Private Capital Bails Out Barclays Bank

By tapping into Far East investors, Barclays has raised £7.05 billion. Barclays’ chairman, Marcus Agius states that ‘The board believes that this [capital raising] maintains Barclays as a strong, independant and well-capitalised bank’. But the decision to raise capital in this way rather than secure a loan from the government is causing concern amongst investors. At the time of writing Barclays shares have tumbled to around 170p, losing almost 20% since the announcement of the deal was made at the end of last week.

So why isn’t the news that Barclays has raised this capital being taken positively?

Primarily it’s because it is estimated by market analysts that by taking this route it could cost shareholders more than twice what it would have cost by going to the government. There is also some concern that as a result of the deal around one third of Barclays will be owned by just two Middle Eastern investors.

John Varley, Barclays’ chief executive, argues that it is vital that the bank continues to be able to respond nimbly to day to day operations and strategy requirements and securing capital from private investors supports this.

Is this another way of saying it ensures that Barclays can continue to pay top executives huge salaries and bonuses? Some are suggesting this is the case. Others though are less critical, highlighting that Barclays has strong international business and investment banking interests and taking these into consideration opting for the UK government as an investor is not a realistic option as the government is really focused on domestic matters.

Raising this capital has helped address the writedowns arising from bad subprime debt but it’s not the end of the issues for Barclays or indeed other UK high street banks. As the economy moves into recession the ability for homeowners and businesses to cover their debts becomes increasingly difficult. The number finding themselves in default will increase, this in turn will increase the losses, or impairment charges the banks will incur.

It’s clear there’s a long way to go before we start getting good news.

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