he said that the current level of discounting was excessive. "We are left attempting to piece together various, disparate clues as to what is really going on." His target price for Barclays is 740p – down from 810p but some way ahead of where we are now.

In a "realistic downside scenario", Barclays could write down £1.6bn and RBS could write down £500m, Mr Broadbent tells us.

So what to do?

I'm paralysed by indecision. I'm unwilling to crystallise a loss, and events don't seem so dreadful yet that it would justify me doing so. When I bought and sold Northern Rock I did so in the certain knowledge that, while I had bought the Rock at comparatively cheap levels – 660p – at the time I was selling at the best price I could ever get – 450p – and there was really no alternative. Barclays is certainly not in that category.

Logically, perhaps, I ought to be brave and buy some more at what may turn out to be a ludicrously cheap rate. That will only happen, though, if the credit squeeze doesn't intensify too much, which I'm doubtful about. I think I'll reduce my Barclays holding – the coward's way out.

I ought also to mention a much happier investment – Rio Tinto. I've been a long-term fan, and so, it seems, is its fellow giant BHP. The bid for the shares has sent them comfortably above the £50 mark, which I never thought I'd see. Investing is full of surprises – and not all bad ones.

s.ogrady@independent.co.uk

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Voices
On the last day of campaigning before the polling booths open, the SNP leader has written to voters in a final attempt to convince them to vote for independence
scotland decidesIs a huge gamble on oil keeping the First Minister up at night?
Arts and Entertainment
Rosalind Buckland, the inspiration for Cider with Rosie died this week
booksBut what is it like to be the person who inspires a classic work of art?
Life and Style
techApple has just launched its latest mobile operating software – so what should you do first?
News
A male driver reverses his Vauxhall Astra from a tow truck
newsThe 'extremely dangerous' attempt to avoid being impounded has been heavily criticised
PROMOTED VIDEO
Arts and Entertainment
Lionel Messi in action for Barcelona
filmSo what makes the little man tick?
Arts and Entertainment
tvReview: An undercooked end (spoiler alert)
News
i100
Arts and Entertainment
Pharrell dismissed the controversy surrounding
musicThe singer said 'the last thing I want to do is degrade'
Sport
Cesc Fabregas celebrates his first Chelsea goal
footballChelsea vs Schalke match report
Arts and Entertainment
Toby Jones (left) and Mackenzie Crook in BBC4’s new comedy The Detectorists
tvMackenzie Crook's 'Detectorists' makes the hobby look 'dysfunctional', they say
Life and Style
fashion

Olympic diver has made his modelling debut for Adidas

News
i100
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Trainee Recruitment Consultant Birmingham

    £18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

    Trainee Recruitment Consultant - Birmingham - Real Staffing

    £18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

    Recruitment Consultant - Soho - IT, Pharma, Public Sector

    £20000 - £25000 per annum + OTE £35,000 first year: SThree: The SThree group i...

    Sales Executive

    £20 - 24k (Uncapped Commission - £35k Year 1 OTE): Guru Careers: We are seekin...

    Day In a Page

    Mystery of the Ground Zero wedding photo

    A shot in the dark

    Mystery of the wedding photo from Ground Zero
    His life, the universe and everything

    His life, the universe and everything

    New biography sheds light on comic genius of Douglas Adams
    Save us from small screen superheroes

    Save us from small screen superheroes

    Shows like Agents of S.H.I.E.L.D are little more than marketing tools
    Reach for the skies

    Reach for the skies

    From pools to football pitches, rooftop living is looking up
    These are the 12 best hotel spas in the UK

    12 best hotel spas in the UK

    Some hotels go all out on facilities; others stand out for the sheer quality of treatments
    These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

    Widespread fear of Isis is producing strange bedfellows

    Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
    Topshop goes part Athena poster, part last spring Prada

    Topshop goes part Athena poster, part last spring Prada

    Shoppers don't come to Topshop for the unique
    How to make a Lego masterpiece

    How to make a Lego masterpiece

    Toy breaks out of the nursery and heads for the gallery
    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
    Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

    Ian Paisley’s decision to make peace with his IRA enemies

    His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    Exclusive extract from Janis Winehouse's poignant new memoir
    Is this the role to win Cumberbatch an Oscar?

    Is this the role to win Cumberbatch an Oscar?

    The Imitation Game, film review
    England and Roy Hodgson take a joint step towards redemption in Basel

    England and Hodgson take a joint step towards redemption

    Welbeck double puts England on the road to Euro 2016
    Relatives fight over Vivian Maier’s rare photos

    Relatives fight over Vivian Maier’s rare photos

    Pictures removed from public view as courts decide ownership
    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    Donatella Versace at New York Fashion Week