The Financial Services Club's Blog

The credit crisis was NOT a Black Swan event

One of my holiday books – I’m so geeky dull when it comes to banking – is Traders, Guns and Money, Knowns and Unknowns in the Dazzling World of Derivatives, by Satyajit Das. It was recommended to me a while ago, and has been sitting on the bookshelf ever since, like so many books I buy.

This one intrigued me however, as it was written way back in February 2006, eighteen months before the August 2007 run on Northern Rock and two and a half years before the September 2008 implosion of Lehman Brothers.

So Nassim Taleb talks about a Black Swan crisis ... this one wasn’t. This crisis was thoroughly predictable, as Traders, Guns and Money makes clear.

Rather than writing a review here, as I haven’t read it yet, I thought that Shocked Investor’s blog entry would provide a good backgrounder on this.

However, I have dived straight in to the last chapter on Credit Default Swaps (CDS) and Collateralised Debt Obligations (CDO), one of my favourite subjects.

There’s a good note in there on page 295 about these suckers. Here’s a shortened version of that note:

“CDO logic is perverse. You buy loans and other credit risk from the market, then you cut it and dice it and sell it to investors. It should be impossible to make money. Then why are CDOs so profitable?

“In the credit trading age, dealers were taking massive ‘model risk’ to provide investors with higher returns. It was the geeks and their masters who were writing the cheques; they had placed their faith in the credit models; they had started to believe in their lies. Perversely, they were showing massive profits. That’s the beauty of mark-to-model. If the model fails, the profit will disappear like a chimera.

“In 2002 and 2003, benign conditions in the credit market prevailed. Few companies defaulted; people became foolish or brave and lent to companies at ever lower returns; the credit spread on junk bonds reached record lows. Credit standards declined.

“In 2004, one bank suffered a loss of around $50 million in a single day on its credit dealt books. Nobody really knew why: it was the first tremor.”

You get the idea.

This book explained all the background to why we would see a subprime explosion and liquidity crisis ... back in February 2006, charting events going back to 2004 and before.

The book cites a court case from 2004 for example, where Barclays Capital were sued by German investment fund, HSH, for ‘misrepresentation’ after BarCap lost $151 million on one of their CDOs:

“HSH claims it was mis-sold the products, known as collateralised debt obligations (CDOs), and that Barclays then mismanaged its portfolio of CDOs in a way which further damaged the interests of investors. Barclays also stands accused of "short-selling" the CDOs for its own commercial benefit.”

Barclays argued that the losses were just due to the ‘unexpected’ downturn in the credit markets, and that HSH was a sophisticated investor and aware of the risks.

Doesn’t this sound like Goldman Sachs today?

“The risk associated with the securities was known to these investors, who were among the most sophisticated mortgage investors in the world.” — Goldman Sachs April 16th press release, in response to the SEC’s accusations

It’s a standard defence, as was BarCap’s response that it would ‘vigorously defend’ the action as they were ‘comfortable that these investments were not mis-sold’.

In 2004, Barclays settled the case with HSH a few weeks before it came to trail as they wanted to avoid the headlines.

A similar case was brought against Barclays and Bank of America at this time by the Italian Banca Popolare di Intra. Again, it was settled out of court.

If you’re interested in this stuff, there’s a really good presentation on CDO litigation from Jones Day, a law firm, at a London conference in March 2008.

Presentation: American and UK Perspectives on CDO Claims

Here’s a few of the slides:

What triggers litigation?

• Unexpected and large potential losses
• Tripping of over-collateralization or similar tests
• Disagreement over appropriate priority of payments
• Liquidation of portfolio assets
• Collateral calls
• Poor documentation where ambiguity = opportunity
• An unwillingness to compromise or inability to do so due to an encumbered balance sheet

What are the claims?

America’s claims are based upon:

• Sales Practices:
• • Misrepresentations and omissions
  • Collateral contracts/promissory estoppel
  • Suitability
• Federal securities fraud claims
• Mismanagement; Breach of fiduciary duty
• Breach of contract
• • Contract interpretation
  • Third party beneficiary standing
• Aiding and abetting breach of fiduciary duty/fraud
• Civil conspiracy
• Class actions?

UK claims are based upon:

• Deceit
• Misrepresentation (if contract) based upon being innocent/negligent/fraudulent
• Breach of contract: contract term/implied term (reasonable skill and care in management of funds)
• Negligent mis-statement (if no contract)
• Breach of a duty of good faith/duty to inform

Who brings the claims?

• CDO investors
• • Senior Note holders vs. Income Note holders
  • Institutional vs. individual investors
  • Hedge funds/ fund investors.
  • Liquidators and trustees of insolvent CDOs
• Swap counterparties
• Mono-line insurers
• Warehouse agents

Who gets sued?

• Placement agents\underwriter
• Portfolio managers
• Financial advisors
• Administrative agents
• CDO directors and officers
• Rating agencies
• Mono-line insurers
• Accountants
• Other professionals? Law firms?

Interesting and I’ll bet this rumbles on for years to com.

Meanwhile, if all this was rumbling along back in 2004 such that a book could be written about it in February 2006, how come no-one – including yours truly – knew what was really happening until the poop hit the fan?

 

Bankers bonuses in graphics

Money.co.uk just sent me this lovely graphic that puts the banker bonuses in context quite well ...

 

The land of a thousand voices

It seems that I’m having a long whinge and rant all week, but I’m trying not to.

What I’m really trying to do is to get some answers to this crisis of confidence in the banks and, consequently, the banking system. This is nothing to do with the credit crisis, but the response of the banks to the credit crisis, which is to trash all trust and confidence in their ethics and approach.

This is why there is this non-stop bleating about bonuses and interest rates. The banks justify this behaviour on the basis of all the other kids on the block are doing it so, if we didn’t, we would just get beaten up in the banking playground by the bonus bullies. This is what Stephen Hester said today:

Mr Hester warned “that employees are leaving because it was offering lower bonuses than City rivals. He also said that profits at the bank, which is 84 per cent owned by the taxpayer, would have been about £1 billion higher if it had managed to stop staff leaving. The bank said it had ‘paid the minimum necessary to retain and motivate staff who are critical to the recovery of RBS’.”

Trouble is, this doesn’t cut the mustard.

MPs warned that the public would be astonished that the bank was paying £1.3 billion in bonuses given that it today reported a £3.6 billion loss for last year.

“Vince Cable, the Liberal Democrat Treasury spokesman, said: ‘Stephen Hester is trying to justify the unjustifiable. Most bankers owe their jobs to the taxpayer. His comments will just reinforce the view of bankers in many people's minds as greedy and selfish.’

“Shadow chancellor George Osborne echoed the views of Mervyn King, the Governor of the Bank of England, by telling BBC radio: ‘I do think the level of payment in the banking sector has got completely out of kilter with the rest of society. It is totally disproportionate to what doctors are paid, people working in industry are paid, teachers are paid and the like. We need to bring down pay across the sector — not just in one bank, across the sector — and things like a bank tax, internationally agreed, might help do that.’”

Oh yes, and I love the photograph the Evening Standard  chose to run with that report.

Hmmm ... Hester, the fox killing, horse and hound man.

Nice.

Meanwhile, in the same paper, Chris Blackhurst writes about how we've blown our chances to rein in the banks:

“We somehow think that the bankers will take it upon themselves to lie down on the steps of St Paul's and seek forgiveness — and reform their ways and slash their incomes. They won't. They're human. Yes, they're pariahs, but they will carry on taking the money until they're forced to stop, until the authorities say bank licences will be relinquished if bonuses are paid.”

But none of these arguments raging in the media address the real issue here.

The real issue is not bonuses, profits, lending or interest rates.

The real issue is a lack of internal market leadership within the banking industry.

Nothing to do with regulators, politicians or press. The most significant failure has been the inability for the industry to act as a cohesive hole (sic: whole) to respond to the issues arising under their watch.

Instead we act as a fragmented group of a thousand voices.

Individual voices stand up and are counted, and some count more than others such as the Jamie Dimon’s, John Varley’s and Stephen Green’s. But nothing is co-ordinated or arranged in a way that makes sense or alleviates the public anger and distrust in the system.

Take the example of the past week of banker’s bonuses.

Initially, one bank – Barclays – set an example of waiving bonuses payments, as their leaders chose to repeat the actions of a year earlier and declined the multimillion pound pot they were entitled to. Reluctantly the rest then followed with RBS, Lloyds and now HSBC one-by-one agreeing not to award their leader’s bonus.

The result is that they were accused of being lame sheep in doing so, just following the lead of one, and it just looked limp.

It also rang of insincerity anyway, in that several of these leaders are purely deferring bonuses and have taken large swags of cash via other means (e.g. Bob Diamond’s $46 million payout on the sale of Barclays Global Investors last year) or just don’t need it as most are on million-pound plus packages. In fact, one cynic said that there would just be a top-up of their pension pots to compensate, and so no-one sees these token gestures as being anything other than that- ‘token’.

Does this justify the payouts to their investment banking teams by making such sacrifices?

No.

Does it restore faith and trust and displace the anger and mistrust?

No.

So all it’s done is served as some form of internal justification for the continuance of mega-bonus payments to investment banking staff.

The issue still lies with the press, politicians and regulators however: in this land of 1,000 voices, where no-one coordinated single voice resonates, where is the leadership to change the system?

Take the example I’ve just given.

What bankers should have done is worked together to create a co-ordinated plan across the sector pre-emptively and early on.

For example, Stephen Hester (RBS), John Varley and Bob Diamond (Barclays), Eric Daniels (Lloyds) and Michael Geoghegan (HSBC) see each other often enough in front of Treasury Select Committees to be able to co-ordinate their responses.

So why didn’t they all agree upfront to defer leader’s bonus payments, and announce this as a co-ordinated approach pre-results season?

A joint announcement of rationale and reasoning would have been far more powerful than the sheep mentality manner of following the leader.

Equally, Jamie Demon Dimon (JPMC), Vikram Pandit (Citi), Lloyd Blankfein (Goldman Sachs), Brian Moynihan (Bank of America) and John Mack (Morgan Stanley) see each other all the time in front of Federal Committees. So why didn’t these leaders co-ordinate responses to bailouts and bonuses?

You may say they did, but not from an observer’s viewpoint externally.

It looks like maverick individual actions and approaches, with no single voice to rally the industry to a resolution.

Why these ‘leaders’ cannot organise themselves is beyond the ken.

After all, if these global CEO’s of banks had created a co-ordinated and rational campaign to cap bonuses, waive their own, provide charitable donations, show how bank lending and bailouts had been atoned, then the media, public and politicians would not be baying for their blood.

The fact that: (a) there is no single voice of leadership that is co-ordinated across these banks speaking on their behalf; and (b) these leaders have allowed banks to behave without change, as they were before and as if nothing had happened, is going to lead to a showdown.

That showdown is not far away and, according got all my sources, will be far more draconian and vicious than any action that would have been taken if the industry had spoken with one voice, rather than thousand.

But then, this industry’s ability to self-regulate with transparency and integrity historically has been pretty poor so this comes as little surprise.

Meanwhile, you only have to look at the fact that our poor old Queen has been forced onto the tube these days, to realise how hard times are in Britain ...

Banks aren’t charities, so why do we treat them that way?

Banks aren’t charities and yet the non-stop bleating about bonuses and interest rates would make you think they should be run as though they were not-for-profits.

But banks aren't not-for-profit; they are proprietary firms with stock listings. They are there to make money, not to exist for the public good.

So what’s gone wrong?

Unfortunately during the past two years, the line between public and private has blurred, as evidenced by the Royal Bank of Scotland and Northern Rock, or by Citi and Bank of America in the USA, or HVB and Commerzbank in Germany, or UBS in Switzerland or ...

The fact that these banks were bailed out by their respective governments, albeit temporarily in most instances, has blurred the media and public’s view of what they are there for.

The media and general masses now think they own the banks or, at least, have some skin in their game. And sure enough, in the case of RBS and Lloyds, the UK taxpayer does have some skin in the game: 84% and 43% respectively.

But that doesn’t mean the taxpayer runs the bank or that they exist for the public good.

In the case of RBS and Lloyds, they actually now exist in a shadowland where they are competing with openly aggressive trading firms like Goldman Sachs and JPMorgan, whilst having to conform with the requirements of the Treasury and UKFI.

This causes this schizophrenia between being openly competitive versus being humbly contrite.

What a pain.

But look at the bottom-line: these banks are still private firms with stock listings who have to serve their shareholder first.

That’s why they are paying bonuses, restricting lending, avoiding risk and being competitive.

Or that’s their thinking.

This is why we find it so hard to determine the right approach to bonuses and remuneration.

But take this a step further and we now have the journalistic and taxpaying community believing that they should somehow determine the interest rate setting policy and fees of the bank.

For example, over the weekend, the Beeb got itself into a tiz over credit card interest rates. The question posed is why, when the Bank of England’s interest rates are at their lowest levels ever, are banks charging the highest rates ever on credit card balances?

The answer is simple. The credit card portfolio runs as its own division with its own P&L. Today, more folks are defaulting than ever before. As the risks are greater and bad debts increasing, the interest rate has to rise accordingly.

The media and public then say: but you’re paying out all these hefty bonuses, what about us? Decrease the bonuses so that you can reduce our credit interest rates.

C’mon now and be serious.

The investment bank doesn’t subsidise the card portfolio. They are separately run businesses with their own P&L and both are tasked with making a profit, so both run their book as competitively and profitably as possible.

That’s why Barclays announced an increase in overdraft fees on deposit accounts just two days after saying that BarCap’s bankers would get an average bonus and pay package of just under £200,000 each for the 23,000 staff in that division.

You see the latter achieved their annual objectives and targets, so that’s why they deserve it.

And all of this is in a competitive battlefield where anyone can walk – both staff and customers.

But it ain’t that easy.

First, Barclays are justified in their actions because they never dipped into the taxpayer’s pocket, unlike RBS and Lloyds. Therefore, are RBS and Lloyds justified in providing bonus packages in the same way as Barclays? If they are privately held, shareholder-owned competitive banks, yes; if they are semi-nationalised, taxpayer-funded state-run banks ...

In addition, the divisional components of the bank may be independently structured by their P&L but that argument doesn’t hold water when the bank would have gone under in the case of RBS, Citi and others, thanks to the failings of that very part of the bank that is now sharing the spoils amongst their staff at the customer’s and taxpayer’s expense.

It is this blurring of the lines between a nationalised business that should operate in the public’s interest versus the privatised industry that operates in the shareholders’ interest that is causing all of the media and general debate today, whether it is about bonuses, remuneration, profits, fees, interest rates or any other aspect of banking.

This half-hearted, schizophrenic shadow of an industry that doesn’t know whether it’s coming or going, and has no idea how to regulate itself or be regulated, needs a strong hand to steer it to an objective and vision for future operation.

That vision appears to be one of an independent industry, run under free market principles with shareholder focus as its central tenet.

If you don’t like it ... lump it.

Things worth reading: 17th February 2010

Things we're reading today include ...

Barclays and Bonuses

Barclays reports profits up 92% to £11.6 billion - The Independent
Bankers pocket £2.7bn bonuses as record profits announced - The Independent
Diamond says forget bonuses and be proud - Financial Times
Barclays has changed the rules of the game and bankers should take note - The Telegraph
Debt of honour - The Times
Million dollar men - BBC
Regulator backs EU-wide bonus rules - Financial Times

Insider Trading

Record fine for insider trading - BBC
The Cazenove connection: ex-broker tried for ‘inside deals’ - The Times

Companies

JP Morgan's $1.7bn purchase of RBS Sempra doesn't include US assets - The Telegraph
Deutsche Börse to ramp up cost cuts - Financial Times

Cards

Credit card rates 'at new high' - BBC
UK firms 'forced to use credit cards to stay afloat' - The Telegraph

Markets

Eurozone expects 'fragile' growth - BBC
Banks 'still restricting loans' - BBC
Financial innovation can be harmful, says FSA's Lord Turner - The Telegraph
Inflation rise just 'temporary' says Bank governor - The Independent
Hank Paulson calls for tighter US financial reforms - The Telegraph

Quote of the Day:

"You have to be the most arrogant pompous wanker yet to grace the Bloomberg studio."
Email from Jamie after my appearance on Bloomberg yesterday ... love the feedback!

Barclays bright star

The case against nationalisation: Barclays

Today’s main story around the markets is Barclays and their results, with a stonking £11.6 billion profit for 2009:

All anticipations beforehand were that the bank would announce £10.3 to £11 billion ($16 to $17 billion) profits, so these results were fairly stupendous.

The result is also, according to CEO John Varley, justification for an average of just under £100,000 bonus to each of their 23,000 investment bankers although he and President Bob Diamond are forgoing theirs this year. £100,000 bonus is slightly less than Goldman Sachs but a good whack more than Royal Bank of Scotland, whose bonus pool has been reduced to around £1.3 billion or £60,000 each.

Barclays, and specifically Barclays Capital, have never had it so good.

Or not since 2007 anyway.

But reading through the results and reflecting on their past, there’s a few intriguing insights.

These were brought home to me by the article in the Telegraph which calls Barclays the ‘Houdini Bank’.

The article reminds me that Barclays desperately tried to buy ABN AMRO in 2007, and were well-miffed when the megalomaniacal Fred Goodwin pipped them to the post (for a valuation that was way more than the bank was worth).

They then stepped in to buy out Lehman Brothers, but were vetoed by Alistair Darling from doing so. Result: just a few weeks later, they acquired the American operations of Lehmans, the bit they really wanted as BarCap had a weak presence in the US markets, as a post-crisis gift that delivered around £2 billion profits straight to the Barclays balance sheet.

Barclays, like HBOS and RBS, was also very close to falling into the Treasury’s hands in that dreadful October week of 2008 when the crisis hit. That was until they pulled out an ace in the hand from the Middle East, via the Qatar and Abu Dhabi Sovereign Wealth Funds, who bailed them out with a £7.3 billion investment for a 32% stake in the firm.

That was no bad deal as, a year later, Qatar sold half of their stake for a 30% profit gain of £634 million.

Mind you, the Qatari Authorities must have been concerned when, just three months after their capital injection, Barclays once more almost came a cropper in January 2009 when the share shorters bombarded against them, reducing the share price to just 51 pence, from a previous high in August 2007 of over £7 a share.

Everyone thought Barclays was gonna be a gonner ... and then the Government announced the Asset Relief Scheme and they bounced back again, because this gave the market confidence they could survive, even with the billions of pounds worth of toxic assets hidden on their balance sheet.

As can be seen, this bank has been on a rock n’ rolla and perhaps could be more aptly nicknamed the Kylie Minogue Bank, as in: I should be so lucky!

All in all, the shares have stabilised around the £3 mark which, for those who got in at the low back in January 2009 at 51p per share, and sold at the high in August 2009 when the shares pipped the £3:50 mark, would have seen a seven-times multiple return on their investment. Latest analyst expectations still expect the banks’ share price to rise from today’s levels of £2.75 per share to around £4.20, so BARC is a BUY!

Since January 2009, the bank has moved onwards and upwards with some very tricky accounting schemes to siphon off £12 billion of toxic assets to the Cayman Islands, the sale of Barclays Global Investors to Blackstone, and the gain of some top investment talent from UBS and RBS.

However, all is not rosy in the Barclays pool as it is likely that the leadership tag team of John Varley and Bob Diamond will change. After seven years at the top, rumours are that Varley will finally step aside as CEO to give Diamond, the Head of BarCap, the lead role. But it may not be as simple as that.

With the Volcker plan in sight, the bank might end up splitting into two, with the Retail and Commercial Bank separating from the prop trading and investment operations of BarCap.

If this is the case, then Diamond won’t want to become a boring banker, and will stay with the big swinging investment banking masters of the universe.

Even if the Volcker plan doesn’t happen – as seems likely – there is always going to be a strong focus on narrow banking, or narrower banking, as the Treasury Select Committee has made clear. So, if I were Mr. Diamond, I’d be happy to stay just where I am.

So who are they going to call instead?

Finally, there are regular questions about Barclays risk models, capital ratios and accounting principles, no better demonstrated that the resignation of Deputy Chairman Sir Nigel Rudd last year due to an argument about asset valuations and capital reserves.

Have these arguments been resolved we wonder, or is Barclays still undervaluing and under-reserving?

We wait and see, but one thing remains clear. There’s nothing like being out of the Treasury’s pocket to enable a bank to survive and thrive.

The Top Bank Ads of 2009

Various sites rate banking ads in different ways.  Here are a few of my favourites this year.

Probaby the one that garnered most attention from a traditional bank is this one from Barclays:

... immensely popular for some reason.  

However, most ads have been from mutuals and credit unions, having a cheap shot at the banks for obvious reasons. For example, here's a good one:

Then there's the ad series that gets all the plaudits. The series was created for the launch of Ally Bank, a division of GMAC, in the USA and uses children to illustrate the ridiculous terms that banks sometimes impose. 

Here is an example:

My favourite of these style of ads this year has to be this one from Associated Credit Union however:

Oink, oink!

Finally, there are the more "in your face" ads which was clearly won by this Aussie one from Virgin Money:

I just hope I'm as interested when I get to be that mature.

Happy New Year to all of you, and the blog's back up and running on Monday.

Rogana: the Brangelina of Banking

After yesterday's discussions of London snobbery driving Barclays celeb banker Roger Jenkins and his wife Diana, collectively known as Rogana (pronounced as Rog - Anna, like Regina but with a little East End twist), to Malibu ...

... it's worth noting how this interview looks as Bosnian-born Diana seems to have a wee chip on her shoulder if the story's photograph is anything to go by:

Source: Tatler via Evening Standard

The picture is taken by Bryan Adams, he of the 'everything I do, I do it for you' fame, and it's definitely worthy of a caption competition.  Here are a few for starters ...

Diana: Who just said I looked like an Eastern European mail order wife?

Roger: Must have a word about that FedEx delivery.

Dog: Please give me a million daddio, please, please, please, please ...

 

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Sex and banks and rock and roll

It seems that all this blog is writing about these days is sex and banking, but the papers are full of sex, rock & roll and death in banking this week so it is unavoidable.

For example, here are three stories which illustrate how the rich vein of  real life runs through our banking lives.

For starters are the shocking revelations from a certain Jordan Wimmer about life in the Hedge Fund Nomos Capital, run by alleged lothario Mark Lowe.

Miss Wimmer, whose salary increased tenfold over a four year period to £577,000 a year, accuses Mr. Lowe of perpetual harassment and hiring a Russian hitman to killl her, resulting in her breakdown last year.

According to the Daily Mail * Miss Wimmer claims that Mr Lowe subjected her to all sorts of deplorable behaviour as part of her job, including watching him cavort is a sexual manner with various women.

I sympathise with Miss Wimmer but that sounds like the usual City way of life (when will this change?) especially as, in Mr. Lowe’s defence, he claims that the person in hot pants in question, Miss Ling, is in fact a Malaysian banker who liked to dress attractively for him as she was his girlfriend.

Yea right.

Meanwhile, in the same news day is the tragic story of Huibert Boumeester, the respected banker with ABN AMRO who lost his job after the takeover by Royal Bank of Scotland in 2007.  The result is that he sank into a depression and shot himself in June of this year.

This sort of story is appearing more and more often in our community, and no-one feels this is a good time for banking. Nevertheless, the media witch hunt over bonuses continues to grab the headlines rather than these tragically human stories.

Finally, on the same newsday, is the tittle in Tatler about Roger Jenkins' wife, Diana.

Roger Jenkins is the A-List celebrity banker with Barclays who pulled together the Middle Eastern bailout in January that meant the bank could avoid slipping into the UK Government’s ownership.

He claims that it was Diana’s key role that made this happen, “charming the Qatari royal family into parting with the £7.3 billion that saved” the bank and creating “the Roger brand”.

It was also Diana who made the party happen last Christmas for Charity.  A-list stars attended including George Clooney, Scarlett Johansson and Bono, and £10 million was raised in one night for Darfur.

But Diana Jenkins, who is a Bosnian, has now moved to Malibu because she was treated “like an Eastern European mail-order bride” by London society apparently.

Speaking of London's party circuit, she says that “you have to have your priorities right first. No kid wants the private plane first - they want their parents. That's where all those social girls get it so wrong. My kids would rather be with me in a shack than with a stranger in a private plane who calls themselves a mother.”

She really did not like the snobbery in London.

No wonder she moved to Malibu rather than New York, where the Desperate Hedgewives are just as bad.

It also makes me think that Miss Wimmer might learn a thing or two from Mrs Jenkins.

All in all, just another week in the world of high finance.

* in the original blog entry, we mentioned that Ms. Charity Wanju was cited in the court case.  This information was not presented accurately, for which we unreservedly apologise to Ms. Wanju if this caused offence.

Barclaycard contactless strikes again

Following on from their campaign using the waterslide to promote their contactless cards, Barclaycard strikes again.

This time it was a surprise that popped out as I was looking through the shelves of our local newspaper shop.

Eyeing the shelves, this week's Retail Week stood out. 

It's not a magazine I would normally buy, but there was a wrap around advert over the front page that caught my eye:

 

Mmmmm, methinks, what's this?

Aha, it's Barclaycard getting the contactless message out there again, this time targeting the key audience: merchants.

 

And it's all backed up by their website which makes it sound so easy:

How accepting contactless payments helps your business

This innovative card reader lets customers pay for products that cost £10 or less, like a coffee or newspaper, in less than a second. Using contactless technology, small value transactions are processed securely at phenomenal speed, so you no longer miss out on sales because customers don't have enough change.

The benefits of going contactless

…for your business

• Card payments of £10 and under, are processed in less than a second.
• No authorisation, signature or PIN is required, unless cardholder details need to be verified.*
• Reduced queues allow you to serve more customers.
• Become the preferred retailer for contactless card users.
• Higher spend from customers who aren't limited by the change in their pocket.
• It uses the same secure network as chip and PIN.

…for your customers

• They always have the correct 'change'.
• No need to worry about PIN numbers or signatures, unless their details need verification.
• Shorter queues as customers are served faster.
• No contact is required, speeding up the transaction.
• Contactless keeps a record of their spend.

A step-by-step guide to using a contactless terminal

Any debit or credit card with the Wave symbol can be used to pay for products worth £10 or less, in these simple steps:

1. Cardholders simply touch their card to the reader and the payment is made.
2. This contactless payment is processed through the same secure network as chip and PIN.
3. The whole transaction is complete in under a second.

How to start accepting contactless payments

To join the revolution, all you need is a contactless reader at your checkout. It simply plugs into your existing chip and PIN terminal, for instant installation.

When other banks launch contactless payment cards, our reader will be able to accept those too, with no need to upgrade or change your terminal.

Just after posting this, I notice the mainstream Barclays Bank were hit with the old Lebanese Loop trick. Maybe they could learn a thing or two from their innovative brother.

First Direct leading the social finance mainstream

For over four years, since Facebook first appeared on my radar, I've been waiting for a UK bank to really get into social media.  There have been a few attempts but nothing really mainstream.  For example, the Co-operative launched a MySpace site for Good with Money and Barclaycard did some good things, but most was a gimmick or poorly delivered. 

Generally however, UK banks are reticent when it comes to blogs, podcasts, interaction and Web 2.0.

Finally, for the first time, one gets it.

First Direct.

First Direct launched their social media newsroom in June this year ...

 

and they've been on Twitter since April 27th ...

and have 464 followers and 168 tweets as of today.

So it's great to see them launch a truly open dialogue in their Live area, which was announced in the newsroom yesterday.

"We wanted to give our customers the opportunity to talk back and let us know how they really feel about us.  With this in mind we recently launched our new acquisition campaign - "Live".  It works by taking everything that's said about us online, from over 8 million forums, blogs and social media sites, and then feeding it, live, onto our website www.firstdirect.com/live for all to see.  At the same time we also launched Talking Point - a section where customers can leave a message for us."

Viewing the Live home page, you get some nice commentary to encourage you to dialogue:

 

and it clearly highlights some of the positive views:

as well as the negative:

 

In fact they clearly demonstrate how positive or negative customers are being overall:

with + signs for positive and - for negative floating up and down the home page, in real-time we assume ...

 

So hats off to First Direct for being at the forefront of UK financial social media.  In fact, a real hats off as you can find all of this easily from their home page:

 

as, being Mr. Cynical, some would think this would be hidden away in some microsite somewhere.

Only a bank voted consistently number one by independent surveys would have such confidence to do this of course.

And, just as a reality check, I thought I should see if any other UK bank had a blog, twitter link or anything on their home page to demonstrate social interactivity.

Lloyds TSB?

Nope.

No blog or anything.

NatWest?

Nope.

No podcasts or anything there on the home page.

Barclays Bank seemed to be better as, on their homepage they have a clear area prompting customers to ask a question:

 

so I thought I would search for where's their blog?

Can't find the answer?  Contact us. 

UK banks generally don't offer anything social on their internet prescence today: no Facebook, Twitter, Blog, Podcast or even interactive live chat.

It does confirm that banks don't want to interact with customers online ... only on the telephone or in branch.

At least First Direct is demonstrating some leadership here and it will be interesting to see how their service develops as the first UK bank to be in the forefront of this space ... a bit like they were the first UK bank to lead the telephone banking revolution.

*

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Do bankers understand retailing?

We enjoyed a meeting of the Financial Services Club this week with Bob Bayman, a director with i-am associates. i-am associates are design fiends and work extensively on bank branch designs, so Bob’s presentation looked at how to make a bank cool based upon cool branch designs.

After my recent tirade against branch-based banking, you may wonder why we would have a branch design discussion at the Club.

Answer: branches are still required, just in a different way.

As Bob put it: “the branch is dead, long live the branch”, and illustrated this by saying how he was taking note that the new CEO of Royal Bank of Scotland (RBS) Retail Banking “gets it”.

“Gets what?” I ask.

“Gets the internet”, Bob replied. “Just in the first few weeks of arriving at RBS, he’s made it clear that the internet is the network and the branches sit on the network, rather than the other way around. That’s a fundamental mind shift for most people. To realise that the internet is the core network connection and everything else sits on top of that infrastructure.”

I had to smile as I got into a big debate with one reader two years ago, who thought I was trying to promote replacing all humans with machines.   What I actually said was that the internet is the foundation of all banking, from mobile through call centre and branch, and that banks must redesign from the internet network base foundations, rather than the branch-based foundations of the past.

Here’s that debate:

• Part One: Bank strategies are fundamentally flawed
• Part Two: To dump or not to dump the branch
• Part Three: Bank designs versus architecture

This builds on the other recent entries made about branch-based banking (parts one and two).

The core point in all of this is that branches are still going to be needed to connect, sell, advise and engage in real human contact. The question is how many branches and how they are structured.

I’ve made the contention that it will be a tenth of today’s volume of branches, and the ones that are left will be super sales centres. The rest will be satellite footprints that are there for automated services such as this automated booth from Garanti Bank in Turkey:

This was one of several examples Bob highlighted of new bank structures and he proceeded to cite several examples of ‘cool bank branches’ including Garaniti in Turkey, Che Banca in Italy, Caja Navarro in Spain, Deutsche Bank in Berlin, Jyske Bank in Denmark, HSBC worldwide and Barclays showcase Piccadilly branch in London.

I will present more details of those discussions here next week due to time limitations. Suffice to say, the big point that came up is that banks aren’t retailers.  They offer retail banking, but do not understand bank retailing.

Retail is a mentality that some are superb at delivering. We think of brands like Virgin, Nike, Sony, Apple and note their leadership in branding, distribution and retail. Then we try to think of a bank that comes close ... and struggle.

There are a few – Commerce Bank in America being the name that usually comes to mind - but these are few and far between.

Bob summed it up well by using the example of Nike and football.

Earlier this year, Man United were beaten by Barcelona in the European Champions League Cup.

Nike made a point of their association with the teams by dressing their flagship branch in Oxford Circus, London, in new livery the morning after the final:

This was at 8:45 the morning after the final.  Similarly, they altered their website to suit.

These are fundamentals of retailing: you leverage your brand and your retail associations through your key sponsorships and links to your product.

So, what does a bank do?

Barclays Bank sponsor the UK Football Premiership Division.

That’s the one that is dominated by Manchester United, with close rivals Arsenal, Chelsea and Liverpool.

So what did the Barclays Bank website look like the day after Man United won the Premiership:

Mmmm ... a nice, glitzy, showcase of a futuristic branch in London is ok but retailing is a complete branding and distribution mix and, on this evidence, bankers are guilty as charged m’lud.

p.s. in case you don't read comments, Vivek asks: "you sure you've got the right screenshot of the Barclay's website ? Nothing specific to football or Man U in the screenshot unless i missed something obvious.."

That is the point however Vivek.  Barclays spend millions to sponsor the UK Football Premiership and don't even reference it on their website the day after the season ended.  This is why banks don't get retailing. 

p.p.s. it occured to me after this that we also think of retailing as being 'sales' which is also wrong.  Retailing is about attracting and retaining profitable customers, not burning a big hole in the bank's balance sheet by selling loans at high margins with high risks ...

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Back with a bonus

It’s been nice having a break, and feeling like the banking system isn’t the only thing I care aobut in this world. Nevertheless, the eye wasn’t completely off the ball as several grumblings and mumblings have been taking place during the last two weeks.

The obvious and biggest story being the need to sort out bankers’ bonuses.

I’ve blogged about this stuff before, putting the arguments for and against big bonuses ... but seriously, there is nothing the governments of the world can do about bankers’ bonuses.

For a start, Barack Obama thought about a cap of $500,000 earlier this year. Various newspaper headlines screamed: “Obama imposes $500,000 ceiling on bailed-out bank bosses”, and this was seen as a good thing ... but only by the naive new incumbent of the White House that is who, like most of the populous, wanted to do the obvious thing and clip the wings of the evil banking system.

It just isn’t that simple.

Sure, bankers making ‘obscene’, ‘outrageous’ and ‘vulgar’ amounts of cash out of a failed system is a source of retribution to be sought, but not by making your country unattractive to the very people who fuel your economy.

That’s why Obama was rapidly shot down by those who understand these markets. Their argument went something like:

“OK, OK. So you’re a bit pissed with the banking system, as are all of us. But you gotta see it our way. The banking system is the fuel of the economy. If the system fails, the economy fails, you fail. You know that. That’s why you bailed us all out.

“Now then. What makes the banking system work? Having the brightest talent who totally understand and get these complexities of trading.

“Now you know how complex trading has gotten. That’s why we had these issues in Credit Default Swap Derivatives. In fact, the more derived a product is, the more complex it gets, the more risky it gets but, if you have guys who understand those risks and can trade in them effectively, then you make massive amounts of profit.

“That’s how the ‘vampire squid’ Goldman Sachs works, and that’s how all of us want to work. And it did us good for the past decade or so, didn’t it?

“So, you cap bonuses and you effectively are saying: the best and the brightest traders, go trade elsewhere. And they will.

“Just look at the dead meat on Wall Street and London.

“Royal Bank of Scotland for example. Lost a load of traders to BarCap and others overnight.

“Or UBS? Same thing.

“A bit of weakness in the system and stellar rewards await elsewhere for the best and brightest as can clearly be seen.

“So go on Mr. Obama. Put a cap on our ability to attract, retain and incentives the best and the brightest traders and you’ll soon see all your banks that are working fail. We will all fail because all the guys will be in some other country with some other bank.

“Oh yea, and you throw in a few things like: ‘working with the G20 in a co-ordinated fashion and we avoid this’. Sure. You think China and Russia would really see the opportunity to steal your main strength in the financial system – the knowledge – as something they would ignore or see as being just fair dues?

“We don’t think so.

“Your choice, Barack, but you stifle our competitiveness in salaries and bonuses and you sign our death warrant.”

In other words, the core of the financial system involves having top trading talent who understand their markets intimately in order to be able to deliver profits.

That’s why Citibank are arguing for $100 million bonus for their top trader Andrew Hall, and why Royal Bank of Scotland are paying Brian Hartzer $4 million as a signing on fee.

I liken it to footballers.

Do you really think that Christiano Ronaldo is worth or not worth £80 million?

Does it matter what you think because Real Madrid think he’s worth that and, if they have the money, they get the man.

This is how banks work and it may be economies they are kicking around rather than footballs, but the talented few who have proven track records deliver the greatest profits.

That is why America and Britain have fought Germany and France so hard over this matter, as America and Britain have the financial markets as the core of their economies and economic strength or, more recently, weakness.  But to cede these markets now, as they move into recovery, would be to place a nuclear bomb in the heart of Geithner and Darling's Treasury operations.

It just will not happen.

Governments therefore have learnt that they have to protect their banks, that are too big to fail, and their bankers, who are too bright to lose.

Finally, on this last point, do the brightest really deliver the greatest profits ... or is it their firm and environment?

In a fascinating study by Harvard Business School’s Professor Boris Groysberg of over 1,000 stock analysts who worked for 28 American investment banks between 1988 and 1996, he found that when a company hires a star away from another firm:  46% did poorly in the year they switched jobs and their performance remained lower even after five years; there is a decline in the performance of the group the star analyst joins; the market value of the company hiring the star falls; and the star doesn’t stay with the new employer for very long.

Grosyberg concludes that hiring stars does not do much for a firms’ or the star’s performance, and that everyone would be better off by growing talent inside the firm.

Hmmmm .... it's good to be back.

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First Direct, Cahoot and Smile win again

Two years ago, the BBC ran a survey of 13,000 viewers about their satisfaction with banks and found that the leading financial providers were Cahoot!, Smile and First Direct, whilst Abbey came last. 

Unfortunately, the Beeb has removed the survey from their website but the chasm between leader (90% customer satisfaction) and loser (45%) was dramatic.

The other thing I noted back then is that the winners were all banks without branches and that the respondents had no link between the bank and their parent.  For example, First Direct's ATM network was voted the best in Britain whilst HSBC's was one of the worst - it's the same darned bank and ATM network! 

Now Which?  - the UK's leading consumer rights organisation - has surveyed 14,000 people during the first half of 2009 to find out who is Britain’s best bank. Here are the summary results:

Best current account

91% Smile (206)
90% First Direct (423)
84% Co-operative Bank (151)
84% Cahoot (68)
79% Nationwide (676)
74% Intelligent Finance (60)

Worst current account

50% Northern Bank (33)
51% Abbey (200)
53% Bank of Scotland (264)

* figure in brackets is number of people who voted with an account at that bank

The big four UK banks – NatWest, Lloyds TSB, HSBC and Barclays – are used by 47% of those surveyed and all scored between 55% and 60%, or low in other words.

Again, banks without branches represent four out of the top six.

Equally, the reappearance of Abbey in the bottom three is surprising as, two years ago, their issues were all about a systems upgrade.  Maybe customers haven't forgotten how bad that experience was.

Anyway, it makes no difference to customer loyalty with 61% of respondents saying that they have had the same current account for over twenty years.  Of those who switched (23%) only 7% did so in the last year, even though half of them say it's easy and hassle free.

Combine this with another survey which found that most people wouldn’t bother switching their bank account, particularly to a new entrant, and you realise that once you've got the sucker's account opened, you've got them for life.

Whatever.

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UK banks give thanks for fair value accounting

The UK banks announce their half year results this week (results are provided at the end of this entry, as they are released).  And the results look good. Not great, but good.

This follows on the US banks second quarter results, with Goldman Sachs reporting record profits that were twice as good as expected, and even Citi and BoA reporting profitability, albeit thanks to sales of key assets. The rest has been down to a good investment banking run, with a strong stock market rally and benign yields on fixed–income products.

The UK banks don’t have quite the same conditions, although Barclays should see a strong surge thanks to Barclays Capital. Like the US investment banks, Barclays has the strongest trading desk of the big UK banks. They’re also benefiting from picking up the best and most profitable parts of Lehman Brothers American operations last year and, all in all, this strength will be demonstrated in very strong results.

Barclays were also the bank that had a share price that sank to just under 48p at one point which also reflected the issues of taking over Lehmans and the volatility of Q4 2008. But now, the share price is up over £3:00 in latest trading, a six–times multiplier on a January investment, and all is good.

This is well demonstrated by by the Abu Dhabi investment fund. The fund has made a 73 percent profit so far on their investment after only eight months. Not bad for a loan that allowed Barclays to escape the UK governments clutches.

Result? Abu Dhabi decides to invest in Richard Branson’s space project, Virgin Galactic. Mind you, if you’re making that sort of profit, you would have money to burn wouldn’t you?

Barclays has had a few ups and downs this half–year though, as their dealmaker of the Middle Eastern bailout was Roger Jenkins. Roger Jenkins is one of the most critical players in Barclays’ investment banking operations, and he recently announced he was leaving.

But things overall are good in the Barclays camp which is why they filched the trading desk of Royal Bank of Scotland recently, which bring us on to RBS.

RBS will still have issues and are expected to report a loss. In fact, they’re expected to report a big loss as Stephen Hester, their CEO, is rumoured to be throwing in as much bad news now as he can. Nevertheless, he could be right to do so as, after Q1 reporting, there was a fascinating analysis in the FT about RBS and their asset backed securities.

In the Alphaville blog, the FT had an April article called: “Black swans, black sheep in the world’s biggest balance sheet”.

The FT had spotted in RBS reports that “impairment losses and credit market write–downs totalling £4,927 million ... were partly offset by gains on the fair value of own debt of £647 million.”

What this gets at is fair value accounting and who some screwy book–keeping can make paper profits and losses.

For example, RBS held £92 billion worth of asset–backed securities (ABS) in 2008, shrinking to £86 billion at the end of Q1 2009.

The article then goes on about complex investment banking stuff about hedgies and monoclines, but the reason I pickup on this is that discussion about ‘fair value’. Last year, RBS and the other UK banks were forced to write–down paper losses on assets that were far bleaker than the reality.

This is the nature of IFRS accounting and mark–to–market rules. The result is that the banks appeared to be haemorrhaging losses. What it forgets is that the assets that back those paper–based securities are still assets and, under fair value accounting rules, the write–downs made in 2007–2008 are now being written back in 2009.

This is why RBS should deliver a profit, although it’s a smaller one than expected thanks to Mr. Hester’s conservative approach.

Unlike Lloyds.

Lloyds Banking Group are also writing off major losses on their debt book. These losses will be the largest of all the banks, about £11 billion worth of the £32 billion expected across all UK banks, and relate to mortgage, credit card and other credit related losses. These are the losses that are the reason for banks to still be cautious about lending generally.

However, even with this big loss, I’m still thinking Lloyds will turn a small profit thanks to the accounting technicalities of fair–value accounting along with phenomenal operating profits. According to what I’m hearing, Lloyds delivered a £7 billion operating profit in the first half of this year thanks to low costs of borrowing due to low interest rates, whilst maintaining high costs of borrowing to customers, in line with the general markets. Add to this gains on write–offs last year, under fair value rules, and Lloyds like RBS will turn a profit.

Unlike the shock of HSBC.

HSBC should be delivering solid results, and usually do, thanks to their globally diversified portfolio. Trouble is, they took over household in the USA just before the subprime disaster hit and, as a result, have written off more losses than any other bank. Over $50 billion worth. No wonder they have activist shareholders baying for blood.

But read a little further between the lines of HSBC’s balance sheet, and you will see that it’s not as bad as it looks. Why? Because the same accounting rules that will gift RBS and Lloyds some profitability will take away the solid performance of HSBC’s operations due to their £12.5 billion rights issue in March.

All in all, it’s going to be a pretty topsy–turvy week ... except that John Varley and his merry crew will be enjoying the surge of being the only UK bank that can claim to be making a profit without using creating accounting ... this time.

[If you want an alternative analysis for this week's banking results, the BBC has a good summation]

UPDATE #1 8:45, 3rd August

Barclays make £2.98 billion profit

Profits at Barclays Capital, the bank's investment arm doubled to £1.05bn from £524m, boosted by its acquisition of Lehman Brothers in the US and strong debt, currency and commodities revenues. But a rise in impairments to £4.56bn, up 86pc from £2.45bn a year ago, dragged profit in UK retail banking down 61pc to £268m and knocked its commercial bank profits 42pc lower to £404m. Barclays Capital reported a £4.68bn writedown on credit market exposures, including impairment on loans of £1.17bn. There was another £3.39bn in other group impairments and credit provisions.

UPDATE #2 9:30, 3rd August

HSBC global profits slip to $5bn

Banking group HSBC has reported pre-tax profits of $5bn (£2.98bn) for the first six months of 2009. The figure is about half what it made in the same period a year ago.

Bad debts halve HSBC's profits

UPDATE #3 17:00, 4th August

Good analysis of UK bank capital ratio's:

BARCLAYS (BARC.L) (Pro forma June 30, 2009**):
Tier 1 capital 47 billion pounds
Core Tier 1 capital ratio 8.8 percent
Tier 1 capital ratio 11.7 percent
Presents the impact of the sale of the Barclays Global Investors business to BlackRock Inc.

HSBC (HSBA.L) (June 30, 2009):
Tier 1 capital $117.35 billion
Core Tier 1 capital ratio 8.8 percent
Tier 1 capital ratio 10.1 percent (June 30, 2009)

LLOYDS BANKING GROUP (LLOY.L):
Tier 1 capital 13.7 billion pounds (2008)
Core Tier 1 capital ratio 6.4 percent (January 2009)
Tier 1 capital ratio 9.8 percent (January 2009)

RBS (RBS.L):
Tier 1 capital 69.84 billion pounds (2008)
Core Tier 1 capital ratio 6.7 percent (March 31, 2009)
Tier 1 capital ratio 9.9 percent (March 31, 2009)

STANDARD CHARTERED (STAN.L) (2888.HK):
Tier 1 capital $21.51 billion (June 30, 2009)
Core Tier 1 capital ratio 8.4 percent
Tier 1 capital ratio 11.5 percent
Pro forma August 4, 2009, reflecting 1 billion pound ($1.7 billion) fundraising

NORTHERN ROCK (NRKx.L)
Tier 1 capital after deductions 0.5 million pounds

(June 30, 2009)

Sources: Reuters; Company reports

UPDATE #4 22:30, 5th August

Lloyds rallies despite £4bn loss (BBC)

Shares in Lloyds Banking Group surged by 11% despite its announcement of a £4bn loss in the first half of 2009, due to mounting bad debts at HBOS. Comments that most bad news was now out and that future results would improve had heartened investors, said analysts. The group, which is 43% owned by UK taxpayers, said £13bn of loans and investments had turned bad, most of them from Halifax Bank of Scotland. It predicted future such charges for bad loans would be smaller.

 

Source: BBC

UPDATE #6, 14:00 7th August

RBS cautious after reporting £1bn losst (Financial Times)

Royal Bank of Scotland on Friday said its results were likely to be poor for the next two years as it reported a net loss of £1bn for the first half of 2009 following a quintupling of impairment charges to £7.5bn. RBS, which is 70 per cent owned by the UK government, said the buoyant performance of its investment banking arm, whose £4.9bn operating profit saved it from posting a worse interim loss, was “likely to weaken substantially in the second half”.

RBS Presentation of Results (100 page pdf)

UP*

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The Top 10 Banks of 2009

And yet another Top 10 list is released today.  This time it's the Financial Times analysis of the leading investment banks of the world (doubleclick image to see the list properly):

This is hot on the heels of the Banker's release of the leading banks of the world, with the most profitable banks being:

ICBC (+$21.3bn)
China Construction (+$17.5bn)
Santander (+$15.8bn)
Bank of China (+$12.6bn)
Banco Bilbao (+$9.64bn)
HSBC (+$9.31bn)
Barclays (+$8.86bn)

and the banks with the biggest losses being:

RBS (–$59.3bn)
Citigroup (–$53.1bn)
Wells Fargo (–$47.8bn)
Fortis Bank (–$28.3bn)
UBS (–$19.6bn)
HBOS (–$15.8bn)

and adds to the Forbes list from April:

Global                                                          Sales      Profits  Assets      Market
Rank     Name          Country      Sector          ($bn)       ($bn)    ($bn)   Valn ($bn)

More to come I'm sure ...

... meanwhile, the UN's Millennium Campaign report, which also came out this week, states that the amount of money found to bail out financial institutions over the past six months is 133 times greater than the amount of aid given to poor countries over the past 49 years.

Point taken.

Where's Wally?

I just used a cash machine that uses plain English.

For example, rather than being a 'cash machine' or ''ATM', the bank refers to it as a 'Hole-in-the-Wall', and had this note on the screen:

They didn't seem too happy when I rang up and said that someone had stolen the wall:

No pleasing some people.

What sort of advert is that?

Walking around the City, one of our bright London cabs drove by and it made me wonder:

Is that a commercial for Barclays or a Barclays commercial?

Either way, we're not as thick as Barclays think or they wouldn't have to spell it out for us would they?

Barclays up over 70%

After losing 74% of their value in the past two weeks, Barclays clawed back much of their market capital losses today thanks to this letter:

Open letter from Marcus Agius and John Varley

• SIGNIFICANT PRE-TAX PROFITS IN 2008

• RECORD INCOME LEVELS ABSORB £8BN OF GROSS CREDIT MARKET WRITE DOWNS IN 2008 (£5BN NET)

• RELEASE OF RESULTS AGREED WITH AUDITORS BROUGHT FORWARD TO 9th FEBRUARY 2009

• CAPITAL RESOURCES WELL IN EXCESS OF REGULATORY REQUIREMENTS CREATE LARGE PERFORMANCE CUSHION

• NO FURTHER CAPITAL SUBSCRIPTION SOUGHT

In view of the events in the banking sector last week, we have decided to communicate now with employees, customers, clients, and shareholders in this open letter in order to address the principal causes of concern which we are hearing. Writing in this way ahead of the release of results is unusual, of course, but the turn of events is also unusual.

Our starting point is that Barclays has £36bn of committed equity capital and reserves; we are well funded, and we are profitable. However, we know that our stakeholders want to see the detailed figures for 2008 as quickly as possible. To enable that, we will bring forward the release of our 2008 financial results, as agreed by our auditors, to Monday, 9th February.

When we announce our results for 2008, we will report a profit before tax for the year well ahead of the consensus estimate of £5.3bn. This is as reported in our statement to the stock market of 16th January. The profit is struck after all costs, impairment and market valuations. Whilst it includes a number of individually significant items, it mainly reflects strong operating profit generation.

The profit includes the gains arising from the acquisition of the Lehman Brothers North American business, and also the gain on the sale of our closed life business.

Also included in the 2008 results are some £8bn of gross write downs (£5bn net of own credit, hedging and attributable income) relating to credit market exposures in Barclays Capital. This amount is arrived at by applying year end valuations and marks to market. It is derived on a consistent basis with, and includes, the comparable numbers for the first half of 2008 which were £3.3bn gross and £2bn net. In the interests of clarity and transparency, we are reporting these numbers on a gross and net basis. We will provide extensive details as to the level of write downs and marks by asset class when we report our results on 9th February 2009.

Our ability to absorb this level of write downs is derived from the strong and diversified income performance in Barclays Capital and from the substantial revenue generation of our retail and commercial banking and investment management and wealth businesses in the rest of the Group. In other words, these figures demonstrate that although we have been heavily impacted by the credit crunch, our income generation was at a record level in 2008 and has enabled us to withstand this impact and still produce strong profits.

As a result of the capital raising announced on 31st October 2008, our capital base has been substantially strengthened in accordance with the capital plan agreed with the UK Financial Services Authority. In consequence, our year end capital ratios, expressed on a proforma basis to reflect the conversion of the Mandatorily Convertible Notes, are approximately 6.5% for the Equity Tier 1 ratio, and 9.5% for the Tier 1 ratio. These ratios are as we announced in our statement to the market of 16th January, and are computed after including the combined impacts on our risk weighted assets of the weakening of sterling and the pro-cyclical effects of the International Basel Accord.

On the basis of the above year end capital ratios, we calculate that the Group's Tier 1 capital exceeds the regulatory minimum required by the FSA by an amount equivalent to some £17bn in PBT. This scale of loss absorption capability, when looked at in the context both of the solid and diversified profitability of the Group during the stress test of 2008, and of the substantial write downs that we have taken, gives us confidence that our capital resources are sufficient to manage Barclays safely and prudently even in these difficult markets. For these reasons we confirm in this letter that we are not seeking subscription for further capital - either from the private sector or from the UK Government.

Our capital position could benefit further from two other sources, which we describe below.

First, on 19th January the UK Government announced a comprehensive package of measures designed to support the UK economy by helping borrowers and lenders. We welcome that package and, alongside other banks, have started a dialogue with the Tripartite Authorities which will enable us to determine the terms on which, and the extent to which, we would wish to insure certain assets on our balance sheet through the UK Treasury's asset protection scheme. The procuring of insurance would have the effect of reducing capital consumption (which would allow the writing of new business in the UK).

Second, the FSA has announced a programme of work to reduce significantly the requirement for additional capital resulting from the pro-cyclical effects of the International Basel Accord. That reduction would be a source of further ratio strengthening.

Before closing, we should say a word about current trading. Recognising that 2009 is not yet a month old, and that the global economy will remain weak, we can tell you that customer and client activity levels have been high. As a result, we have had a good start to 2009. In particular the operating performance of Barclays Capital, benefitting as it is from the now completed integration of the Lehman business, has been extremely strong. The trends that lie behind the strong operating performance in Global Retail and Commercial Banking in 2008 are again observable in its performance in January.

We take this opportunity to thank the employees of Barclays for staying focused, and also to thank our customers and clients for their business.

Marcus Agius, Chairman and John Varley, Group Chief Executive

I told you things can only get better ...

Bears bite Barclays badly

Barclays Bank's shares suffered a real mauling in the last hour of trading in London today, to end 25% down on the day and 40% down on the week.

What's going on?

Well, apart from a sector badly hit by bad news, as discussed in the last blog, Barclays has had a particularly rotten week.

On Tuesday, they announced 2,100 job cuts in the investment and wealth management areas of the bank, followed by a further 2,500 cuts in the commercial and retail banking areas a day later.

WHY DIDN'T THEY ANNOUNCE THESE CUTS ALL IN ONE GO?

They are also the bank that has had investments from Sovereign Wealth Funds in Asia and the Middle East, whilst snubbing the UK Government's bailout last October.

WHERE WILL THEY GET FUNDING NEXT TIME THEY NEED CAPITAL?

Today was also the day that short selling returned, having been banned after the run on HBOS last September.

ARE BARCLAYS THE ONLY UK BANK STOCK WORTH SHORTING IN THE BANKING WORLD TODAY?

No, all banks have had some downside today, but Barclays is the hottest target as they are one of the few UK banks that are not nationalised.

Meanwhile, I think the real issue is that Barclays has started to show internal cracks externally with the departure of their Deputy Chairman, Sir Nigel Rudd, on Tuesday.

Why did he go?

Because, some claim, Sir Nigel thinks that John Varley (CEO) is papering over the fissures and not declaring enough write-downs on toxic debts and reserving accordingly. 

Boardroom battles, poor press announcements, difficult relations with investors and regulators, provide a potent mixture to ensure that the bears attack which, with that 25% drop in the last hour of Friday's trading, they did en masse.

Watch this space as Barclays, even though they are reporting pre-tax profits will be well ahead of analyst's estimates of £5.3 billion, is looking more and more like this poor chap in Alaska last December ...