Salz Review - Wall Street Journal

49
Salz Review
An Independent Review of Barclays’ Business Practices
5.48 Subsequently, Barclays reclassified to its banking book the assets which were to be
the subject of this second transaction. In doing so, Barclays achieved one of its
objectives to reduce their volatility for accounting purposes by making them subject
only to impairment charges, in line with the permissible accounting treatment at the
time. The total assets reclassified were of a slightly higher value than the Protium
assets, and contained Collateralised Loan Obligations against which the Group held
credit protection with monoline counterparties. 78 In the press, comparisons were
made between the Protium transaction and the reclassification. For example, in an
article headlined “Barclays’ Protium Deal is all that’s wrong in the City”, the
Telegraph reported that: “Senior Barclays sources … conceded that the bank could
have achieved exactly the same thing by ‘reclassifying’ the … [Protium] … assets –
as it did with the … [other]... assets two months later. The Institute of Chartered
Accountants in England & Wales confirmed there was nothing stopping it switching
the assets from its trading to its banking book. In other words, Barclays did not need
to set up Protium. A simpler and cheaper asset reclassification would have done the
trick.” 79
5.49 This raises the question why this reclassification was not adopted as an alternative to
the Protium structure. We accept that Barclays viewed Protium as offering the
advantage of securing necessary specialist expertise to manage the assets, but it would
seem to us that their incentivisation could have been achieved in other ways.
5.50 In the Treasury Committee hearings following the 2012 announcement of the
LIBOR fine, the FSA described Protium as an example of aggressive management
actions. Moreover, according to press reports at the time of the hearings, the FSA’s
Andrew Bailey had told Barclays’ Board in February 2012 that Protium was “pushing
the envelope too far”. 80 FSA Chairman Lord Turner wrote to Marcus Agius, the then
Chairman of Barclays, on 10 April 2012 81 about “a pattern of behaviour over the past
few years in which Barclays often seems to be seeking to gain advantage from the use
of complex structures or through arguing for regulatory approaches which are at the
aggressive end of interpretation of the relevant rules and regulations”. Protium was
cited as an example which was “within the accounting rules” but was “perceived by
many external commentators as a convoluted attempt to portray a favourable
accounting result”. 82
5.51 Barclays interviewees pointed to the subsequent realisation of the Protium assets.
As at 31 December 2012 the carrying value of the assets had been reduced to
$1.9 billion with net losses incurred of only $308 million. This, they told us,
represented a relatively favourable result for shareholders and confirmed the
reasonableness of their views on the asset values in late 2008.
78 Barclays, 2009 Annual Report, March 2010, p. 303; note that the relevant accounting standards had
different rules relating to the on-balance sheet assets and related derivatives.
79 Telegraph, “Barclays’ Protium Deal is all that’s wrong in the City”, 28 April 2011; www.telegraph.co.uk/
finance/newsbysector/banksandfinance/8478780/Barclays-Protium-Deal-is-all-thats-wrong-in-the-
City.html.
80 The Times, “Regulator warned Barclays of Failings”, 6 July 2012.
81 See Appendix K.
82 FSA letter, dated 10 April 2012, disclosed to the Treasury Select Committee; see
http://www.parliament.uk/documents/commons-committees/treasury/10April2012.pdf.