Since that story broke last week about Blackrock (maybe) muscling in on the iShares sale to CVC Capital Partners by swallowing the entire Barclays Global Investors (BGI) operation I have wondered what possesses the bank's board, in actual context, of the necessity to dump such an asset.
FT Alphaville last Friday covered much of the ground in this regard and generously provided one analyst's take (Alex Potter at Collins Stewart):
"Whilst BGI does generate c.15% of Barclays group profits, is a relatively low-risk business and has been a great success since its acquisition from Wells Fargo and Nikko in 1995 for $440m, the benefit of raising book value and capital whilst avoiding government intervention outweighs this loss, in our view."
The bothersome part is not that it leaves the fate of earnings in the hands of the investment bank which, thanks to the Lehman acquisition, had a strong first quarter. That the level of these results is probably not sustainable is a given. There will be volatility.
No, the curious bit is what they left behind on the balance sheet instead. "Sell your losers" is the difficult but necessary task of market business.
Barclays has £18 billion of leveraged loans and commercial real estate sitting on its books. Mostly the latter. And, whilst page 1 of Friday's FT led with the potential $10 billion BGI sale, page 3 was entirely devoted to rising defaults in UK commercial property (link to web version). For its part, Barclays wrote-down £2.6 billion, partly in this sector, during the first quarter: the £18 billion referred to above is the post-losses number.
As the FT article sets out, UK banks do not want another 1990s property slump to deal with. They are therefore not calling in the loans but gouging borrowers on the rollover. Sounds a good idea for margins but this puts them in danger of doing a Japan and "supporting" problem loans in the very sector that requires the unpleasant medicine of a shakeout.
That would allow Barclays (and the others) to keep classing such loans as performing. But it will also contribute to keeping capital values at depressed levels - including those on their own balance sheet. To perhaps end up doing it with the good money made from the sale of a true asset whilst merely only delaying the day when government intervention is required looks the risk.
Barclays diluted shareholders twice in 2008 to the tune of nearly £12bn - all at a cost higher than the terms on offer from the UK's Treasury. Now it hopes to get another £6bn to £7bn from BGI. It all looks mightily like selling winners in order meet margin calls on losers.
Perhaps there will be no more deterioration beyond what is forecast by the bank (1.5% impairment this year on the whole loan book). But in the event that they are wrong (again) one wonders where the next pot of money will come from if not the public purse. Equity holders should wonder too.
All guesswork, of course, although the Japan "zombie" banking experience through five public recapitalisations is a handy guide.
NB: Scribe short BARC