Jeremy Warner: Barclays pays high price for avoiding government money

Outlook Barclays is paying a heavy price to save BobDiamond's multimillionpound bonus. By shunning the UK Government's recapitalisation programme for British high street banks, and instead raising the required capital privately, Barclays hopes to avoid the commercial, dividend and pay constraints being imposed on others by the UK authorities. Yet whether this supposed freedom outweighs the much heavier costs of raising capital from the Arabs is a moot point.

The proposals have rightly gone down like a lead balloon in the City, where there is widespread complaint about dilution, lack of pre-emption rights, high fees and apparently favourable terms for the potentates of the Middle East. Barclays' apparent preference for the unaccountable sheikhs over the UK taxpayer is explained only by the perhaps naive belief that divide-and-rule will enable the board to treat the sovereign wealth funds as essentially passive shareholders who, unlike the UK government, won't meddle in its affairs.

Whether that will in practice be true is anyone's guess, but certainly Barclays is giving away an awful lot of shareholder value in securing this source of capital. Far more, on the face of it, than would have occurred had it gone with the UK government a couple of weeks back. According to one estimate doing the rounds in the City yesterday, Barclays is giving away some £3bn of value to secure its £5.8bn of Arab money.

Nobody would have cared too much if pre-emption rights had been in place to enable shareholders to claw this giveaway back, but Barclays says that the need for speed means the long-winded rights issue process had to be by-passed. As far as I can see, this is rubbish. Why couldn't the Middle Eastern investors simply have underwritten the £7.5bn capital raising, rather than be gifted the greater part of it? The biggest bit of the giveaway is in the warrants attached to the issue of reserve capital instruments. These are basically just free shares on which the Middle Eastern investors cannot lose money. On conventional valuation models, they are worth a small fortune. At 14 per cent, rising to Libor plus 13 per cent after 2019, Abu Dhabi and Qatar are also getting a higher rate of interest than either the UK Government or Warren Buffett on the preference stock they are being issued with for bailing out the banks. The wealth funds also get a 2 per cent advisory fee.

The separate convertible paper is meanwhile issued at a discount of 22.5 per cent and carries a fee of 4 per cent. Then finally there areseparate fees of £66m paid to Qatar Holdings. That's presumably where Ms Fixit, Amanda Staveley, adviser to Abu Dhabi's Sheikh Mansour Bin Zayed Al Nahyan, will be drawing her stipend for the foresight she showed in whooping it up with the Arabs at Ascot. Everyone, it seems, is getting a cut apart from the poor, miserable Barclays shareholder.

Barclays was cheered for its bravery in turning down the UK Government's money, but it is not clear shareholders have done well out of the decision. Barclays wanted to avoid the stigma of a UK taxpayer-funded bailout, but the terms from overseas governments seem even harsher. The board has allowed pride to get in the way of sound judgement.