David Prosser: Did Barclays' own executives see the bank coming?

Outlook Two years ago, when Royal Bank of Scotland contemplated a future in which it would be interminably dragged down by horrible losses on toxic sub-prime loans, it decided the humiliation and expense of asking the Government to insure it against such setbacks, via the asset-protection scheme, was the lesser of two evil alternatives. But this unsophisticated – and, worse, state-backed – solution was never going to be for Barclays. It came up with a much more cunning solution: lending a group of senior staff $12.6bn to take $12.3bn of potentially loss-making loans off the bank's hands.

On the face of it, Protium, as the former Barclays staff christened their new venture, has served its purpose, shielding the bank's balance sheet from the worst of its loans (and keeping the staff in question, who had been talking of setting out on their own, sweet). Still, the thing about being just a little too clever by half is that it tends to catch up with you. So it is proving at Barclays.

For one thing, under the latest rules agreed in Basel, Barclays was faced with setting a great deal more capital aside against the loan to Protium than the bank had ever envisaged. For another, those assets are turning out to be much less toxic than Barclays feared – as it turns out, at least so far, the bank would not have been forced to make huge write-downs after all.

The third problem with the Protium arrangement is that from the moment Barclays dreamt it up, cynics began sniping. After all, during the credit crisis, the world learnt a thing or two about the banks' off-balance-sheet assets. The last thing people wanted to see in this bright new era of transparency was a return to what looked like a similar arrangement.

The upshot is that less than two years into what was originally planned as a 10-year project, Barclays is calling time on the venture and taking its loans back.

At a cost, mind you – it will pay the managers of Protium $83m to liquidate the scheme so far ahead of schedule. It's not a bad little windfall to share at the end of just 18 months of work, particularly since the 80 or so staff at the firm have already had $40m worth of management fees from Barclays.

Times have changed, the bank says, and what worked two years ago is no longer so appropriate. Maybe, but Protium has always looked to be a rather too cosy arrangement for both the bank and its former staff – some of whom, presumably, played a role in saddling Barclays with the loans in the first place. This U-turn does nothing to change that view.

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