Bar­clays trou­bles stem from how it avoided cri­sis

The National - News - Business - - Front Page - Ivan Fal­lon

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.

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