Speculation had been flying about the City for weeks that Barclays was sitting on massive losses from its investments in dodgy US mortgages, causing the share price to bounce up and down like a head-banger at a heavy metal concert (trading was even suspended briefly on Friday when the rumours reached a peak). As a result, the bank has been forced to issue an emergency trading update, even though it’s only two weeks until their quarterly results.
The news wasn’t great – but it could have been a lot worse. Barclays was forced to write off £800m in October on top of a £500m write-down in the previous quarter, leading to a total loss of £1.3bn. Bob Diamond, who runs its investment banking arm Barclays Capital, blamed this on ‘the impact of rating agency downgrades on a broad range of CDOs and the subsequent market downturn’. He said the bank had changed the way it valued its exposure, taking a more conservative approach and writing down the value of its riskiest collateral backed securities to zero.
As you’d expect, Diamond was putting a brave face on things today, pointing out that pre-tax profits of £1.9bn for the year to October (despite the losses) was still an improvement on last year’s record total. Although that’s largely because the division had such a storming start to the year, making profits of £1.7bn in the first half. He also stressed that other areas of the bank – such as its commodity, equity, currency and interest rate products – were all going great guns.
But there may be more bad news to come yet. Barclays still has billions of pounds tied up in US sub-prime mortgages through all sorts of complicated financial products with silly names, particularly since it bought US mortgage originator EquiFirst in March.
And it also revealed today that another big area of its business is feeling the squeeze. As one of the biggest lenders to private equity, the recent slow-down has taken its toll – BarCap has managed to shift £1.7bn of leveraged loans in the last month or so, but it still has £7.3bn sitting on its books. But Diamond was bullish about this too, suggesting that the pipeline should start moving again in the first quarter of next year.
Until recently, BarCap has been a money-making machine, giving Diamond the reputation of a man who could do no wrong. Turns out that he is human after all…