Jeremy Warner: Barclays mulls £50bn of asset protection


Outlook Lloyds Banking Group is said to be stamping its feet in rage over the penalty terms of participation in the Government's Asset Protection Scheme. Regrettably for the chief executive, Eric Daniels, he has little option but to bend over and take what ever punishment the civil servants choose to impose. There is no point in him bleating that the Government owes him one for helping out with HBOS. He bought into a pig in a poke when he merged with the beleaguered mortgage bank, and he now has to live with the all too brutal consequences.

But what of Barclays, which beyond liquidity support has so far managed to avoid taking any of the UK Government's money? John Varley, the chief executive, is like the cat with nine lives. Were it not for the hubris of Sir Fred Goodwin, it would have been Barclays, and not Royal Bank of Scotland, which ended up with the toxic assets of ABN Amro.

Lehman Brothers proved an equally lucky escape. Barclays wanted to buy the whole thing when it was teetering on the brink last September, and was only finally deterred when the US authorities refused to provide the required guarantee of liabilities through to completion of the deal. Either of these acquisitions, had they been successful, would have holed Barclays below the water line.

Napoleon said the quality he most valued in his generals was luck, and Mr Varley seems to have it in spades. Yet though luck may have enabled Barclays to escape outright wipe-out, the share price continues to reflect deeply rooted doubts over the shape of the balance sheet. There's a credibility problem which Barclays has yet to overcome.

The addition of Simon Fraser to the board as a non-executive director ought to help. Mr Fraser is a former chief investment officer at Fidelity. He'll understand the concerns shareholders have about the way Barclays has managed its way through the banking crisis better than any.

On the asset protection scheme, Mr Varley is insistent that if he uses it at all, he'll pay in cash. Is that really credible? Three portfolios of assets with a face value of a couple of billion each have already been put forward as a way of testing the waters. If the proposition stacks up commercially, then Barclays plans to insure a total of around £40bn to £50bn of assets. This is much lower than both RBS and Lloyds, but then Barclays claims that the quality of its loan book is much better. Is this comparatively small amount of insurance enough? And even if it is, would Barclays need to raise more capital to fund it?

Using the RBS template, insuring around £50bn of assets would cost Barclays around £8bn in impairment charges and premiums, though it is possible these wouldn't have to be accounted for all at the same time. That kind of a hit to the balance sheet might in itself require Barclays to raise more capital, except that on the other side of the ledger, derisking the balance sheet in this way may allow a commensurate reduction in required capital. In any case, there can be no possibility of Barclays raising more capital until the end of June. The "non dilution" clause that was given to Middle Eastern investors during the last recapitalisation virtually rules it out until then.

What's more, the markets may think £50bn insufficient. Barclays' loan book may or may not be better quality than rivals, but however good it is, its sheer size would seem to demand something bigger.

Yet there is one thing Mr Varley has got going for him. The purpose of the insurance scheme is to free up capital so that banks can have the confidence to begin lending again. For the Government, the scheme achieves a political as well as a public interest purpose.

Yes, it might help mitigate the worst consequences of the economic correction, but for Gordon Brown there is also the hope that it will generate sufficient green shoots of economic recovery by this time next year to get him re-elected.

Labour's electoral prospects are no part of Barclays' concern. Having not taken any of the Government's money thus far, Barclays is under no obligation to pursue the public policy objective of renewed balance sheet expansion, nor is its own commercial interest necessarily served by it. By avoiding the Government's shilling, Barclays has maintained its commercial freedom. Round at Lloyds, Mr Daniels must be rueing the day he gave it up by agreeing to buy HBOS. If participation in the scheme comes with conditions on lending and pay, Barclays may not be prepared to play ball.

The decision comes down to whether Barclays is better off out than in. This in turn depends on quite how much worse Barclays thinks the banking and economic crisis is going to get. Stephen Hester, chief executive of RBS, has called the asset protection scheme "catastrophe insurance". Mr Varley may decide he doesn't need it. Either way, he's going to require more of his fabled luck to see him through. Let the chips fall as they may.

Start your day with The Independent, sign up for daily news emails
Sport
sportSo, how closely were you paying attention during 2014?
Arts and Entertainment
Dennis speaks to his French teacher
tvThe Boy in the Dress, TV review
News
One father who couldn't get One Direction tickets for his daughters phoned in a fake bomb threat and served eight months in a federal prison
people... (and one very unlucky giraffe)
Arts and Entertainment
Joel Edgerton, John Turturro and Christian Bale in Exodus: Gods and Kings
film
PROMOTED VIDEO
Arts and Entertainment
Brendan O'Carroll as Agnes Brown in the 2014 Mrs Brown's Boys Christmas special
tvCould Mrs Brown's Boys have taken lead for second year?
News
i100
Arts and Entertainment
The Plaza Theatre in Atlanta, Georgia was one of the 300 US cinemas screening
filmTim Walker settles down to watch the controversial gross-out satire
Sport
Alexis Sanchez missed a penalty before scoring the opening goal with a header at the back post
footballArsenal vs QPR match report
News
Members and supporters of the lesbian, gay, bisexual, transgender (LGBT) community walk with a rainbow flag during a rally in July
news
News
i100
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Arts and Entertainment
Amy Adams and Christoph Waltz in Tim Burton's Big Eyes
film reviewThis is Tim Burton’s most intimate and subtle film for a decade
Arts and Entertainment
Jack O'Connell stars as Louis Zamperini in Angelina Jolie's Unbroken
film review... even if Jack O'Connell is excellent
Arts and Entertainment
Madonna is not in Twitter's good books after describing her album leak as 'artistic rape and terrorism'
music14 more 'Rebel Heart' tracks leaked including Pharrell Williams collaboration
News
i100
Sport
Rooney celebrates with striker-partner Radamel Falcao after the pair combine to put United ahead
footballManchester United vs Newcastle match report
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.

iJobs Job Widget
iJobs Money & Business

Selby Jennings: Quantitative Research | Equity | New York

Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

Selby Jennings: SVP Model Validation

Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

The Jenrick Group: Night Shift Operations Manager

£43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

Day In a Page

A Christmas without hope: Fears grow in Gaza that the conflict with Israel will soon reignite

Christmas without hope

Gaza fears grow that conflict with Israel will soon reignite
After 150 years, you can finally visit the grisliest museum in the country

The 'Black Museum'

After 150 years, you can finally visit Britain's grisliest museum
No ho-ho-hos with Nick Frost's badass Santa

No ho-ho-hos with Nick Frost's badass Santa

Doctor Who Christmas Special TV review
Chilly Christmas: Swimmers take festive dip for charity

Chilly Christmas

Swimmers dive into freezing British waters for charity
Veterans' hostel 'overwhelmed by kindness' for festive dinner

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

Yazidi girls killing themselves to escape rape and imprisonment
Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

Ed Balls interview

'If I think about the deficit when I'm playing the piano, it all goes wrong'
He's behind you, dude!

US stars in UK panto

From David Hasselhoff to Jerry Hall
Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

Grace Dent's Christmas Quiz

What are you – a festive curmudgeon or top of the tree?
Nasa planning to build cloud cities in airships above Venus

Nasa planning to build cloud cities in airships above Venus

Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all