Barclays accused of trickery in $12.3bn toxic asset sale

Barclays has been accused of "banking by sleight of hand" after creating a new company to take over its most toxic assets and ringfence future losses.


By Philip Aldrick, Banking Editor
Published: 8:19PM BST 16 Sep 2009

he deal promises to make 45 former investment bankers at Barclays Capital very rich Photo: AFP/GETTY

Britain's second largest bank has sold $12.3bn (£7.5bn) of its riskiest assets to a new company called Protium Finance, registered in the Cayman Islands and run by two Barclays bankers who resigned on completion of the deal on Wednesday. Barclays has provided Protium with a 10-year, $12.6bn loan to buy the assets.

The sale will allow the bank to "derecognise the assets", shielding it from any further fall in their "mark-to-market" value. Instead, Barclays will use a different accounting treatment to take "a longer term view" that will provide "a boost to its capital strength by punting the issue into the long grass", Ian Gordon, banks analyst at Exane BNP Paribas, said.
Simon Maughan, analyst at MF Global Securities, described it as a way for Barclays to "wriggle free from its toxic assets". Barclays has a core tier one capital ratio of 8.8pc, which Mr Gordon said was expected to be under pressure as the assets face further mark downs.

Barclays' clever accounting comes at a time of failing trust in the banks and politicians claimed the move would not help restore it. John McFall, chairman of the Treasury Select Committee, said: "This is short-circuiting the transparency that is required in the market at the moment. Is it banking by sleight of hand?"

The deal also promises to make 45 former investment bankers at Barclays Capital very rich. They have resigned to join Protium, which will charge Barclays a $40m annual management fee, including office costs. The bank stressed that no leaver will receive a severance payment.

The structure of Barclays' loan is unusual. It will earn interest at 2.75pc above the US inter-bank rate, which it hopes will "amount to a cumulative total of $3.9bn" over the 10 years. However, interest will be paid after investors, who are injecting $450m and earning 7pc a year, receive their cut. Normally, investors rank behind lenders in the payment heirachy.

Chris Lucas, finance director, said: "If we have received $16.5bn in 10 years time, I will be very satisfied with this trade."

The investors, who have not been revealed but Barclays said consisted of one US and one UK fund, and the bank will be paid from the assets' cashflow. Mr Lucas said: "What we are trying to do is get a stable return profile for shareholders. We rely on those cashflows, so why not undertake a restructuring to show we rely on them and maximise shareholder value?"

Protium hopes to repeat the deal with other banks.