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.

Sport
footballLIVE City face Stoke, while Warnock returns to Palace dugout
Life and Style
3D printed bump keys can access almost any lock
gadgets + techSoftware needs photo of lock and not much more
News
Paul McCartney backs the
people
News
i100
PROMOTED VIDEO
Arts and Entertainment
Inside the gallery at Frederick Bremer School in Walthamstow
tvSimon Usborne goes behind the scenes to watch the latest series
Life and Style
Silvia says of her famous creation: 'I never stopped wearing it. Because I like to wear things when they are off the radar'
fashionThe fashion house celebrated fifteen years of the punchy pouch with a weighty tome
Arts and Entertainment
Gregg Wallace in Summer's Supermarket Secrets
tv All of this year's 15 contestants have now been named
News
i100Steve Carell selling chicken, Tina Fey selling saving accounts and Steve Colbert selling, um...
Life and Style
A picture taken on January 12, 2011 shows sex shops at the Paris district of Pigalle.
newsThe industry's trade body issued the moratorium on Friday
Arts and Entertainment
Could we see Iain back in the Bake Off tent next week?
tv Contestant teased Newsnight viewers on potential reappearance
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
News
i100
News
The slice of Prince Charles and Princess Diana's wedding cake and the original box from 29 July 1981
newsPiece of Charles and Diana's wedding cake sold at auction in US
Voices
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
Sport
Mario Balotelli pictured in his Liverpool shirt for the first time
football
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

Network Engineer (CCNP, CCNA, Linux, OSPF, BGP, Multicast, WAN)

£35000 per annum: Harrington Starr: Network Engineer (CCNP, CCNA, Linux, OSPF,...

DevOps Engineer (Systems Administration, Linux, Shell, Bash)

£50000 per annum: Harrington Starr: DevOps Engineer (Systems Administration, L...

Data Scientist (SQL, PHP, RSPSS, CPLEX, SARS, AI) - London

£60000 - £70000 per annum: Harrington Starr: A prestigious leading professiona...

Financial Technical Consultant (C++, C#, Finance, MSc, PhD)

£50000 per annum: Harrington Starr: Financial Technical Consultant (C++, C#, F...

Day In a Page

Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

The phoney war is over

Russian troops and armour pour into Ukraine
Potatoes could be off the menu as crop pests threaten UK

Potatoes could be off the menu as crop pests threaten UK

The world’s entire food system is under attack - and Britain is most at risk, according to a new study
Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
From Mozart to Orson Welles: Creative geniuses who peaked too soon

Creative geniuses who peaked too soon

After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
Caught in the crossfire of a cyber Cold War

Caught in the crossfire of a cyber Cold War

Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

Salomé: A head for seduction

Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

British Library celebrates all things Gothic

Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

Is the Hard Rock Café worth fighting for?

The restaurant chain's owners are currently embroiled in a bitter legal dispute
Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

In search of Caribbean soul food

Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
11 best face powders

11 best face powders

Sweep away shiny skin with our pick of the best pressed and loose powder bases
England vs Norway: Roy Hodgson's hands tied by exploding top flight

Roy Hodgson's hands tied by exploding top flight

Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

Di Maria and Ronaldo: A tale of two Manchester United No 7s

They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

Robert Fisk: No victory for Israel despite weeks of devastation

Palestinians have won: they are still in Gaza, and Hamas is still there
Mary Beard writes character reference for Twitter troll who called her a 'slut'

Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

The Cambridge University classicist even wrote the student a character reference
America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

America’s new apartheid

Prosperous white districts are choosing to break away from black cities and go it alone