Why did Barclays' Shares Drop 25% in a Day?
Companies / Banking Stocks Jan 20, 2009 - 05:08 AM GMTBy: Andrew_Butter
Answer: The market did not believe the valuations of assets and liabilities.
The Solution?
Well the management of Barclays went on record to say that the valuations were sound and even went so far as to pre-release their numbers. Last time I looked (early on 20th January) the shares had gone down 10% on that news.
Although so far they have not (yet) taken the drastic step that the management of HBOS took in similar circumstances, which was to publically buy-up “under-valued” shares…only to find out that they were in fact, sadly worthless.
Trust the Brits to “stiff upper lip it” and go down with their ship, hey we didn't rule the world (once) for nothing; perhaps the next instalment will be the sight of management of Barclays committing collective financial suicide? Oh it makes me feel so proud that some traditions still count for something!!
But as a casual observer of the dark-comedy soap-opera that forms the staple of Reality TV these days, (the one with men-in-dark-suits trying to talk dead donkeys up onto their feet), I can't help feeling that the plot is getting a bit repetitive.
We had Fannie and Freddie telling the world that “everything was fine, just a glitch”, they weren't trading insolvent, that would be criminal wouldn't it? Then the bailout mania started. Then we had Richard Fuld, he had a small “glitch”, but everything was dandy, then surprise!!! He couldn't talk that donkey to its feet either.
And on and on and on, Hank Paulson was going to form a cartel with his mates in Wall Street to use taxpayers money to buy up all those toxic assets; detoxify them, and make a huge profit (for the taxpayers?). Of course neither he nor his mates would have personally benefitted…?
That was THE SOLUTION.
But then…oh, he changed his mind. I wonder why?
Who knows? All I can say is THANK GOD for Small Mercies, in September I was afraid he might actually put his money where his mouth was (http://www.marketoracle.co.uk/Article6451.html).
But this is the thing; the plot is getting so disturbingly repetitive that I'm beginning to wonder whether the BBC has got a hand in all this?
Could Basel II be the answer?
The whole purpose of the Basel II Guidelines and the changes in banking regulation that these spawned was so that bankers would not be subjected to the ignominy of standing knee-deep in the mud, in the pouring rain, (and) in their best suits, trying to talk a dead donkey to its feet…with every word, every nuance being faithfully recorded on Prime-Time Reality TV.
I wouldn't like anyone to say that I'm trying to rock the boat or that I'm not a team player, but I am starting to get the uneasy feeling that the Grand Strategy, didn't actually do the job very well.
Could it have something to do with the valuations?
That's the issue, the auditors puff themselves up and say that assets are worth “X” and liabilities are worth “Y” and “X>Y” so everything is dandy!!
But then the market says, “Pull the other one”.
Basel II Guidelines are about 200 pages full of long words like “haircuts” and “valuation” which are not explained. On valuations all they say is that they should be done “strictly”, which given the circumstances of where these guidelines were written is not surprising, although for me that word said in a Swiss-German accent just conjures up fantasies of blond ladies dressed up in leather talking in husky voices.
Basically what Basel II says is you have to be very strict, except on the issue of valuations of assets and liabilities, where well anything goes.
Perhaps that was the problem? Perhaps the fact that starting in 2000 the International Valuation Standards Committee (IVSC) started saying that the valuations that were relied on by banking regulators, auditors, and eventually investors were QUOTE: “fundamentally flawed and bound to be misleading ”, (1) might have something to do with the fact that RIGHT NOW no one believes in the valuations?
I mean IVSC is not a “fly by night” operation like the International Accounting Standards Committee (or whatever they call themselves, they change their names so often one loses track), which is not in any way “International”.
Just because Oman and Belize decided to adopt IFRS doesn't make you “International”, any more that a property company in Dubai with headquarters in a “one-shutter-shop” in Kabul , calling themselves “International Manchester Reel-State”, is “International”.
Nope…IVSC is a United Nations NGO and International Valuation Standards are accepted, and approved by practically every valuation institute in the world.
But would IFRS or Basel II use these standards, NO WAY!!
That would mean that they would have to lose the leather tights and the whips, and the ecstasy of painful SURPRISE “Ah so…what we told you was a perfectly safe investment six months ago, is now worth absolutely nothing…enjoy”!!
And the fact that the transition from being a great investment to being worth zero happened in less time than it took to say “mark-to-market” just adds to the fun.
So what are Barclays' shares really worth?
Sorry I haven't got a clue. Nor I suspect does the management, or the auditors or the banking regulators. There just isn't enough information available to be able to call it one way or another.
Until they start to do their valuations using International Valuation Standards (IVS) instead of the “Dumb Ass Big Surprise Valuation Standards” (DABSVS), favoured by IFRS and Basel II, no one will know for sure (for a more graphic account of DABSVS see http://www.marketoracle.co.uk/Article8177.html).
And well, in the current climate, sadly, everyone is going to think the worst.
And Oh…I almost forgot, the latest idea is for banks to pile up assets in good times in case there are bad times!! WOW!!!....someone is thinking out of the box these days. Jolly Good Show!!
NOT!!
DABSVS over-values assets in good times and under-values them in bad times, that how the mess came about in the first place and why it's going to get much worse until they are dumped.
Personally, based on a back of a fag-packet valuation done in five minutes whilst multitasking (easing Pizza and watching TV, but using IVS), I wouldn't be surprised if Barclays shares are worth at least 25% MORE than what they were worth at the beginning of last week. That's of course if they can avoid falling in the Bear Trap.
But until they stop reporting using DABSVS, and start using a valuation standard that tells you what an asset is likely to be worth on the day you decide to (or are forced to), sell it; frankly, who know?
(1): See for example the open letter sent by IVSC to BIS in July 2003 (it's on the BIS website).
By Andrew Butter
Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.
Copyright © 2009 Andrew Butter
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