Barclays - The accounting games go on and on.

simytrader

Seriously, how can we trust anything these days.

www. telegraph.co.uk/finance/newsbysector/banksandfinance/6203128/Barclays-Protium-Finance-deal-will-release-capital-to-grow-BarCap.html

This is a very cunning move by Barclays, although it sounds to me as though Barclays is still carrying the default risk on the asset via its $12.3bn loan to Protium.


Let's just think about this for a minute. First question I would ask is, what was the basis of the market to market calculation? Is it over inflated? Are these assets facing further writedowns possibly? Well, as Barclays have stated they will not be making a loss on the sale, my guess is they must be overinflated.


Why the cynicism? Well, Barclays is obviously very concerned about how these asset are going to perform otherwise it wouldn't want to get them off it's balance sheet. It's got $12.3bn in troubled assets which it knows are going to have to be marked down further. What can it do? I know sell them to an offshore company and lend them the funds to buy them. That way they can record $12.3bn as a performing loan and will not have to write it down unless Protium defaults.


Why was Portium setup in the Cayman Islands? Is it because there is no statutory requirement for the filing of financial information with any government body? or the fact that companies do not have to apply GAAP accounting principles?

So what does this mean? Well, I would love to know the full terms of the loan agreement to Protium. What interest rate is Barclays charging, is it on commercial terms? The fact is, no other bank would finance 100% of the purchase of £12.3bn troubled assets. Therefore, the rate should be astronomical to reflect Protiums default risk. Guess what - Barclays are funding this at 2.75% over Libor! Talk about favourable terms!!!!


I think the rate charged by Barclays has been carefully calculated so that the income generated on say 50% of the troubled assets is sufficient to meet the $400 million interest cost of Protiums loan. This way Protium can writedown the loans on its balance sheet and Barclays can differ any writedowns on it's own balance sheet for at least 10 years.

The hope is that these assets will become performing again within the 10 years, if not they have a problem.


Is this creative accounting or a return to off-balance sheet shenanigans? Is this legal? I thought the FSA said no more games?

Sir_Humphrey

Isn't this just what the Japanese banks did the early 1990s? Hiding the bad assets.

simytrader

Yes! and I thought this government and FSA said they would not let it happen!!!

Thrugelmir

The Telegrapgh article is self explanatory.

“Ostensibly the deal could look like the accounting alchemy of the bad old days. But the assets are still on the balance sheet, and are still liable to Barclays – they’ve just freed up some cash for growth. It’s less sinister that it seems.”

The liability of Barclays’ structured finance portfolio has long been the subject of speculation. Analysts pointed out that while the volatility of the assets is removed from Barclays’ balance sheet, the bank’s regulatory capital will not be changed by the deal in the short term.
However, as the loan is gradually repaid and the liability reduced, more regulatory capital will be freed up.
One analyst said: “In an ideal world, Barclays would like to simply dump all these toxic assets. But it’s done the next best thing, which is to get them into a manageable position where the risk is removed and money is coming it.”

Seems straightforward and logical. If this is the worst toxic debt on Barclays books then £7.5 billion in the current economic climate is a small figure anyway.

mewbie_2

Thrugelmir wrote: »

Seems straightforward and logical. If this is the worst toxic debt on Barclays books then £7.5 billion in the current economic climate is a small figure anyway.

It's not then is it. Look over here while we show you 7.5 billion. Don't look over there where we have hidden the rest. tbh for a 'secret' move they couldn't have gained much more publicity. I smell a rat.

ManAtHome

Thrugelmir wrote: »

Seems straightforward and logical.

Dunno - won't a loan have a different (eg more Barc-friendly) valuation on the books - a bit like loans curently greater than market value of the 'assets' (thinking credit cards, car loans etc as well as houses in negative equity here).

Thrugelmir

ManAtHome wrote: »

Dunno - won't a loan have a different (eg more Barc-friendly) valuation on the books - a bit like loans curently greater than market value of the 'assets' (thinking credit cards, car loans etc as well as houses in negative equity here).

No. These Assets will have been written down to a market valuation or realisable value in Barclays books. Most likely these are complex multi layered spliced and diced trades which could 10 years at least to unwind.

simytrader

Thrugelmir, how can you say this is straighforward and Logical

They have kept the loan to Protium on the balance sheet not the toxic assets themselves. That's is a big difference. 50% of those asset could default however Barclays will still show the $12.3bn loan on its balance sheet.

Agreed as a starting point £7.5bn is nothing in the current climate. However it sets a precedent. If they are allowed to do down this avenue what stops them burying all toxic assets in this way??? Will it get any media coverage next time? How can anybody have any confidence in their accounts?

Sounds like a potential ponzi scheme to me!

Thrugelmir

simytrader wrote: »

Thrugelmir, how can you say this is straighforward and Logical

They have kept the loan to Protium on the balance sheet not the toxic assets themselves. That's is a big difference. 50% of those asset could default however Barclays will still show the $12.3bn loan on its balance sheet.

Agreed as a starting point £7.5bn is nothing in the current climate. However it sets a precedent. If they are allowed to do down this avenue what stops them burying all toxic assets in this way??? Will it get any media coverage next time? How can anybody have any confidence in their accounts?

Sounds like a potential ponzi scheme to me!

See my original response. This does not effect Barclays balance sheet.

As Barclays still owns the underlying debt, the the value of the investment ( the loan) will be stated in Barclays Group Accounts at its realisable value if this is less than its cost value.

Rather like unwinding Lehman positions. There are few people with the technical ability to do this task. So I suspect that Barclays needs to incentivise these traders to do so. If they walk then Barclays will recover nothing.

simytrader

This a scheme to bypass mark to market accounting pure and simple. It means Barclays no longer has to price its assets at current market values.

If we are saying that companies should not have to show their assets at current market values fine, but the government should change the mark to market rules rather than allowing creative accounting.

Thrugelmir

simytrader wrote: »

This a scheme to bypass mark to market accounting pure and simple. It means Barclays no longer has to price its assets at current market values.

If we are saying that companies should not have to show their assets at current market values fine, but the government should change the mark to market rules rather than allowing creative accounting.

Mark to market often means that assets are valued well below their true value.

Banks follow far more stringent accounting rules than other Companies. Who I know use creative accounting (and deception) to flatter their results. When the nadir hit that was the time to invest in banks. As investments were valued well below their long term realisable value.