The Parallax Brief

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Unrepentant Subjectivity on Economics, Politics, Defence, Foreign Policy, and Russia

Barclays Beggars Belief

Barclays have officially entered ga-ga land. Desperation and efforts to bolster the balance sheet have overridden common sense.

From Willem Buiter’s Maverecon blog on the Financial Times website:

In its report today on Barclays’ Annual results for 2008, the Financial Times writes:

“The bank confirmed it had written down its exposures to complex debt instruments by £8bn in 2008, though the impact was reduced by a £1.66bn gain it booked from the reduced value of its own debt.”

My immediate thought was: surely that report cannot be true. When your market-traded debt becomes worth less because the market considers you less creditworthy than before, and prices your debt to reflect that perception of increased default risk, this does not add to your profits – it simply makes you a worse credit risk.

This is mark-to-market gone mad.

Of course, as Willem points out exasperatedly, this does have a certain basis in real life — a real life scam. A company can make a pretty packet from the bond market by issuing bonds, spending the cash, and then persuading the market that it is highly unlikely to pay back the bonds. The value of the bonds plummets and the company then buys back the (by now valued as next to worthless) bonds for a nominal sum. Hey presto! Free money.

But to imagine that one’s declining credit risk — and therefore declining value of debt — counts as a mark-to-market profit is truly absurd. Barclays still has to pay back the full amount, if it wants to maintain its good reputation and wants access to reasonably priced debt in the future — quite important for a bank, I would imagine. So when will these ‘profits’ be realized? Never. The real value of Barclays’ debt is the same as it was; only its credit worthiness has gone down.

Who does Barclays’ accounting? Arthur Anderson?

And we wonder why it went so wrong.

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Filed under: Economics, , , , , , , , , , ,

2 Responses

  1. Totally unrelated to your entry, here is a link to a site I like (www.dooce.com). She seems to be redesigning, which is a drag. But what you want it The Daily Chuck.

    Chuck is one of her dogs.

    http://www.dooce.com/daily-chuck/2009/02/11/family-recipe

  2. parallaxbrief says:

    Now THAT’S a website. And she can WRITE. Wow.

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