I don't really like commenting on day-to-day news as I subscribe to the view that most of it is noise that distracts from what is really going on. Why bother wasting your time and effort when it doesn't really matter?
For example, who cares if the FTSE goes up 1% one day due to 'reason x' only to fall 2% the next due to 'reason y'. All that matters is what happens in the long term. So why bother trying to understand 'reason x' when it is just the opinion of some random journalist?
But the story of Barclay's profits is an interesting example of the current economic situation. Robert Peston did a piece on it in his blog yesterday. The numbers are totally barmy!
It is clear as mud what is going on with Barclays. They haven't taken any bailout money (yet!) but have probably secured some of the assets with the BoE, but that's not really clear either at present.
They announced £6.1bn of profits yesterday at a time when most of the competition are suffering either heavy losses or total collapse. Impressive - you'd have to make 3,050,000,000 ironing boards to generate that much profit. The equivalent of 50 ironing boards for every person in the UK!
But the profits suggest Barclays should be valued at 5-10 times their current share price (the price earnings ratio is something like 1.3 compared with an average around 10). But they're not, suggesting the market has doubts about how 'real' their earnings really are. So something doesn't stack up. 'No smoke without fire' springs to mind...
But what really confuses me are the assets held by Barclays. They've gone up from £1,227bn to £2,053bn in the last year. So they hold the equivalent of 205 billion ironing boards of stock - that's a BIG warehouse! Or the equivalent of 3,400 ironing boards per UK person. That's a big number...
But this is at a time when assets have generally lost value - but the profits suggest their value has gone up. What are these magical assets? I realise they have been boosted by the aquisition of some of (collapsed) Lehman Brothers, but it still does not make sense. There just is no transparency...
It's mad. But we'll have to wait for the history books to be written to know how this story finishes...
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Loving the ironing board metric!
ReplyDeleteI assume Peston hasn't ignored the stocking great acquisition of Lehmans US in Oct and their "assets"? That was my working assumption?
But according to their results, Lehman's was a net gain; the results apparently had a £2bn(?) sweetener from the US Govt to cushion the deal which topped up their results (& bonus) nicely.
ReplyDeleteSo their balance sheet is boosted by £800bn at a time when most assets are down. Ooookkkayy! Plus the aquisition was given basically free of charge. I wouldn't mind a slice of that. I'd even be prepared to make do with the Govt giving me just £1bn of assets free! Suppose a few million might even be handy if there's not much of Lehmans left!
I'd then go straight down the pawnbrokers (Fed/BoE) and cash those fine assets in! Where's the flaw in that????!!!
My rather ropey understanding is that Barclays 'only' have about £17bn of reserves. So a 1% fall in asset values and they'll be have to get the begging bowl back out to their SWF buddies in the Middle East. Not much of a cushion.
Hey, fingers crossed!!
Whole thing looks like a house of cards to me. Assets are almost 1.5x UK GDP. May be a case of too big to fail yet too big to survive if things get worse.
ReplyDeleteI'm not sure the UK alone can absorb this one easily, so we have to keep our fingers crossed things don't get worse.
The banks are all big houses of cards (by design if you ponder them for too long)... the accounting rules make the houses impossible to evaluate and understand and even if you can, assets are only going to be worth what someone else is willing/able to pay for them today...
ReplyDeleteOn the balance sheet, I agree that Lehmans is a net gain of £2bn, but I'm guessing (and only guessing) several hundred £bn of Lehmans assets come with several hundred £bn of liabilities, hence the ballooning balance sheet?
If Barclays only have £17bn in reserves, that means all historical profits made over the life of the bank have been burnt up in the past year? They should have £10bn from the arabs and £6bn of "profit" from this year, plus historical reserves...
Also highlights one of the less mentioned effects of the bonus culture - giving all the Ironing Boards ;-) in bonuses systemically depletes the bank of capital and reserves when it is making "profits" and distributes it to individuals with no down side risks at all.
I think tomorrow's Mirror has the winning headline...
The accountancy appears to a bit of a fudge. The profits appear to be coming primarily from whatever they want to value the assets at. So, what do you know, they value them as being at a level to generate billions of profits (and bonus).
ReplyDeleteThe idea of making a few billion profit from losses on your own bonds sounds bonkers. Or maybe cannibalism?
The world has definitely gone mad...