LONDON -- Another week, another constituent of the FTSE 100 index falls from grace. This time it's Barclays'
The shares, at 170 pence, now value Barclays at well less than half of its tangible net assets. That's value territory, if the balance sheet is to be believed. So is now the time to buy?
"Not so fast" would be my advice. Many investors piled into BP
A horse of a different color
This week, any slight recovery may well be premature, as the true story still seems to be evolving. That said, Barclays did steal a march by cooperating with the authorities and settling first. The impact on other banks -- including Royal Bank of Scotland
But it looks as if there are actually two issues. First, over a long period of time, LIBOR submissions were tweaked to help the positions of traders at Barclays and other banks. But at the height of the financial crisis in 2008, Barclays also lowballed its submissions to give the impression that its finances were sounder than they really were.
According to an anonymous insider reported in the Daily Telegraph, Barclays was paying 5% or 6% for funds while it was reporting LIBOR of 2%. If that's true, it wasn't just tweaking; it was downright misrepresentation -- and it was done at the behest of senior management to keep the bank afloat, not to line traders' pockets. That's a whole different dimension.
Barclays has a wall to climb before it gets over this crisis.
First, it risks management disintegration. The chairman, and now chief executive Bob Diamond, have been forced out, with the outgoing chairman now standing in for the immediately departing CEO. That's a management car crash if ever there was one.
Bob Diamond built the investment banking division to be the most important part of Barclays, and his loss will surely cost the bank dear. Though his departure was necessary to diffuse the reputational impact on Barclays, the board now faces a dilemma.
The board, overloaded with former investment bankers, is bereft of anyone with experience in retail and commercial banking. So Diamond's exit naturally augurs well for the prospects of Antony Jenkins, the retail bank's respected head. But what would that signify for the investment banking profit stream?
Furthermore, Bob Diamond had appointed a number of loyal lieutenants to key positions. They include Jerry del Missier, the recently appointed group chief operating officer, and Rich Ricci, head of the investment banking division, both of whom worked closely with Diamond in the U.S. Diamond's departure may either lead to a number of further executive departures or leave them isolated and mistrusted.
The threat of legal action looms. U.S. lawyers have already begun lodging civil claims against the banks, and class actions might spiral as they did after BP's Gulf of Mexico accident.
Cenkos Securities has suggested that damages could amount to several billions each for Barclays and RBS, which could make a measurable dent in their respective balance sheets. Whatever the figure, litigation is likely to be lengthy, disruptive, and expensive.
One certain consequence of the scandal will be increased focus on bank regulation. The Vickers proposals to ring-fence retail and commercial banking from investment banking, expected to come into force in the U.K. in 2019, could be accelerated and/or tightened.
Investment bankers will be looked on with even greater suspicion, especially so when they are part of a universal bank. That's likely to hit Barclays disproportionately hard, given its greater dependence on investment banking, which represented 50% of profits during 2011 and the first quarter of this year.
And let's not forget why Barclays' shares are down 40% over the past year, when the FTSE 100 has lost just 2%. Indeed, it is financial stocks, which comprise 20% of the index, that have pushed it into negative territory. The banking sector remains extremely vulnerable to the eurozone crisis and the risk of contagion.
Banking is an industry I've largely steered clear of, preferring to put my money in safer sectors like the ones described in this free report from The Motley Fool: "Top Sectors for 2012."
At some point, the market's fear will be overdone, and Barclays may well be a bargain. As with BP, it would be wise to wait until both the full extent of the problem and the plan for its resolution are clear. I think that's some time away yet.
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