Barclays troubles stem from how it avoided crisis
All the acreages of comment about the fraud charges against four Barclays executives, including its former chief executive John Varley, have missed a key point: Barclays didn’t go to its Qatari and Abu Dhabi sources to raise money to keep its independence as widely suggested. It raised it to buy Lehman Brothers, which Mr Varley and its flamboyant American president, Bob Diamond (not among those charged), pursued right up to the final hours. When Lehman dramatically filed for bankruptcy on September 15, 2008, Barclays no longer needed the funds but they remained on the table. A month later, when the UK authorities raised the capital requirements of all British banks, Barclays used them to avoid state control. When I was working on my book, Black Horse Ride: The Inside Story of Lloyds
and the Financial Crisis, I came across a lot of information about that particular fund-raising operation, which wasn’t all that controversial at the time. It is only since the dealmaker Amanda Staveley highlighted the side deals and terms surrounding it, and then the dramatic charges last week, that it is seen in a very different light.
It was of course known that Barclays was interested in rescuing Lehman Brothers, and when Bank of America dropped out, it actually believed it had done the deal. It had all the approvals and support it needed from the US authorities and was only thwarted at the last moment when the officials at Financial Services Authority (FSA) refused to support it. The US treasury secretary Hank Paulson has since described how, just hours before Lehman failed, he called the chancellor Alistair Darling to ask him to overrule them – and was furious when he refused.
According to Paulson, Darling told him, “We don’t want to import your cancer into Britain.” Darling gave me a slightly different version of the conversation, but remembers the call. He also described how Varley came to see him on that fateful Sunday afternoon. “He was candid and wanted to know if the British government would give its blessing to this deal,” he said. Mr Darling of course didn’t. When that message was passed back to Tim Geithner, the chairman of the New York Fed, he went into Mr Paulson’s office to tell him the Barclays deal was definitely dead. According to Mr Geithner’s own account he told Mr Paulson. “We’ve no Plan B,” he said. Lehman collapsed that night.
What we didn’t know at the time, but do now, is that while Mr Varley and Mr Diamond were frantically negotiating with the Americans, the Barclays executive Roger Jenkins, who was among those charged last week, and Ms Staveley were negotiating with Sheikh Hamad bin Jassim bin Jabr Al Thani (or HBJ), to raise the extra capital they needed to complete the Lehman deal. A month later the banking system went into meltdown and all the British banks were summoned to the Treasury where three of them – Lloyds, HBOS and RBS – were required to accept £37 billion (then about Dh237bn) of state capital between them. The UK government ended up owning 43 per cent of Lloyds/HBOS and more than 80 per cent of RBS. To the astonishment of the other bank chief executives, Barclays, alone of the Big Four clearing banks, escaped the stigma of state control by raising more than £7bn from private sources. How did it do that when the markets were closed and no bank could raise a cent in new capital? Now we know – it already had the money lined up. It just used it for a different purpose. Mr Varley and Mr Diamond were hugely disappointed to lose the Lehman deal but they made the most of it a few weeks later by buying the assets they wanted, leaving the liabilities behind – not the deal they originally wanted but actually, as things turned out, a much, much better one. Barclays originally thought there was a net deficit in Lehman of about US$10bn. A study in 2013 estimated that Lehman was actually “in the hole” for at least $100bn, and perhaps $200bn – which would have brought down not just Barclays but the whole British economy.
So it was a lucky escape for the British government and for HBJ, who would have lost all his money. But it is not so lucky for Mr Varley, Mr Jenkins and the other two former executives who now face charges of fraud over the terms of the deal struck with the Qataris. They will literally be in the dock on July 3 for a case that will probably run for years and which could, if they are found guilty, result in them doing up to 10 years in jail.
The irony is that the charges relate, not to what they did to precipitate the financial crisis – but what they did to avoid it. I think we’d all feel better if the real culprits, notably the former chief of RBS, Fred Goodwin, were in the dock instead.