FTSE 100
Dow Jones

Friday, 6 August 2010

A wunch of bankers

A commenter asked if I was going to analyse the banks' results. Well I had a quick look at Barclays and HSBC and there is little that I could spot of note in the numbers and RBS and Lloyds hadn't come out at the time I looked so maybe more on those later.

The big news in the UK banking world is that John Varley has piped up extolling the virtues of a universal banking system. Well, "Mandy Rice-Davies" to you, John. According to Mr Varley “Our view is that if you want to see clearly revealed the ability of narrow banks to cope with extreme conditions, you have to look no further than the upheaval now visiting some of the narrow bank communities in mainland Europe”.

Which overlooks the fact that the UK tax payer put the best part of £40 billion into bailing out the one bank whose profile most closely matched that of Barclays, namely RBS, and other not too dissimilar banks such as Citicorp and HBOS were given similar support. If Barclays Capital hadn't built a steady profit stream from tax avoidance to bolster Barclays' Tier 1 capital, they would have gone the same way as RBS.

Of the universal UK banks only HSBC came through the financial crisis with flying colours. HSBC's success probably derives from the fact that when they are dealing with cruddy credits, particularly in their US arm, they take it head on and charge an appropriate margin. Unlike RBS and Barclays and the rest they don't think they can wrap the crap in guarantees and fancy vehicles, top slice and bottom slice the risk according to some physics PhD geek's stochastic model.

As an aside, this reminds me of a true story of a young banker who started out a Slater-Walker, a UK finance house. On his first day they sent him out with the repo man (not a gilt trader, but the man who takes back assets from defaulting customers). As they pulled up outside the gates of the first customer call, the repo man handed the young salesman a sleeping bag. "Are we going to be here overnight?", asked the youn innocent. "No", replied the professional thug, "wrap it round your arm, and hold it up when they set the dogs on you."

Bank reform #1: Before any geek gets to model the "shit-into-shinola" debt repackaging schemes touted by the investment banks, they should spend a week with the repo man.

But back to Barclays, Mr Varley and, indirectly, the Barclays figures. A quick perusal of Barclays income and its sources reveals that, gross income from lending (i.e. net interest) is less than income from fees commisions and every thing else. Which tells us that although Barclays is a substantial bank and would expect to be earning fees and commissions in reality it is making far more from trading on its own account than it is making from lending.

Secondly if we try to determine where Barclays is making its profits, it is less than transparent. Sure enough we see a few hundred million here or there under Retail Banking (UK), or Barclaycard or similar, but the vast wodge of their profit shows up under Barclays Capital. Now we can't really tell what that means. Everybody wants to be an investment banker because they get paid more so everybody tries to move their desks into The Investment Bank, including ostensibly wholesale banking functions such as FX and treasury, but the implication of this is that they are usually given more leeway to trade for their own account.

But even so, Mr Varley is trying to have his cake, eat it and have a slice of ours too. With such a relatively small part of the Barclays operations devoted to serving retail and corporate customers, why should the tax payer be interested in keeping Barclays solvent? Barclays lured a team of gold traders away from JP Morgan last year and paid $98 million last month to buy a Swedish carbon emissions trader. Why should the UK tax payer want to bail out Barclays if either of those entities caused the bank to fail? And why should other traders who are not owned by banks want to see their taxes used to bail out their competitors? Mr Varley has answers to none of those questions.

Like the dealer in a game of three-card Monte, Mr Varley wants you and the UK banking authorities to focus on the fact that he has a branch in every High Street and ATM's throughout the land, and to forget the fact that the UK Treasury is underwriting the losses in the world's biggest casino.


Bill Bell said...

Excellent post, good to see you back on form (fewer Jeff Randall quotes please, he makes me feel ill)!

Steven_L said...

I so want to get into this selling carbon/carbon accounting lark!