Barclays falls to earth
Fears over Barclays’ exposure to bad debts have led to its share price plunging and endangering its bid for Dutch bank ABN AmroGrant Ringshaw
Alex the doorman has in the past few days become used to being asked about one of his residents, Edward Cahill. At an apartment block in London’s Docklands, reporters have come looking for Cahill, a financial wizard at Barclays Capital. Alex has politely turned them away, explaining their search is in vain. Cahill has become the City’s Scarlet Pimpernel.
Until two weeks ago, the 33-year-old was a little-known employee at Barclays’ successful investment-banking arm, Barclays Capital. The tall Irishman, described by Alex as a “polite, nice guy”, worked hard, leaving for the office before 8am and routinely returning after 11pm. As an energetic banker working in the booming debt markets, Cahill is thought to have earned close to £1m a year. His top-floor flat, in a converted sugar warehouse, where he has lived for three years with his brother Michael, is thought to be worth about £750,000.
But in the past few days Cahill has made an unwanted trip from anonymity to national news. His name has become closely associated with the credit crisis that is gripping global markets. And the activities of his team, which created exotic investment vehicles that have now turned sour, may derail Barclays’ attempts to pull off the biggest-ever financial services deal, a €60 billion takeover of the Dutch bank ABN Amro.
Despite his grand title – European head of collateralised debt obligations – Cahill was not one of the investment bank’s top executives. His business contributed a minor part of Barclays Capital’s £6.2 billion revenues last year. He and a small group of colleagues created a version of structured investment vehicles (SIVs) for clients. These are highly indebted investment funds that make money by trading on the difference in interest rates between short-term money and longer-term investments backed by supposedly high-quality loans, such as American mortgages.
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Four debt vehicles, known as SIV-lites, set up by Cahill’s team have hit problems. Two have been forced to sell assets to pay down debt. On Friday, Barclays said a third, Cairn High Grade Capital Funding I, was being restructured in a $1.4 billion (£700m) financing. The bank has also faced scrutiny over the collapse of German bank Sachsen, a user of its SIV products, which was rescued by a rival a week ago after problems with another fund not linked to Barclays.
On August 20, Cahill, described by some colleagues as “pretty arrogant”, returned from holiday. He knew his luck had run out. For more than three years, banks and investors had been on a frenzy of buying ever more complex packages of loans. Now, as the American sub-prime mortgage crisis erupted, they had lost their nerve and the debt markets were imploding.
For Cahill, the future must have looked bleak. According to some former colleagues, he faced a stark choice – watch his business dry up, and his bonus shrink, or get out. He chose the latter, packed his bags, and has not been seen at his loft apartment since.
Although he has been elusive, Cahill is said to be in contact with Barclays and serving out his notice.
In less turbulent times, his departure, though odd, would probably have been a minor event. Suggestions that Cahill could be the next Nick Leeson, the trader who brought about the collapse of Barings in 1995, are very wide of the mark – Barclays’ compliance department is understood to have checked out his operations and found no wrongdoing and nothing untoward. Cahill himself was unavailable for comment.
Yet Cahill’s resignation sent shock waves through the market, fuelling wild speculation that Barclays was sitting on losses running to hundreds of millions of pounds. “It is fear. Fear of the unknown,” said one banking analyst.
Barclays has not helped its own cause. Twice in just over a week it has been forced to borrow expensively a total of £1.9 billion from the Bank of England’s emergency reserves. Such loans are routine, but in the current fragile markets any hint of financial distress has prompted panic among investors. Barclays is looking distinctly accident-prone.
As a result, Barclays shares have been hammered, just when the price needs to be strong to help Britain’s third-biggest bank in its bid to win the takeover battle for ABN. As investors fret about mounting losses, there are also fears that Barclays Capital’s stellar growth in profits could hit the buffers. For Barclays chief executive John Varley and Bob Diamond, its president and investment-banking boss, it all adds up to a big headache. BY any measure, Barclays Capital has been a stunning success story. Born from the ashes of BZW, the stricken investment bank, as a debt-focused operation a decade ago, the division has been the engine of Barclays’ growth in recent years. In the first half of this year, profits jumped 33% to £1.7 billion, accounting for 40% of Barclays’ overall earnings. For the past seven years, it has been the world’s fastest-grow-ing investment bank.
Under Diamond, Barclays Capital has gained a reputation for being agile, identifying new markets and responding quickly. That led the bank to expand aggressively into commodities right at the bottom of the market after the collapse of the American energy trading giant Enron. The SIV-lite business was another pioneering move.
For years, sceptics have argued that Bar-calys Capital could not maintain its astonishing growth. Even before the present market malaise some analysts were cautious, with Collins Stewart forecasting profit growth of only 10% next year. Others claim the outlook for big investment banks is ugly. Last week Nick Hill, an analyst at Standard & Poor’s, predicted their profits will collapse by 70% in the second half if the credit crunch is as fierce as in 1998.
Antony Broadbent, an analyst at Sanford Bernstein, said: “Barclays Capital clearly made hay while the sun shone in the European fixed-income markets for the past five or six years. That is where they started and that remains the core of their business. They haven’t done an awful lot wrong, but those markets have gone pear-shaped, at least in the short term, and Barclays Capital’s revenues are going to be vulnerable.”
Diamond, a sports-mad American who was paid £22m last year, disagrees. It may be mayhem in the markets, but Diamond is confident that the debt markets will stabi-lise within the next couple of months. “You will see us come out of this market turmoil stronger and with a stronger franchise. I do not want to be too sunshine-and-lollipops about this because these have been difficult markets for clients and our shareholders – perhaps the most difficult I can remember,” he told The Sunday Times. “Are we going to let a tough month throw us off course? Absolutely not. I have talked about 15%-20% annual growth through the cycle and there is nothing to make me come back from that at all.”
Diamond admits there will be losses at Barclays Capital but is adamant that Cahill’s sudden departure has been vastly overplayed. The losses on the SIV-lites created by Cahill and his team are capped at a “conservative” £75m even if the bank had to sell the assets it holds as collateral at knockdown prices. Thoug