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Thursday, 5 March 2009

Slight whiff of rodent poo at Barclays?

Assiduous readers will recall the raised eyebrows a few weeks back when Barclays decided there was a couple of billion of extra value in their Lehman’s deal which allowed them to mark up the value of their investment and book a face saving gain to prop up their accounts for the year. Now the liquidator’s at Lehman think they know where that value lies, and maybe they want some of it back.

They have asked Barclays to explain what happened to an estimated $3.3bn earmarked for bonuses and other liabilities that the UK bank received when it acquired part of the bankrupt Wall Street company last year. Barclays acquired the North American arms of Lehmans for $1.5bn after it filed for bankruptcy in September. In its yearly results last month, Barclays booked a gain of £2.3bn ($3.3bn) on the difference between the fair value of the assets and liabilities acquired from Lehman and the price paid for them. The gain accounted for about a third of Barclays’ pre-tax profits and helped Barclays Capital, its investment banking arm, to record a profit of £1.3bn. The liquidator is reported to have written to Barclays on February 19 asking it to reconcile the $4.2bn transferred to the UK bank after the takeover – composed of $2bn for compensation and $2.25bn for other purposes – with his firm’s estimate that BarCap has so far spent about $900m. The letter says that, under the takeover deal, Barclays received $2bn from Lehman to pay bonuses and severance to transferring employees. However, the liquidator estimates Barclays had to pay only about $700m in bonuses and severance. The liquidators’ analysis of Lehman’s internal documents concluded that the total amount of compensation set aside for the investment bank’s global workforce until the end of August was $1.3bn. But because Barclays bought only Lehman’s North American operations, whose 10,000-plus employees accounted for 55 per cent of the compensation pool, its expenses should have been about $700m.

The agreement between Barclays and Lehman also provided for the transfer of cash and collateral, including $2.25bn to pay for liabilities to be settled after the takeover. However the liquidator calculates that Barclays’ payments for these liabilities have been about $200m, and the estimate for the final amount is much lower than expected. Alex speculates that these “liabilities” are tax liabilities which Barclays would not have to pay. I can’t give details because I don’t have them. US tax is complicated but there are many ways this could work.

My guess is that Barclays might find a liquidator grasping to get back some of the money so far as it relates to non-tax liabilities. No wonder John Varley is such a regular visitor to our church.

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