Jeremy Warner's Outlook: Back to the future as Barclays eyes Cazenove

Housing/equities
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The Independent Online

What goes around comes around. Seven years ago, Barclays determined it couldn't hack it in the cut-throat world of integrated investment banking and sold its equities and corporate finance businesses to CSFB, where they have since fared rather well. With Cazenove up for sale, the story is that Barclays is willing to have another go. It was impossible to get anyone who would know to speak about it yesterday, which in my book is as close to confirmation as we are ever likely to get. What's happened to bring about this change of mind?

What goes around comes around. Seven years ago, Barclays determined it couldn't hack it in the cut-throat world of integrated investment banking and sold its equities and corporate finance businesses to CSFB, where they have since fared rather well. With Cazenove up for sale, the story is that Barclays is willing to have another go. It was impossible to get anyone who would know to speak about it yesterday, which in my book is as close to confirmation as we are ever likely to get. What's happened to bring about this change of mind?

The sale back in 1997 of what was then known as BZW was a loss of nerve unworthy of one of the biggest names in British banking, and even at the time there were those on the Barclays board, notably the present chairman, Sir Peter Middleton, who thought it a mistake.

How different the City might have looked if Barclays had stuck to the original script and soldiered on. With the benefit of hindsight, it was madness to break up such an expensively and painstakingly assembled collection of top drawer City assets.

BZW was arguably the best chance the City had post-Big Bang of developing a British-owned alternative to the bulge bracket investment banks of Wall Street. Barclays necessarily had to keep a part of the old investment bank, since renamed Barclays Capital. This now houses the group's core treasury functions, including foreign exchange and debt trading.

Yet without equity distribution and corporate finance, Barclays Capital looks like a limbless torso, a pale shadow of Morgan Stanley and Goldman Sachs, plugged in as they are to all aspects of the world's capital markets, from equities, to debt, and from derivatives to corporate and government advice. Securitisation has blurred the divisions between these different functions, making them inter-related as never before.

The shambolic nature of the BZW sale lit a fuse that was ultimately to cost the then chief executive Martin Taylor his job. Today, there's a new man in charge, Matt Barrett, with an entirely different perspective. A jovial, no-nonsense Canadian, Mr Barrett believes, I think rightly, in the necessity of Barclays being a decent sized player in the investment banking world. You only have to look at the returns made by Goldman Sachs and others to see why. Get investment banking right, and the rewards are spectacular, regardless of the state of the economic cycle.

Old concerns about whether it is possible to combine the very different cultures and pay structures of investment and retail banking have largely disappeared. Commercial banking, which is one half of Barclays, and investment banking are in any case becoming one and the same thing. So what to make of Cazenove? On the face of it, they make an excellent fit, even if Cazenove is too domestically orientated to be the bride of absolute perfection.

Cazenove is strong in equities and corporate finance, at least in so far as the British market is concerned, while Barclays Capital is big in debt markets, a key weakness for Cazenove during the stock market meltdown of the last four years.

For Cazenove's staff, Barclays will also look a much more appealing home than the alternatives. The uniqueness of Cazenove's brand and independence would be lost in one of the bulge bracket firms of Wall Street, where duplication of functions would in any case lead to a bloodbath of job losses.

The idea of the deal comes from Bob Diamond, the head of Barclays Capital. He's naturally keen to expand his own fiefdom. Yet I imagine it also finds favour with both Mr Barrett and Sir Peter. Harder to predict is John Varley, the retail banking doyen who shortly steps up to the plate as Barclays' chief executive. Mr Diamond was a contender for the job, and there may still be some rivalry there. Price could also prove problematic. Yet this is a deal that deserves to happen. Let's hope the two sides can agree.

Housing/equities

Nobody in their right mind could think the domestic property market still offers value for money as an investment. Well, that would be my view anyway, but it's plainly not one shared by the tens of thousands of aspiring landlords still dashing lemming-like into the buy-to-let market. Those who can afford it and desperately need a place to live have no option but to pay today's exorbitant prices. The curiosity is that so many of those who already own their own homes are still queuing down the street for second and third properties that can be bought to let.

Unsustainable though it might seem, the phenomenon is not wholly without logic. Potential first-time buyers, progressively forced out of the market by soaring prices, have to live somewhere, and therefore find themselves renting rather than buying. Lenders are today doling out more buy-to-let mortgages than those to first-time buyers. Britain has one of the highest levels of owner occupation anywhere in the developed world - more than 70 per cent of households own their own properties - yet if present trends continue we could quite rapidly shrink closer to the Continental norm, which is about 60 per cent.

It is not clear what that would do to prices or rents, but it is hard to think it good for either of them. It would also amount to a quite dramatic socio-economic shift, with the population split down the middle between the haves, who in the main would be from older generations, and the have-nots. That cannot be healthy.

Many of those who have entered the buy-to-let market have done so as a substitute or supplement to a pension. Disillusionment with traditional forms of stock market saving has never been greater. Set against still bombed out and high-risk equities, housing holds out the promise of outstanding rates of return with all the reassurance of a physical asset. Rental income may do no more than cover mortgage servicing and upkeep costs, but as long as the value keeps appreciating housing is bound to seem a sounder bet than the stock market.

It is often said that you know the top of a bull market when the taxi driver tells you which shares you ought to be buying. The same applies to buy-to-let.

I was astonished to see an interview on the TV news the other night with a woman in her mid-twenties who had no home of her own, yet was buying a flat in a new development so as to rent it out. It was her pension she said. No doubt she understands the risks and has worked out the economics of her transaction, but she is of a generation that has only seen property prices rise, and therefore finds it difficult to contemplate a time when they might fall. She may be lucky, but the reality is that as a late comer to the dying days of a speculative housing boom, she would be better off simply ploughing her excess earnings into a traditional pension.

The scandals of the long-term savings industry have encouraged people to think it better to take charge of their own financial future than entrust it to a life assurer. In itself, this can be no bad thing. Yet to shove your money into the investment fashion of the moment nearly always spells disaster. Long term, housing is plainly a sell, if only because so many of us now regard it as our pension. Eventually there will be a veritable tsunami of property coming onto the market as baby boomers all at the same time attempt to cash in their property millions. On present demographic trends, the best policy would be to sell houses and buy granny flats.

But even on a short term perspective, the present buy-to-let phenomenon must surely be past its high water mark. Rising interest rates damages the economics of buy-to-let, making it progressively harder to cover mortgage costs out of rental income. If rising interest rates induce the expectation of falling property prices, we might also see a flood of buy-to-let properties coming on to the market. Forget property: the pendulum is about to swing again and although it will be a long time before equities once more show the soaraway rates of return of the 1990s, they look a better long-term bet than overpriced housing.

jeremy.warner@independent.co.uk

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