CEO rejects Barclays subprime concerns

Barclays' chief executive officer, John Varley, says the bank doesn't need a bailout from the UK government. Investors aren't so sure.

Barclays fell 23% in the past two days on concern the UK's second-biggest bank didn't have enough cash to finance operations after the purchase of Lehman Brothers' North American securities unit. The firm may be stretched further if it has to write down more of the toxic assets held by Barclays Capital, the investment banking unit headed by Robert Diamond.

''People can say what they will say,'' Varley said October 3 in an interview at Barclays's offices in London's Docklands district. ''The disclosure that we gave at the half year was pretty much unprecedented and, of course, we feel completely confident in the rigor of the marks.''

In the first six months, Barclays took writedowns of 2.8 billion pounds ($US4.9 billion) on assets exposed to credit markets. The lender has an additional 3.6 billion pounds of losses to record, making it the UK's ''least well-capitalized bank,'' Dresdner Kleinwort said in a September 22 note to clients.

''Barclays does have a potential problem,'' says Alan Beaney, head of investments at Principal Investment Management, which manages $US2 billion, including Barclays shares. ''They have not marked down some of their assets as low as other people.''

Chancellor of the Exchequer Alistair Darling said last night that he will announce a plan today to put British banks on a ''sound footing.'' He didn't give details.

Barclays hasn't asked the government for capital and has no reason to do so, Varley said in a statement released earlier in the day in response to reports that the CEOs of Britain's largest banks had met with UK officials.

Diamond Estimates

Diamond, 57, wrote down the value of collateralized debt obligations tied to US subprime mortgages by 31% to 3.2 billion pounds in the first half. The losses were based on an estimate of what buyers may be willing to pay when the underlying loans mature.

By comparison, Edinburgh-based Royal Bank of Scotland and UBS of Zurich valued their subprime-linked CDOs as if they were being sold under current market conditions. RBS cut the value of similar assets by 50% to 2 billion pounds. CDOs group lower-rated loans into securities that are worth more than the underlying assets.

Barclays's CDOs are held in its reserves where, under international accounting rules, the bank sets aside cash to cover losses only when the loans start to default. Many of Barclays's peers, including New York-based Citigroup Inc. and Zurich-based Credit Suisse, treat CDOs as tradeable assets that must be valued at market prices.

'Not Immune From Market'

Barclays has repeatedly explained how it calculates writedowns on toxic debt, and most investors are satisfied with the bank's position, Diamond said in an interview yesterday.

''People now understand that risk is not generic,'' he said.

Still, Barclays would benefit from publishing a second set of figures showing how the losses compare to those of its peers, said Peter Hahn, a capital markets specialist at Cass Business School in London and a former Citigroup managing director.

''Barclays can say it is not appropriate, but it is not good information if they don't do it and things change,'' he said.

Barclays has also reported smaller losses than its competitors on loans used for buyouts. While Barclays took a 42 million-pound writedown on 7.3 billion pounds of such loans in the first half, RBS cut the value of its loans by 26% to 10.8 billion pounds.

''We feel very comfortable with our positions and the disclosures we have made,'' Diamond said. ''We are not immune to the market conditions.''

Barclays Capital

Diamond's units, which also include wealth and fund management, helped Barclays report five straight years of increased profit through 2007 and contributed about 45% of the bank's 7.1 billion-pound pretax earnings last year.

In the first half, Barclays Capital's pretax profit slumped 69% to 524 million pounds.

It is ''realistic'' to expect that Barclays Capital's annual profit growth will slow, Varley said.

''If we're going to be able to compensate for that deceleration, I need other Barclays businesses revving up,'' the 52-year-old CEO said.

''Would it be true to say that for a lot of this decade we were overly dependent on Barclays Capital for growing Barclays group as a whole? I think that would be a fair comment.''

More than half of Barclays's profit in the first six months came from UK retail banking, commercial lending and credit cards. The bank's goal is to diversify its earnings geographically and across business lines, Varley said.

Loans to Deposits

Barclays, like its competitors, is relying on overnight money market loans and central bank funds to help finance its lending as longer-term credit markets freeze.

In the first six months of the year, Barclays loaned 1.24 pounds for every pound of deposits it received, 38% more than London-based HSBC, which has the best loan-to- deposit ratio among UK banks.

On September 17, three days after Barclays ditched efforts to buy New York-based Lehman Brothers as a whole, Diamond picked off Lehman's North American unit following the firm's bankruptcy filing. Later that day, Diamond told investors the $US1.75 billion deal was a ''once in a lifetime opportunity.''

'Sensible Deal'

While Barclays didn't acquire any of the division's toxic assets, it has taken on $US68 billion of liabilities and about 10,000 employees.

''We are confident we can continue to invest, and people now have to execute on that,'' Diamond said. ''We are comfortable with our capital position.''

On September 18, Barclays sold 701 million pounds of new shares to undisclosed investors to help finance the Lehman acquisition and other operations. The buyers have lost 57 million pounds, based on yesterday's closing price.

''Lehman looks a pretty sensible deal, but it depends on how bad things get,'' says Colin Morton, who helps manage $US3 billion, including Barclays stock, at Rensburg Fund Management. ''If markets continue to deteriorate, Barclays may be wishing they had saved every penny and hadn't done it.''

Bloomberg