Thursday, January 22, 2009

The last bank with an antidilution clause...

Was Washington Mutual. It caused them no end of trouble.

Barclays has one.

Implication - either Abu Dubai waives the clause or it is confiscation for Barclays.

If I were Abu Dubai I would be waiving the clause NOW.

But then I was not long Barclays - unlike SMFG who put almost 700 billion yen in only a little while ago. (Hey what is 700 billion yen between friends?)

John Hempton


CouldMarxBeRight said...

Sorry with all due respect you might have to rethink your analysis. If you were Abu Dhabi, your choice is actually very simple. You hold out for a windfall. Why?

Barclays is so under the water beyond the common equity level that absent a government bailout, Abu Dhabi's common equity, along with other shareholders' investment will go to zero anyway. The government can either give a windfall to the bondholders and probably commmon equity holders to make them whole, or seize Barclays, force unsecured debt to take a haircut and then save the rest of the bank, i.e. your fateful Wamu precedent. The only problem with seizure/nationalization is that Barclays is infinitely bigger than Wamu (infinite is no exaggeration if you consider Barclays' derivatives book). The repercussion of impairing hundreds of billions of investment grade Barclays Unsecured liabilities is not the same as the default of the tens of billions of Wamu debt, and is without any precedent save Lehman, which also happenned to be of smaller scale. Remember how the default of Lehman's investment grade liabilities led to the collapse of money markets after the "breaking the buck" of Reserve Fund. The thing that a lot of people don't yet realize is that the Western financial house of cards cannot survive a default of RBS's, Barclays' and/or HBOS' liabilities. A windfall to the bondholders to make them whole are the only way out. This is the exact parrallel of AIG in US. So if the bondholders were to be made whole, why not common equity? If you were a normal shareholder you might have no choice but to let government dilute you at any equity valuation. But Abu Dhabi is not any random shareholder - they wield the nuclear launch button. He should sit there and watch the Western world (along with the Gordon Brown) do whatever it takes to save Barclays. Whatever Abu Dhabi is asked by the UK government, he just need to give the middle finger and the UK government would still do whatever they need to do.

RBS and Lloyds will go through the same drill as AIG, which is a great outcome for their bonds but bad for their stocks. The Barclays scenario is also great for bonds but bad for stocks, but it's not as bad for Abu Dhabi because they don't need to waive the anti-dilution clause. The FX market knows that the amount of money needed to make whole the liabilities of these 3 banks are beyond the UK government. So would the Western financial world come to its rescue?

If I am wrong that Barclays' common equity is not so under the water, then the case for a holdout is that much stronger. It's really impossible that there is any real common equity value left in Barclays though. That much I'm sure you, John, would agree.

John Hempton said...

No - I suspect the government seizes it and wipes out ALL the tier 1 structures... debt and equity... but not the senior debt...

But I guess who knows what is the Prime Minister's mind. I am not sure he knows either.


CouldMarxBeRight said...

Then in this scenario of yours, Abu Dhabi gets a doughnut too. So why not hold out?

I don't think it's possible to confiscate the bank, wipe out all the tier 1 capital and then not trigger a cross-default of the senior unsecured liabilities.

Anonymous said...

To clarify, by liabilities, I don't just mean the senior unsecured debt, but also all the derivatives contracts and other financial contracts on the right hand side of the balance sheet.

Anonymous said...

i seem to agree with CouldMarxBeRight

Arabs (or whoever) dont have a choice but to hold out

Cant imagine a CDS on Barclays

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