2012 wasn’t a good year for Barclays. Thrust into the spotlight over a scandal about rigging the world’s most important financial benchmark—the London Interbank Offered Rate (Libor)—the bank lost three of its top people, including its chief executive and darling of the London financial world, Bob Diamond.
Yesterday (Feb. 3), two more joined them. The bank announced the retirements of finance director Chris Lucas and general counsel Mark Harding.
Lucas has been one of those under investigation since the summer over a deal that, if the stories that surfaced recently are true, would leave Barclays’ Libor-rigging looking angelic by comparison. As the Financial Times reported Jan. 31, Barclays may have engaged in some shady dealings (paywall) with Qatar Holding, a subsidiary of the Qatari sovereign wealth fund, and Challenger, the Qatari prime minister’s investment vehicle, to help the bank misrepresent its assets to the UK government and to its shareholders.
The story as it’s been reported so far goes something like this: As the global financial crisis unfolded, Barclays was doing everything it could to avoid a government-led bailout. For one thing, it didn’t want the stigma. But it also may have been leery of letting the government scrutinize its operations. (As a condition of their accepting taxpayer-funded bailouts, both Lloyds and the Royal Bank of Scotland were subjected to stricter government oversight.)
Barclays raised capital twice in 2008 in a bid to stay independent, and Qatar Holding and Challenger ultimately chipped in £6.1 billion ($9.7 billion) of that. Here’s the catch, though. It might not have actually been Qatar Holding’s or Challenger’s money at all. Rather, it now looks like Barclays loaned the Qataris money to invest back into Barclays. In October of that year, Barclays sweetened the deal, paying Qatar Holding £66 million for “having arranged certain of the subscriptions in the capital raising,” according to Barclays’ financial statements.
Why would Barclays do this? Why not just count that money as capital you don’t need to raise, instead of loaning it to the Qataris and taking it back? The answer is that it got to count a rock-solid loan on its books, as well as accepting the capital needed to avoid inviting a government bailout. It’s almost like double-counting the money Barclays actually had; instead of just keeping that cash on its balance sheet, Barclays could increase its value in equity markets and the safe assets on its balance sheet.
Why it’s worse than Libor
It’s not clear what might happen as a result of this discovery. The British authorities uncovered the deal in the course of a larger, ongoing investigation. So far no charges have been filed—and it’s not clear what such charges might even be. Barclays, for its part, has to date refused to comment on the investigation.
But if Barclays was misleading regulators to believe it was on better financial footing than it was, these allegations would be far more egregious than rigging Libor. In tinkering with borrowing rates, Barclays was a) doing something that every other major financial institution was also doing; and b) conducting an activity that wasn’t even strictly illegal. More than anything, the Libor scandal explains the failure of the rate-setting system rather than illuminating the bad behavior of any specific bank. And despite the media hue and cry about Libor, Barclays’s involvement ultimately earned it little more than a sharp slap on the wrist from UK authorities. The £290 million fine, while a record for fines of its kind, was only about 10% of the bank’s pre-tax profits the previous year.
Paying Qatar Holding and Challenger to help the bank distort its assets, however—that would be a far more reckless form of deceit. If Barclays did indeed make this deal with the Qataris, that would mean it willingly risked insolvency rather than accept government help, even though it was on shaky financial footing. That not only left the bank in a precarious position, but it could also have done further damage to the entire financial system.
The bank may face steep monetary penalties or even criminal charges if it turns out that it lied to regulators. It appears odd that the government would not have noticed—and registered concern about—a funding structure like this in the process of examining Barclays’ need for a bailout.
But as Louise Armitstead points out in The Telegraph, even lending money out to fund oneself looks pretty darn illegal. Section 678 of the UK Companies Act 2006 expressly prohibits firms and their subsidiaries from providing “financial assistance” to anyone buying their shares. Although the capital-raising scheme was complex, if the loan existed at all Barclays could face punishment.
Admittedly, it’s all water under the bridge, to some extent. Barclays made it through the financial crisis with its head well above that water. It’s weathered a shakeup of its executives, and while financial penalties may smart, they rarely derail banks in the long-term. Still, it looks like CEO Anthony Jenkins has yet another public relations hullabaloo on his hands.