Monday, 9 February 2009
According to Robert Peston, Barclays' share price appears not to reflect the underlying state of the bank. It raised £10bn in new (private, not public) capital last year and made £6bn in pre-tax profits (between £4bn and £5bn post-tax). Thus, in theory, its balance sheet should contain around £15bn of new capital since this time last year. Not to mention whatever was on there before.
And yet, its shares are valued at under £9bn. Presumably this is because of uncertainty about the value of some of its assets, and the fear that they will be written down - eliminating the capital base of the bank.
So why doesn't Barclays take - on its own initiative - the advice many economists have given to the US government, and create its own "bad bank"? It could simply split itself into two or more pieces, with the better half of the assets in Bank A and the riskier half in Bank B; and provide the minimal required capitalisation to bank B. B would carry off a big chunk of capital but, on the basis of the accounts, by no means all of it.
Bank A, "good Barclays", would be left as a strong and low-risk institution whose market value would surely exceed £9bn; Bank B, "bad Barclays" would be much riskier, but even if its shares became completely valueless the shareholders would be better off.
This might not be "playing fair" - it would risk shoving the liabilities of Bad Barclays onto the government - but it would surely be in the interests of the shareholders, who are so far still in control of the bank. And, arguably, in the interests of the economy by providing at least one large, secure, well-capitalised bank capable of providing credit to willing borrowers.