Barclays Takes a Money-Market Beating
Mark GilbertSept. 3 (Bloomberg) -- Every morning, the British Bankers Association asks 16 banks how much it would cost them to borrow dollars, euros and pounds from each other. It then calculates what are known as the London Interbank Offered Rates, benchmark levels that set the cost of money around the world.
The final round of contributions at the end of last week threw up a troubling anomaly. Barclays Plc, the U.K.'s third- biggest bank, told the BBA that borrowing pounds for three months would cost it 6.8 percent -- more than any other bank on the panel, and a full 11 basis points above the official Aug. 31 fix.
Three-month euros would cost Barclays 4.76 percent, also more than any other contributing bank. Three-month dollars, meantime, would cost 5.75 percent which -- yes, you've guessed it -- was also the highest rate among the 16 institutions canvassed.
So what the hell is happening at Barclays and its Barclays Capital securities unit that is prompting its peers to charge it premium interest rates in the money market?
Here are some things we know, and some things we don't know.
We know that Barclays tapped the Bank of England for emergency overnight funds twice last month at the central bank's penalty rate of 6.75 percent, which is 1 percentage point higher than its benchmark rate. On Aug. 20, it borrowed 314 million pounds ($631 million) to backfill a loan from HSBC Holdings Plc that had gotten delayed for unspecified reasons.
Caught Short
Last week, it asked the central bank for as much as 1.6 billion pounds. After initially declining to comment on whether it was the bank that had sought the funds, Barclays later put out a statement citing a "technical breakdown in the U.K. clearing system." It went on to say "there are no liquidity issues in the U.K. markets," and that "Barclays itself is flush with liquidity."
Hmmm. If there are no liquidity issues in the U.K. markets, why is the average three-month rate for borrowing British pounds at 6.69 percent, the most expensive since December 1998 and the highest it's been above the Bank of England's benchmark rate for at least 20 years?
Getting caught short once looks like an accident; finding yourself out of pocket twice starts to suggest someone isn't paying attention in the treasury department at Barclays.
"Speculation regarding three-month interest rates for any of the banks is an irrelevance, as there is little volume in these markets currently," Alistair Smith, head of media relations at Barclays in London, said in an e-mail today.
On Aug. 28, Barclays shares fell 3.6 percent after the Financial Times reported that the bank had cash at risk amounting to the "low hundreds of millions of dollars" to investment funds battered by the collapse of the U.S. subprime mortgage market. Barclays described the report as "inaccurate."
To the Rescue
On Aug. 31, Barclays said its securities unit was providing loans to refinance a $1.6 billion debt fund run by London-based asset manager Cairn Capital, because the fund was unable to raise cash in the credit markets and would otherwise be forced to sell assets at discounted prices.
Barclays was the bank responsible for setting up funds for Solent Capital Partners LLP in London and Avendis Group of Geneva. Last month, $3.2 billion of debt issued by those funds was cut by Standard & Poor's, with some of it falling 17 levels to CCC from AAA overnight.
We don't know how many more of these funds, known as structured investment vehicles, Barclays might feel obliged to help out as the freeze in the commercial paper market punishes investors that borrow short-dated cash and invest the proceeds in longer-dated asset-backed debt.
We do know that Edward Cahill, the head of European collateralized-debt obligations, left Barclays last month after three years with the firm. Two people with direct knowledge of the matter told Bloomberg News about the departure. Barclays declined to comment at the time.
Fighting Over ABN
"From a headline view, unfortunately each event on its own looked like it could mean something more," Bob Diamond, Barclays' president, said in an interview published by the Sunday Times yesterday. "The fears over the SIV-lites, Edward's decision to resign and the borrowing from the Bank of England were taken out of context. We need to draw a line under this."
Barclays is embroiled in a takeover battle with a group led by Royal Bank of Scotland Group Plc for ABN Amro Holding NV, the largest Dutch bank. ABN has scheduled an extraordinary general meeting of its shareholders for Sept. 20 to discuss the competing offers.
The cash and stock offer from Barclays is currently valued at about 61 billion euros ($83 billion), while the bid from Royal Bank of Scotland, Fortis and Banco Santander SA is pitched at 72 billion euros. With its stock down by about 12 percent in the past two months, Barclays can't afford to be in the news every day borrowing emergency funds, bailing out hedge funds or losing department heads.
Handing Out Liquidity
Last month, I was accosted by a pretty girl on London Bridge who handed me a free bottle of water. The label, stamped with the Barclays eagle logo and colored with the bank's light blue advertising hues, said "Take me away with you." I doubt Barclays will be in any position to hand out free liquidity in the current environment.
As one of my editors used to preach, "in price, is knowledge." There's knowledge buried in the price that Barclays is being charged in the money markets. We just don't know what that knowledge is yet.
To contact the writer of this column: Mark Gilbert in London at magilbert@bloomberg.net