11/16/07

In keeping up with the current financial crisis, I found it appropriate to do a journal entry on the losses UK bank Barclays suffered as a result of this whole ordeal. It turns out that Britain's third largest bank calculated a £1.3bn hit on the sub-prime mortgage crisis. This writedown is very descriptive and includes £700m against the bank's top-rated mortgage-backed securities, £400m for mezzanine finance exposures and £400m on other sub-prime positions. In addition to this, Barclays said it had written off £500m during July, August and September, and £800m in October alone as the result of a "second leg down" in the sub-prime market when credit rating agencies downgraded a huge number of CDOs (according to BarCap chief Bob Diamond). Since last Friday, rumors had been swirling about the losses the bank could be facing, some rumors put the losses as high as £10bn. While £1.3bn is a great deal less than £10bn, it is still quite a bit of money to lose as a result of the recent financial turmoil surrounding the US and the UK.

Title of Article: Barclays calculates £1.3bn sub-prime loss
Source: The Guardian
Date: 11/16/07

In order to make "consciously conservative" write-off estimates, John Varley, the bank's chief executive, said the bank had carefully analyzed its past and current situation and looked ahead at potential defaults. According to Varley, this recent extensive disclosure by Barclays "demonstrates the strength and resilience of [its] performance during the year and in particular during the turbulent month of November." However descriptive it may have been, however, there is still some ambiguity. Philip Richards, analyst at Execution, says that "they've given us some clarity but the numbers are still pretty big" and points to Barclays' £5bn exposure to CDOs (collateralized debt obligations), £5.4bn for its whole loans and trading book, and a £7.3bn exposure from unsold leveraged finance underwriting positions.

With the exception of the criticism from Richards, the descriptive write-down analysis by Barclays has received praise. Analyst Alex Potter at Collins Stewart said the statement was confidence-inspiring and commended Barclays officials by saying that they went though their situation with a fine-tooth comb and made some realistic decisions. Analysts at Credit Suisse said that the statement was useful and will put a backstop, at least for now, on the speculation that much bigger losses had emerged.

Surprisingly enough, the huge scale of the write-downs has not held the bank back. The BarCap business has still generated huge profits--£1.9bn in the first 10 months of the year, which is ahead of last year's October total. In the full 2006 year BarCap made a record £2.2bn. Diamond said that other parts of the BarCap business had been making profits with "strong growth" across commodity, equity, currency and interest rate products, and "excellent contributions from continental Europe and Asia and good results in UK markets." Varley added to this that Barclays has been "firing on a lot of cylinders."

Since its onset in August, the crisis has caused a plethora of problems. Not only has it caused numerous amounts of companies a great deal in losses, but it has also virtually destroyed the structure and stability of the sub-prime market. In the beginning of the article, Diamond described the sub-prime market as "a mess" that would take up to two years to be sorted out. This opinion is most likely shared by many if not all financial experts and demonstrates the problems that the crisis has presented. From our discussions in class and from the news reports I've read, I can only agree with Diamond's statement. The market is literally a mess right now and will most likely take an army of people and a great deal of time and planning to rehabilitate it.