The deal makes BlackRock the world’s biggest asset manager

FROM REUTERS:

BGI-BlackRock by the numbers

"What’s the BGI deal?

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Posted by: Chris Kaufman

Tags: DealZone, European equities, Global Investing, Barclays, bgi, Blackrock

Apture™

by Paehder

Barclays will look a whole lot healthier after securing $13.5 billion from BlackRock for its crown-jewellish BGI asset-management arm. This is the same Barclays that turned down aid from the British government and bought defunct Lehman Brothers’ U.S. investment banking business in September, giving it that heroic posture of a down-but-not-out, maybe somewhat punch-drunk prize fighter — Britain’s own Rocky Balboa. Now, as far as Chief Executive John Varley is concerned, BGI-less Barclays is one of the best-capitalized banks in the world.

Investors are cheering Barclays on. Its share price has soared more than fivefold in the last three months, after crashing to a 24-year low on fears that it might need taxpayer funds.

The deal makes BlackRock the world’s biggest asset manager. Though the wealthy of the world are hurting in the recession along with the paycheck-to-paycheck crowd, it’s hard to see Barclays staying in the back seat of the lucrative asset-management market for long. Under the cash-and-shares deal, Barclays takes a 19.9 percent stake and two seats on the board of the enlarged group, to be called BlackRock Global Investors (giving the new firm the added bonus of not having to change BGI’s stationery)."

All of a sudden it seems to be a sellers’ market for financial assets.

From Alphaville:

"BGI sale to Blackrock nears, $12bn price tag mooted (updated) Posted by FT Alphaville on Jun 05 17:52.

All of a sudden it seems to be a sellers’ market for financial assets.

Usually knowledgeable sources indicated on Friday that Barclays is now very close to completing the sale of its entire asset management arm, Barclays Global Investors, to American rival Blackrock. A statement was being prepared for release in New York after the market close, although sources warned that a formal announcement could be delayed by last minute haggling over price.

A price tag of $11-13bn has been mooted — substantially in excess of market expectations.

Barclays was first approached about selling the whole of BGI back in February. The bank subsequently decided to shore up its balance sheet by selling just iShares, its market-leading exchange trade fund business, to CVC Capital Partners. But the $4.4bn terms included a “go shop” provision (which ends on June 18) - and this left the door open to fresh approaches for the whole of BGI.

Blackrock’s interest in BGI was eventually confirmed towards the end of May.

Of the $11-13bn proceeds, some $175m will go to CVC in the form of a break-fee, but attaining such a full valuation for a business with assets under management of around $1,600bn is bound to impress - even if it was supposed to be the jewel in the Barclays crown.

The move will clear away any nagging doubts over Barclays decision to avoid seeking bailout funds from the UK government.

Oh, and Bob Diamond gets another fantastic payday.

As for Blackrock, which has been advised by Credit Suisse and Citigroup, the only question now is how it will fund the deal.

UPDATE 19.00: Still not clear whether this deal will be finalised on Friday. But one tidbit to add is that Barclays could well retain a stake in the newly merged Blackrock/BGI. So there is the potential here for Barclays Capital to get a new big customer (it doesn’t trade with BGI at present), while also sharing in the upside. If there is any, of course.

Neil Hume and Paul Murphy

This entry was posted by FT Alphaville on Friday, June 5th, 2009 at 17:52 and is filed under M&A, Capital markets, People. Tagged with barclays, blackrock, bob diamond, credit suisse, CVC capital, larry fink, roger jenkins.

Me:

Don the libertarian Democrat Jun 6 04:53

"All of a sudden it seems to be a sellers’ market for financial assets."

I believe that this is also influencing the behavior of asset owners towards the proposed Legacy Loan Program.

it's boom time again for those firms lucky enough to be alive

TO BE NOTED: From the BBC:

"Victor Blank may be proved right (eventually)

Robert Peston | 08:48 UK time, Monday, 18 May 2009

The most colossal amount of lending capacity has been taken out of the banking system.

That is another way of saying that we've been living through a credit crunch. D'oh!

But for all the damage that the collapse of some banks and the shrinkage of others has caused to the global economy, there is an attractive consequence for shareholders in those banks that are still standing.

You can already see it in investment banking, where the few remaining independent investment banks and the investment banking arms of Barclays and Royal Bank of Scotland among others have been coining it since the start of the year.

Whether it's underwriting and distributing issues of bonds and equities, or trading in currencies and fixed interest, it's boom time again for those firms lucky enough to be alive.

And for banks more widely, including retail banks, the reduction in capacity means a reduction in competition.

So the margins that banks earn on lending - the gap between what they pay for their funds and what they charge to borrowers - has widened very considerably.

Actually, that's not quite true yet for those banks disproportionately dependent on special taxpayer-supported funding and asset insurance from central banks and finance ministries.

Finance provided by taxpayers tends to be pricier, which most would say is only fair: we wouldn't want the banks to make a habit of coming to us with the begging bowl.

So the likes of Royal Bank and Lloyds aren't yet coining it.

Also, of course, any widening in margins they achieve this year may look irrelevant when bad debts on conventional lending to households and businesses are rising so fast.

To put it another way, since Royal Bank and Lloyds will make massive losses this year, you may think that I'm bonkers to be extolling their intrinsic profitability.

But make no mistake: these are giant money-making machines with enormous and rising market shares in a relatively closed retail banking market called the UK.

If you thought that they were monsters before the credit crunch - and many did - you ain't seen nothing yet.

They face far less competition than they did a couple of years ago: the American and Irish banks have reduced their presence in the UK; the Icelandic banks, former building societies and newly created specialist lenders have crumbled and most extant mutual building societies simply can't raise sufficient deposits to pose much of a threat.

Yes, the mighty Tesco is coming in and promising to be a formidable competitor. But the sensible way of seeing Tesco's ambitions is as proof of the huge profits to be made in a market where the balance of power has shifted decisively from the consumer (that's you and me) to supplier.

Against that backdrop, the claims of Lloyds that buying HBOS represented a once-in-a-generation opportunity don't look exaggerated.

Lloyds' shareholders will argue that they've paid far too big a price for this opportunity: HBOS's losses on its reckless loans hobbled Lloyds and led to it being semi-nationalised.

But there will come a moment when it has absorbed all the losses generated by imprudent loans and investments made in the bubble years.

At that point, Lloyds will be a gargantuan collector of our earnings and savings.

So if you believe that wholesale sources of funding are unlikely to gush again for years, if ever, Lloyds will have a mind-boggling competitive advantage: disproportionate power in banking will reside with those, like Lloyds, able to hoover up precious cash from households and small businesses, for recycling into loans.

Perhaps, therefore, Sir Victor Blank - jumping from Lloyds before being defenestrated (see yesterday's Picks) - will, in two or three years, be able to blow a raspberry at his critics."

strategy announced in January that would separate Citigroup’s main banking business from its other assets

TO BE NOTED: From the NY Times:

"Citi Will Sell Japan Units, Bolstering Its Capital

By HIROKO TABUCHI

TOKYO — Citigroup said on Friday that it would sell its Japanese brokerage and investment banking units for $5.56 billion, securing much-needed capital before results expected next week from a government “stress test” of its financial health.

Citigroup, the recipient of about $45 billion in bailout money, will sell its Japanese securities arm and parts of its investment banking business to Sumitomo Mitsui Financial Group.

The overall transaction, including shareholdings and retained debt payments, is valued at 774.5 billion yen ($7.8 billion), Citigroup and Sumitomo Mitsui said. Citigroup said it would realize a loss of $200 million on the transaction, which would generate $2.5 billion in tangible common equity, a measure of financial health.

Citigroup’s sale of important businesses in Japan would reverse an ambitious, yet short-lived, push into the country. Just two years ago, the bank, based in New York, had spent about 1.6 trillion yen to acquire the Nikko Cordial franchise.

But Citigroup has been scrambling to raise capital after a year of crippling losses that has led to three bailouts, the last of which gave the government a 36 percent stake in the bank.

Vikram S. Pandit, Citigroup’s chief executive, called the sale “another step in the execution” of a strategy announced in January that would separate Citigroup’s main banking business from its other assets.

Citigroup’s sale in Japan includes Nikko Cordial Securities, a large brokerage firm, and parts of Nikko Citigroup, the investment banking unit of Citigroup in Japan.

The transaction does not include Nikko Asset Management, which is expected to be sold separately. The sale also leaves out Citigroup’s consumer banking and credit card assets in Japan, which Citigroup says it will keep.

The deal comes as United States regulators prepare to disclose results of the stress tests, which are assessing the banks’ ability to withstand a further deterioration in the economy.

With its purchase, Sumitomo Mitsui hopes to close the gap with the top brokerage house in Japan, Nomura Holdings. Nomura bought some of the operations of the failed investment bank, Lehman Brothers, last year.

Sumitomo Mitsui invested $745 million in the British bank Barclays last year and has had capital ties with Goldman Sachs since 1986. The Japanese bank said Friday that it would also work with Citigroup in the securities brokerage, sales and trading businesses.

Japanese banks have been looking to expand globally and increase fee revenue amid sluggish corporate activity at home. But losses on recent investments, as well as mounting bad loans and write-downs in the value of shareholdings, have battered their balance sheets.

On Friday, the biggest bank in Japan, Mitsubishi UFJ, said it expected to swing to a 260 billion yen loss for the year ending next March, compared with a previous forecast of a 50 billion yen profit. Mitsubishi UFJ, which invested $9 billion in Morgan Stanley last year, said its equities losses were likely to come to 520 billion yen.

Sumitomo Mitsui booked a loss of 390 billion yen in the year ended March 31. The bank said it was assessing the effects of the Citigroup deal on its finances."

Investment bankers had become the most powerful political lobby in the country

TO BE NOTED: From the FT:

"Labour’s affair with bankers is to blame for this sorry state

Published: April 24 2009 20:24 | Last updated: April 24 2009 20:24

In Wednesday’s Budget statement, Alistair Darling acknowledged that even on his optimistic assumptions a decade was needed to repair Britain’s public finances. The UK government’s reputation for economic competence was already in tatters; the chancellor of the exchequer has now laid it definitively to rest. How did the New Labour project end in such disaster?

The answers lie not in unpredictable global events but closer to home. The government failed to deal effectively with the reform of public services and conducted an indecent love affair with the financial services industry. These two apparently unrelated errors, allied with hubris, proved to be a fatal combination.

When Labour came to power in 1997, dissatisfaction with public services such as health, education and transport was widespread, and justified. For two decades not enough money had been spent, particularly on capital projects. This underspending had contributed to weak and demoralised management, reservations about which led to a fear that simply allocating more cash would provide poor value for money.

There were two possible directions of reform. One – it might be described as Blairite – decentralised management authority and financial responsibility. The other – it might be described as Brownian – tightened centralised control and imposed performance targets on managers, with associated sticks and carrots. Both approaches were pursued, inconsistently, but overall with more Brown than Blair. When, by 2000, there was little to show in the way of beneficial results, the decision was made to spend lots more anyway. There were some service improvements, but the concern that the extra money would not be well spent proved largely justified.

The reasons targets do not work are evident from any study of the failure of planned economies. You can require people to meet goals, but that is not at all the same as encouraging them to meet the objectives behind the goals. By emphasising targets you undermine both their motivation and their ability to achieve these more fundamental underlying goals. In a delicious irony, a major victim of this process would be the Treasury itself. Here is how it happened.

The government’s principal fiscal target was to balance current expenditures with revenues over an economic cycle. This makes sense as a generalised objective: but not as a binding constraint. The financial services sector boomed from 1998 to 2000 and the government benefited from a surge of revenues. The tide then receded. But by mechanically averaging spending and receipts over the cycle, earlier revenues could be used to offset the later splurge in spending. When this resource started to run out, the Treasury redefined the economic cycle to claim compliance with the target.

This is where the two stories become linked. We now know that many of the banking profits of that period were illusory. But they generated substantial revenues from corporation tax and income tax on bonuses. The real funding gap was wider even than it appeared.

But the illusion was at its most influential at the highest levels of government. Investment bankers had become the most powerful political lobby in the country and there was no vestige of political support for action to restrain City excess. Light touch regulation was not just a matter of policy but a matter of pride.

What would have happened if the Financial Services Authority or Bank of England had sought to block the competing bids from RBS and Barclays for ABN Amro – a contest which, we now know, would bankrupt the bank that won the race? The phones in Downing Street would have been ringing insistently and it is easy to imagine the government’s response.

Little has changed. The government continues to see financial services through the eyes of the financial services industry, for which the priority is to restore business as usual. For a time in 2008, it seemed possible to argue that a package of temporary support for the banking industry, combined with substantial recapitalisation of the weaker players, might stabilise the financial sector and prevent serious knock-on effects.

But the problems of banks are much deeper than were then acknowledged and the destabilisation of the real economy has happened anyway. Government now provides taxpayers’ money to financial services businesses in previously unimaginable quantities. But there is no control over the use of the money, no insistence on structural reform or management reorganisation, no safeguarding of the essential economic functions of the financial services industry and no accountability for the damage that has been done.

It is as though the teenage children and their friends were to wreck the house and then demand that the grown-ups clean up before the next party. Their parents are too intimidated to do anything more than ask Uncle Adair to keep an eye on them and excoriate the hapless Fred who made off with some of the silver.

On Wednesday, Mr Darling gave the impression of an honest man who would have much preferred to have been somewhere else, as befits someone caught in a trap not of his own devising. We need a comprehensive reappraisal of both the fiscal framework and the economic and political role of the financial services sector. The crippling consequence of inability to admit error is the impossibility of learning from past mistakes.

johnkay@johnkay.com"

banks acknowledging that "self-help" is a preferable option to taxpayer cash and selling non-core assets may be the best route to take.

TO BE NOTED:From the NY Times:

"U.B.S. Sells Brazilian Unit as Banks Step Up Disposals

By REUTERS

ZURICH/LONDON, April 20 (Reuters) - Two European banks on Monday stepped up efforts to raise capital privately and reduce their reliance on state funding.

Switzerland's UBS AG agreed to sell its Brazilian business for about $2.5 billion while Allied Irish Banks pledged to raise $2 billion possibly through disposals.

Recent asset sales by Britain's Barclays (NYSE:BCS) and Royal Bank of Scotland showed a reluctance to sell assets at low prices may have shifted, with banks acknowledging that "self-help" is a preferable option to taxpayer cash and selling non-core assets may be the best route to take.

UBS said on Monday it was selling Brazilian arm Banco Pactual back to its original owners just three years after buying it. It will make a small loss, but lift its tier 1 capital ratio by about 0.6 percentage points.

UBS surprised investors when its capital ratio fell to 10 percent from 11 percent in just three months, at a time when all lenders are being encouraged to build up a bigger capital cushion to prepare for rising bad debts.

"We consider this operation neutral as it is attacking the most urgent problem (low tier 1 ratio) but on the other hand a leading position in an important market has to be given up," said Georg Kanders, analyst at WestLB.

That dilemma faces many banks. Dozens of lenders in Europe and the United States have been shored up with rescue funds from governments, but many are keen to limit their reliance on the state and selling profitable units is the most realistic alternative.

Barclays this month sold its fast-growing iShares (NYSE:TUR) (NYSE:THD) (NYSE:EIS) (NYSE:SCJ) (NYSE:ECH) (NYSE:BKF) (NYSE:AIA) (NYSE:EWZ) asset management business for $4.4 billion to bring in a net gain of over $2 billion.

RBS last week sold half of a Spanish insurance joint venture for $560 million as the part-nationalised bank pulls back to its core markets and cuts risk.

RBS is also set to sell assets in Asia, and rivals including Lloyds Banking Group and ING are expected to sell non-core businesses, bankers reckon.

UBS, one of the European banks hit hardest by the credit crisis, said its Brazilian sale was part of its strategy to reduce its risk profile and strengthen its balance sheet.

Activist investor and former UBS chief executive Luqman Arnold called last year for UBS to sell the highly profitable Brazilian investment bank to help the Swiss bank return to profitability and rebuild its brand.

By 0920 GMT UBS shares were up 0.6 percent at 14.05 Swiss francs, outperforming a 2.7 percent fall by the DJ Stoxx European bank sector, which has surged over 80 percent since early March.

AIB ASSET SALE

Allied Irish Banks, Ireland's largest bank by market value, plans to raise 1.5 billion euros of core tier 1 capital by the end of this year to supplement a 3.5 billion euro state injection, it said on Monday.

It said the extra capital could come from the sale of assets, in a move seen by analysts as preventing a slide towards nationalisation. The Irish government took control of rival Anglo Irish Bank in January.

AIB said the state injection had turned out to be insufficient to end public uncertainty about its capital adequacy.

Also on Monday, Norway's largest bank DnB NOR said it might tap state financing to help it reach its core capital ratio target but only if the terms were attractive and existing shareholders not penalised.

An improved mood across the bank sector was underpinned by better-than-expected results last week from Goldman Sachs (NYSE:GS) , JPMorgan Chase (NYSE:JPM) and Citigroup. (NYSE:C) Bank of America is tasked with maintaining that tone when it reports later on Monday.

Analysts remain wary that an improved first quarter will be sustained, although optimism has built that the global economy has turned a corner, sending world stocks on a six-week climb.

U.S. President Barack Obama warned of more pain ahead and European Central Bank chief Jean-Claude Trichet said it was dangerous to read too much into recent data suggesting signs of life in major economies.

Greater stability could encourage some bargain hunters to be on prowl.

Libyan Foreign Bank said on Monday it planned to raise its capital 10-fold to $10 billion to finance expansion in Europe and Africa."

many of BarCap’s (and for that matter Goldman’s rivals) have failed, merged and therefore withdrawn, or scaled back, from certain markets

TO BE NOTED: From Alphaville:

"Mystic Bob Diamond Posted by Neil Hume on Apr 16 09:15.

The ebullient BarCap boss has been looking into his crystal ball and guess what, the better than expected earnings reported by Goldman, Wells Fargo aren’t a “one-off” phenomenon.

They will be repeated, says Bob.

From Bloomberg.

“You have to look at which banks have improved their competitive position in this period, and in that regard I don’t think it’s a one-off,” Diamond, 57, said in an interview today on Bloomberg Television.

“If I step back and look at the Wells Fargo earnings and the Goldman Sachs earnings, there’s good news for the whole industry there,” Diamond said. “It has been quite a while since we’ve seen analysts talk about revenue as opposed to writedowns and balance-sheet risks.”

By that we presume Diamond means the favourable widening of bid/offer spreads in customer flow business and the fact that many of BarCap’s (and for that matter Goldman’s rivals) have failed, merged and therefore withdrawn, or scaled back, from certain markets, such as fixed income, commodities and currencies.

Of course, not everyone thinks the first quarter results we be repeated. Many in the blogsphere suspect Goldman’s first quarter results will prove to be “non-recurring” in nature because they were mainly due to the unwinding of AIG hedges.

And Wednesday’s results from UBS prove that all is still not well in the IB world.

That said, Barclays’ purchase of Lehman Brother’s North American business out of bankruptcy does look to have been well timed. It has given the bank strong positions in several markets, such as US government debt, which are pretty attractive right now.

Little wonder Diamond has this to say to Bloomberg about the Lehman deal.

“When we look back, we really have to pinch ourselves.”

So do we Bob.

Related links:
Goldman’s blowout Q1 figures - reaction - FT Alphaville
UBS not in Q1 happy bank club - FT Alphaville
On Wells Fargo and banks’ well-being - FT Alphaville

This entry was posted by Neil Hume on Thursday, April 16th, 2009 at 9:15 and is filed under Capital markets, People. Tagged with barcap, barclays, bob diamond."

Cincinnati bank Fifth Third did something similar for buyout group Advent International just two weeks earlier with the sale of its credit processing

TO BE NOTED: From BreakingNews.com:

"It's good to be a bank

By Rob Cox

iShares: Imagine a deal where the buyer only has to put up 29% of the purchase price and the new company ends up with debt equal close to eight times earnings. Sounds like a throwback to the days when the world was awash in cheap money and Blackstone boss Stephen Schwarzman was booking Rod Stewart for his birthday parties.

In fact, those are the terms accompanying Barclays' sale of its iShares business to British private equity firm CVC, which was announced Thursday. Cincinnati bank Fifth Third did something similar for buyout group Advent International just two weeks earlier with the sale of its credit processing business. Leveraged buyouts look to be back - but only when the lender is the seller.

Take the iShares deal. Barclays is selling the US purveyor of exchange-traded funds for $4.37bn. But CVC is only putting up $1bn of that in cash. Barclays, which owns iShares through its money management arm, is lending CVC $3.1bn, including $1.7bn of senior debt and another $1.1bn in vendor financing.

That means leverage will comprise 71% of iShares' enterprise value. Moreover, the debt load will represent around 7.5 times the $411m of earnings before interest, tax, depreciation and amortization that iShares reported for last year. These are the kinds of debt levels not seen since the credit crisis hit more than a year ago.

So does this mark a return to the halcyon days of private equity? Don't bet on it. The sale of the iShares business bolsters Barclays' capital ratios across the board. Combined with some other measures the London-based bank has undertaken to avoid accepting UK government funds and the strings attached, Barclays says the iShares deal will increase its Tier 1 capital ratio to about 10.3%.

Fifth Third's leveraged sale of its processing business boosted its capital ratio by nearly a full percentage point to a pro forma 11.5%. It's hard to believe that Barclays or any of its competitors would offer such terms to just any old private equity firm. As with Fifth Third's foray into leveraged lending, there's more at stake in these deals than mere banking fees.

rob.cox@breakingviews.com"

lent the buyer, the private-equity house CVC, £2.1bn of the purchase price.

TO BE NOTED: From the BBC:

"Barclays' painful deal

Robert Peston | 17:50 UK time, Thursday, 9 April 2009

Barclays says that it has sold iShares - a provider of specialist stock-market funds - for £3bn.

But it's not a sale in the sense that most of us would recognise. Because it has lent the buyer, the private-equity house CVC, £2.1bn of the purchase price.

In fact Barclays' continued exposure to iShares seems even greater than just those loans, in that the deal adds £2.7bn to what the bank shows on its balance sheet as its so-called risk weighted assets.

That said, Barclays says that through the miracle of how banks do their accounting there will be a useful addition to its capital resources, its buffer against losses on lending.

Some would argue that extra bit of buffer has been acquired at the steep price of selling a growing business at a knockdown price into a buyer's market.

Which only goes to show quite how desperately Barclays - like most banks - needs capital, even if it has avoided the indignity suffered by Lloyds and Royal Bank of Scotland of getting that capital from us, from taxpayers.

What's even more delightful for the purchaser, Barclays will pay CVC £120m if it rats on the deal by securing better terms from another bidder (there's also provision for both Barclays and CVC to receive between £34m and £120m if either side walks away for other reasons).

And for some Barclays employees who have stakes in a subsidiary of the bank, BGI, there's a lovely windfall from the deal, in the form of a cash dividend and a more than doubling of their holding in BGI.

Barclays' president, Bob Diamond, will receive £4.7m in cash and a substantial increase in his interest in BGI.

So to summarise: Barclays is providing the buyer of iShares most of the finance to "buy" iShares; the purchaser will receive £120m, if Barclays secures a better offer; and the transaction has triggered handsome rewards for some Barclays' employees.

In normal times, that would be seen as a deal so bad for the bank that shareholders would be volunteering to throw themselves off Beachy Head.

But Barclays' share price rose more than 12 per cent today.

To state the obvious, these are not normal times, these are credit-crunch times: and, I guess, if a bank can raise capital in any way at all without tapping taxpayers, that's seen as good news.

PS I'm planning to skive off for a few days. So forgive me if Picks goes quiet for a bit (and if you appreciate the silence, you don't need to inform me)."

Barclays plans to sell assets to boost capital after loans and other investments soured

TO BE NOTED: From Bloomberg:

"Barclays Maroons Secret of Stable Banking in Suburb (Update1)

Share | Email | Print | A A A

By Simon Clark

April 9 (Bloomberg) -- Hidden in a blue warehouse on an industrial park 200 miles (320 kilometers) northwest of London, Barclays Plc stashes historic documents that provide a lesson for bankers nursing record losses.

For most of the British bank’s 319 years, financial statements put balancing assets and liabilities before showing profit growth. Some investors say banks such as Barclays would be in better financial health if that were still the case.

“The historic switch in focus to the income statement from the balance sheet helped hide the asset bubble and bust,” said Neil Dwane, who helps oversee $83 billion as chief investment officer for Europe at Allianz Global Investors’ RCM unit in London. “We must refocus attention on the balance sheet.”

The credit crisis is proving a painful reminder of why it’s important to constrain assets and liabilities. Profit at London- based Barclays more than tripled to 4.38 billion pounds ($6.45 billion) in the 10 years through 2008, while its balance sheet swelled more than ninefold to 2.05 trillion pounds, exceeding the size of the U.K. economy.

Barclays plans to sell assets to boost capital after loans and other investments soured, pushing the bank’s shares down 66 percent in the past 12 months. The London-based bank today agreed to sell its iShares exchange-traded funds unit to private equity firm CVC Capital Partners Ltd. for 3 billion pounds. The bank has so far avoided tapping government funds, unlike Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc.

Balance Book

In Manchester, documents on 1 1/2 miles of shelving at the Barclays archive show finance was different in the 18th century, when author Daniel Defoe was a client of the bank and writing the tale of marooned sailor Robinson Crusoe.

In the 1700s and 1800s, bankers “simply needed to know where the money was coming from and where it was going to and how much they were able to allocate to themselves as profit after everything else was balanced,” said Barclays archivist Nicholas Webb, his fingers black with the Victorian-era soot that clings to some records.

Barclays’s earliest surviving “balance book,” from 1733, contains 20 yellow pages of creditors and debtors written in brown iron gall nut ink from a quill pen. By contrast, the first pages of Barclays’s 2008 annual report focus on profit at its units and include a table of income statement highlights.

Primary Statement

“The balance sheet was seen as the primary financial statement,” said Stephen Walker, professor of accounting at Cardiff Business School. “In a context where shareholders and especially creditors were concerned about the risk of insolvency, it was important to show that the company had sufficient assets to meet its liabilities.”

Bank balance sheets expanded in the credit bubble as money was borrowed to make new loans and investments. When capital markets froze in 2007, customer deposits weren’t sufficient to fund a bank’s business.

Barclays Chief Executive Officer John Varley acknowledged in March to members of the U.K.’s House of Lords, the upper chamber of Parliament, that Barclays had lost its balance in the debt-fueled boom years.

“There was an asymmetrical growth of assets versus liabilities over the course of the last years,” Varley said.

Ribbon-bound documents at RBS’s archive in Edinburgh tell a similar story to Barclays. Stephen Hester, CEO at the Scottish bank, told shareholders on April 3 that the company lost its way by focusing too much on income.

‘Borrowed too Much’

“We have to make profit, but it has to be seen in a long- term sustainable” formula, Hester said, “which we did not succeed in doing,” he added. “We borrowed too much and then lent too much.”

RBS lost 24.1 billion pounds in 2008, the biggest loss reported by a British company. The bank’s balance sheet boomed 2,685 percent to 2.22 trillion pounds during the past decade as it increased lending, trading and acquisitions.

U.K. bank lending exceeded customer deposits last year by 700 billion pounds, making the lenders dependent on foreign capital for funding, data compiled by the Bank of England show. In 2001, total lending to customers roughly equaled deposits.

“Profit growth at banks like Barclays distracted attention from balance sheet growth,” RCM’s Dwane said. “We’re all paying a price for that now.”

Balance sheets have been a key measure of financial health since at least 1494, when Luca Pacioli, an Italian mathematician, Franciscan friar and friend of Leonardo da Vinci codified balanced book-keeping in Renaissance Venice.

Luncheons, Sherry

In the Barclays storeroom, visited by 77 people last year, 19th century balance books are supplemented by green-covered, hand-written ledgers of partners in the then-private bank. The books detail thousands of pounds spent on luncheons, French wine and sherry, and investments ranging from Anglo American Telegraph Cos. shares to Birmingham Canal debentures and donations to Leicester Square Soup Kitchen, Asia Minor Famine Relief Fund and London’s Royal Free Hospital.

Barclays first printed a financial statement in 1896, when it combined with 19 other banks. The following year, it reported a net profit figure for the first time in a 10-line report opposite the balance sheet, the archive shows. In 1914, Barclays published a profit and loss account for the first time, beneath the balance sheet. The account took up about two-fifths of a page. In 1958, the profit and loss account was first printed ahead of the balance sheet, and it still is today.

Barclays’s 326-page report for 2008 “bears testament” to the bank’s balance sheet disclosure and analysis, spokeswoman Gemma Abbott said.

Mass Shareholding

The income statement became more prominent as banks like Barclays attracted increasing numbers of public shareholders who focus mainly on earnings and dividends, said Walker of Cardiff Business School.

“This was a result of mass shareholding and the consequent importance attached to delivering returns for investors and the emphasis placed on profit generation as a way of gauging the performance of managers,” Walker said.

Alexander Hoare, CEO of his family’s 337-year-old bank, said bankers can benefit from history lessons.

C. Hoare & Co., which funds itself from profits and has increased deposits during the credit crunch, keeps an archive in its London headquarters.

“An institutional memory helps avoid repeating elementary banking errors,” Hoare said. “The balance sheet is the all important measure.”

The GAPS is basically a good-bank/bad-bank structure

TO BE NOTED: From Alphaville:

"Comparing the Swedish timeline Posted by Paul Murphy on Apr 02 10:56.

A considered piece of research out of Goldman Sachs on Thursday reached the brave conclusion that Britain’s Government Asset Protection Scheme will mark the turning point for Britain’s banks.

The GAPS is basically a good-bank/bad-bank structure, according to Goldman’s Aaron Ibbotson. And, so long as the two participants, Lloyds and RBS, make sure the bulk of their bad assets are in the “bad bank” GAPS, both Lloyds and RBS look to be low risk players compared with their European peers.

Indeed, Britain’s experience (ex-Barclays) may yet emulate that of Sweden during the 1990s. Here are two timelines for comparison purposes. Click to view.

Related links:
Bad bank brewing - FT Alphaville
Knowing our banks, knowing yours - FT Alphaville

This entry was posted by Paul Murphy on Thursday, April 2nd, 2009 at 10:56 and is filed under Capital markets. Tagged with barclays, Lloyds, rbs."