" Why we have decided not to take funds from the UK Government"

Fascinating post on Alphaville today:

"Message from John Varley: My perspective on Barclays Capital Raising

Monday, 3 November 2008)Dear Colleague

Dear Colleague

There was a lot said and written in the media on Friday and over the weekend about our capital raising and I wanted to write today to share my perspective on what has been said so far (there will be more coverage in due course – of that I am in no doubt).

Often when I write to you I am trying to make sure that you have the arguments at your fingertips so that, if you are challenged by friends or family, or indeed by customers and colleagues, as to what we are doing and why, you have been able to develop your own views.

I am going to cover three areas in particular in this letter:

• Why we have decided not to take funds from the UK Government
• Why we chose to raise capital in the way that we did
• How the path we have chosen looks in hindsight – especially versus the UK Government option"

Read the whole thing:

"It was very clear from the conversations that I had with the UK Government over that weekend that it would, as a shareholder, influence our dividend policy; it would influence our lending policy; and it would become involved in the formulation of strategy. Of course the role of the Board is to protect the interest of shareholders and to create the circumstances in which, over time, we can maximise value on their behalf. And that was what was in the mind of the Board as we came to our decisions: we felt that our ability to do what our shareholders would expect of us would be compromised if Barclays was nationalised."

Of course the government would get involved if the taxpayer's money is involved. He is actually saying that the government would make poor decisions, otherwise, why care about the involvement?

"First of all, the cost of the reserve capital instruments (or RCIs) that we intend to issue is not significantly different to the cost of the preference shares which those who took UK government money will issue, and that is true even if we take into account the cost of the warrants which attach to the RCIs. Second, the discount on the new shares that we are issuing is bigger than the discount that we would have got from the UK Government. But it is significantly smaller than the discount that would have been forced on us had we done a conventional rights issue.

My next point is rather complex but it’s important: it seems to me very clear that the only reason that we would have taken UK Government support was because we had lost the right to choice – i.e., because the FSA would have concluded that it was not safe for us to open for business on the morning of Monday, 13 October"

They're actually paying more to keep the government out. Wow. I approve.

This is what TARP should have done. Make the terms so onerous that only insolvent banks would apply. However, I would have let those banks fail, or have taken them over to get the taxpayers the best deal on saving an insolvent bank, assuming that makes sense. Given AIG, someone must believe that it is.

Here was my comment:

Posted by Don the libertarian Democrat [report]

"It was very clear from the conversations that I had with the UK Government over that weekend that it would, as a shareholder, influence our dividend policy; it would influence our lending policy; and it would become involved in the formulation of strategy."

Obviously, for the worse, otherwise why would you care?

"not significantly different to the cost of the preference shares which those who took UK government money will issue"

But it is more. However, these investors will allow us to make money and run our business correctly.

Take that government.

"But governments were implicitly underwriting the financial system all along. They still are."

Here's another interesting post on the FT:

"Not exactly a private solution. Indeed, even if Barclays is not owned in some part by the UK government, it will still be guaranteed by it – and that matters.

Last month, the UK government asked banks to fortify themselves against further financial shocks by increasing their capital cushions, in return for which it would offer new guarantees on inter-bank lending. To help the banks to raise new capital, the Treasury offered to buy preference shares, albeit only on onerous terms; some hoped that the banks would seek alternatives. This is what Barclays has done."

The British plan is:

1) Banks must increase capital ( The big problem )

2) Government guarantees inter-bank lending ( The resulting problem )

3) Government buys shares in banks ( Seems reasonable to me. Better deal for taxpayers )

4) Terms of loan to be onerous ( Absolutely necessary )

5) Would prefer private solution ( Absolutely )

So, in the U.K., the terms on the loans from the government were thought to be onerous. Really:

"It is striking that these investors are charging more than the UK government’s punitive rate. Given that sovereign wealth funds’ earlier investment in financial institutions have resulted in heavy paper losses, it is hardly surprising that the Gulf royals have driven a hard bargain.

Ultimately, it is for shareholders to decide whether to back this deal. There can be no doubt Barclays is paying a heavy price for a measure of independence."

Now note this:

"The bank, however, is still not entirely independent. One of the great fictions of recent years was that large banks could be allowed to fail and had no state guarantees. But governments were implicitly underwriting the financial system all along. They still are. Regardless of who owns the shares, the UK Treasury must make sure that its large banks are stable – and it has a duty to intervene if they are not.

The Gulf deal has reduced risk for the UK government; in the event of problems, new shareholders will lose out before the exchequer. But Barclays is much too big to fail, and the government would be forced into a rescue if the bank were seriously to stumble. The government may not be in the boardroom but it must keep a watchful eye."

Absolutely. This fiction has been the main point on this blog since the beginning of this crisis. The guarantees are still there. I've already explained what we can do going forward, but it's at least becoming clear to everyone that these guarantees were in place. It only remains to examine how they factored into this crisis.

"Barclays non-governmental recapitalisation efforts don’t exactly appear to be thundering forward."

Interesting post on Alphaville about banks not taking bailout money and how they're doing in getting investment:

"To bailout or not to bailout…

Barclays non-governmental recapitalisation efforts don’t exactly appear to be thundering forward. In the US, meanwhile, as observed by footnoted, banks’ are exhibiting some peculiarly similar recap-PR lines:

NorthernTrust put out a press release yesterday to announce its $1.5 billion infusion because it “fully supports the U.S. government’s efforts to strengthen our nation’s financial system.” There’s also this one from Valley National: “Although Valley is a well-capitalized organization, we believe such a program provides an excellent opportunity for healthy strong banks like Valley to participate in and support the recovery of the U.S. economy”. Even relatively small banks seem to be on message, like First Niagara which said in its press release yesterday, “We are supportive of the Treasury Department’s efforts and remain strongly committed to supporting the economy in Upstate New York.”

Banks’ boards, indeed, face quite a tough call when it comes to using government money. The below has been sent to us from Hilary Winter - a partner at Orrick:"

Do read the whole post.

Here's my comment:

Posted by Don the libertarian Democrat [report]

Maybe the banks that don’t take money from the government should say something like the following:

” We conducted our business in such a way as to not need government money, and are even getting private money in this environment, showing how much we are trusted. And, hey, we won’t lose the taxpayers a lot of money. So invest in us: Don’s Bank: I don’t need no stinking bailout!

I wonder how Casey Mulligan feels about this story?