Regulatory arbitrage of the day, Barclays edition

By Felix Salmon
September 17, 2009
Nils Pratley and Neil Unmack both have good columns on the latest bit of regulatory arbitrage by Barclays. Essentially, the UK bank is taking $12.3 billion of toxic assets and replacing them with a $12.6 billion loan to some kind of special-purpose entity which exists to own those assets. By doing so, Barclays gives all the upside on that toxic debt to the new vehicle, called Protium; in return, it gets lower balance-sheet volatility, since the loan to Protium doesn't need to be marked to market every day. The total amount of capital that Barclays has at risk will go up; meanwhile, the degree to which Barclays' shareholders will have any degree of transparency will go sharply down.

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Nils Pratley and Neil Unmack both have good columns on the latest bit of regulatory arbitrage by Barclays. Essentially, the UK bank is taking $12.3 billion of toxic assets and replacing them with a $12.6 billion loan to some kind of special-purpose entity which exists to own those assets. By doing so, Barclays gives all the upside on that toxic debt to the new vehicle, called Protium; in return, it gets lower balance-sheet volatility, since the loan to Protium doesn’t need to be marked to market every day. The total amount of capital that Barclays has at risk will go up; meanwhile, the degree to which Barclays’ shareholders will have any degree of transparency will go sharply down.

The fact that the UK regulators are letting Barclays get away with this is very depressing — and yet another sign that in the world of high finance, we’ve learned nothing, and nothing has changed. For all the grand rhetoric which will be ladled on in Pittsburgh this weekend, the base-case scenario now is that nothing substantive is going to happen at all when it comes to regulatory reform.

Comments
5 comments so far

If Barclays had been bailed out by tax-payers the move would be outrageous – but it wasn’t. So as long as the transactions are legal and shareholders are happy then it’s no big deal.

It’s capitalism. Greed, short-term profits, the pursuit of bonuses, cosy deals with pals. Nothing’s changed.

Can you expand a bit – how has the amount of capital at risk gone up? Is it just 12.6>12.3? or is there something else going on? Why has the transparency to shareholders gone sharply down? Can’t shareholders find out about what’s going on at Protium as often and easily as they can obtain information about the value of toxic assets marked to market if they were still held by Barclays?

Posted by Luis Enrique | Report as abusive

You should google R3 capital and Lehman. Same trick, different company (or is it really a different company?).

Posted by Brown Ram | Report as abusive

did nobody have to kick in equity capital? does barclays own all the equity of protium?

if there is enough equity capital at protium, then, sure, this makes sense.

Posted by q | Report as abusive

article in housingwire differs from what you say.

they say that the assets remain on barclays’ balance sheet for regulatory cap purposes and that this move serves to lower balance sheet volatility for investors, not for regulatory capital purposes.

i don’t know the truth, but this story differs from yours:
http://www.housingwire.com/2009/09/17/ba rclays-sells-123bn-of-assets-to-protium- finance/

Posted by q | Report as abusive
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