Of Barclays Coup de Grace

18th June 09 - Of Barclays coup de grace

It is about the free market and brainpower beating the interventionists hands down. Our friends at Barclays have done it again. Not content with refusing the taxpayers’ shilling in favour of largely Middle Eastern investors funds to shore up the balance sheet and ignoring shareholders’ pre-emption rights, as described in this diary at the time, the mavericks at Barclays have done a deal to sell their fund management arm to America’s Black Rock. The numbers are staggering, as is the new partnerships being forged.

Black Rock will pay $13.5bn to buy Barclays Global Investors (BGI) and so bolster its balance sheet by a net financial gain of $8.8bn to increase the tier 1 ratio from 6.7% to 8.3%. Bob Diamond, Barclays group president explained the reasoning behind the deal as follows "It’s increasingly difficult for a bank like Barclays to have a top-tier position in institutional investment banking and in institutional investment management." There are two elements to the funding of this enormous sum pouring from Black Rock to Barclays. First come shares. Barclays will receive 37.8 million Black Rock shares giving it a 19.9% stake in Black Rock plus two seats on the board. Secondly, the cash. The total of the hard stuff is $6.6bn and here is the deal making surprise. Of this sum, $2.8bn is coming from three sovereign wealth funds. They are believed to be (not formally confirmed at the time of writing) The Kuwait Investment Authority, the Government of Singapore Investment Corporation and the China Investment Corporation.

What is really surprising is that these sovereign funds have had their collective fingers burned in the past by investing in Western financial services and corporations. But that is only to strengthen a view that the long-term interest of these creditor bodies is to move funds out of sovereign debts and natural resources and into what we might think of as working capital.

The moral to this story is to do with the pre-eminence of specialisation, the lack of sacred cows, the motivation from independence and perhaps a bit of self-interest. The latter in that a group of 410 Barclays bankers are reported to be in for $607.5m profit from the sale of their shares in BGI. Take your pick.