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February 16, 2010

Comments

Luis Enrique

I don't know how to interpret these numbers. Does this mean that if Barclays Capital decided to sell off its assets*, its outstanding loans, the commercial property it has invested in, private equity stakes, market making inventory, and whatever else it has on the books, it would raise £1629.1bn? So 0.16% is, what, a negative real return on that?

also - presumably to calculate the per worker number, you must know the total bonus pool - how does it compare to the £2.46bn? i.e. if we add the two numbers together and call it something like 'total returns', I'd be interested to know what % of total returns is being captured by employees in the form of bonuses.


* ignoring the liquidity / firesale problem of tying to do it all at once

Econoclast

Investment banks are supercylical businesses. When the markets are going up, they make profits. When the markets drop, they lose money. Unfortunately, Greenspan's 'put' in 1997-98 and 2001-02 convinced many investment bankers that markets could never fall or, if they did, policymakers would step in. The lesson of the last two years proves the point. Given this knowledge, why would you stop risk-taking? Policymakers need to wake up and recognize the 'doom loop' this creates.

Tim Worstall

"So its profits are only 0.16% of these assets. "

Hmm....means a 0.05% transactions tax is going to take quite a bite really, doesn't it?

Calum

These are rather bizarre numbers. It's rare to find a fund manager charging less than 1%, so one would expect revenue to be on the order of ten times the profit figure. They must have lost money on something else quite badly to come up with results like that.

Luis Enrique

Tim,

not if it's passed on to customers, no. (be consistent)

chris

@Calum - the difference between Barcap and an ordinary fund manager is that Barcap has to pay to get hold of the assets - via,say, money markets - whereas L&G doesn't pay me for getting hold of my cash.
@ Tim - I think you're right. Giles has more here:
http://freethinkingeconomist.com/2010/02/14/the-robin-hood-tax/
Barcap is doing what Giles describes, across many markets - it makes teeny profits in short-term transactions. It's only because it stakes so much capital that the these profits add up to much. And this is why investment banking is "supercyclical", as Econoclast says - it depends enormously upon the cost and availability of chepa capital.

Luis Enrique

hmm, I think I really don't understand what BarCap does.

on another note, does it make sense to use "supercyclicality" as an explanation for these low profits, whilst also saying '[investment banking] depends enormously upon the cost and availability of cheap capital' and that this is 'a time of record-low short-term interest rates'?

jameshigham

Barcap, then, is not freakishly profitable - quite the opposite.
Which raises the question: why is it paying an average bonus of £95,000 per worker?

You've hit the nail on the head. Answer - because they know what's coming.

Matthew

Surely though on those 'asset' figures this is important:

Derivative assets and liabilities would be £917,074m (2007: £215,485m) lower than reported under IFRS if netting were permitted for assets and liabilities with the same counterparty or for which we hold cash collateral.

Laura

Total assets means everything the company owns (including "pretend" things like goodwill, which only exist on paper/in accountants' heads, and tangible assets such as any buildings or computer equipment it owns). It's like adding up the value of everything you own and what's owed to you - your house, your toothbrush, what you have in your current account, the cash in your wallet, the wallet, your clothes, your CD collection, your laptop, the wages for the days you've worked but haven't been paid yet.

The total assets figure takes no account of a company's liabilities (what it owes). This can be a very similar number to total assets or tiny in proportion to it; and some of those liabilities (the interest bearing ones like loans from banks) will cost the company money. Total liabilities is like adding up everything you owe - the phone bill, the electricity bill, the water bill, what's on your credit card, your mortgage, the £20 you borrowed from Dave. Without these liabilities, total assets would be smaller (the £20 still in your wallet that you borrowed from Dave, the goods you bought on your credit card and the house you have a mortgage on get counted as part of your total assets; without these liabilities you wouldn't have had the assets), but these liabilities can have a cost which can have an impact on profits (just think the impact your mortgage has on what you have left at the end of the year).

Leaving the question, is it so relevant to look at profits as a percentage of total assets without a thought to liabilities or the form these assets take? I'm not so sure.

Gaw

You're comparing apples and oranges. Profits are a return on equity not on assets, the bulk of which will be funded by liabilities.

Luis Enrique

Gaw ... therein was the source of my confusion.

Frank Little

Much has been made of the fact that Barclays has not had to rely on UK government hand-outs. However, they are massively indebted to Arab investors.

chris

@Gaw - profits are not merely a return on equity. If they were, a 100% debt-financed business would be infinitely profitable.
What matters is a firm's return on capital. This includes equity and debt. I don't think it's wrong, therefore, to look at total assets. After all, if a firm isn't using these to make money, why does it have them?

k

What is the possibility BarCap management are concealing hits from major frauds?

Gaw

Chris - the return on assets pays for the cost of liabilities as well as the cost of equity. It doesn't therefore make sense to look at profitability as a return on total assets.

All sorts of funny things can happen to returns on the book value of equity, which I've known to be a minus figure. Work the return out on that!

Luis Enrique

oh dear, I'm at risk again of making a fool of myself .... but if you really did finance a venture 100% with debt and put down no equity, then any profit you make after servicing your debt would be an infinite return, wouldn't it? after all, what have you staked?

chris c

I think it's power. I think the issuance of bonuses says two things, the first being to investment bankers and the high level employees who receive the bonuses - that is, we can still pay you as much as the others, so stick with us.

The second is baiting the Treasury, and the public, by saying we'll do what we want and you can't stop us.

I thought the most interesting argument from Barclays - we didn't go to the government for help, so we're entitled to do what we want - was counterbalanced by the fact that they actually had to go to someone for help, regardless of the vicarious aid they received from the other banks' acceptance of the bailouts. They had to go to others backed by other governments, regardless of how those affairs are structured to, for example, remove profits from mineral extraction from the public sphere and place them in minority hands.

Gaw

Luis, I think we're getting too hung up on book definitions of equity. A 100% debt financed venture is still owned by someone. They will typically hold shares in the venture, which will likely have a book value, even if it's miniscule. But their real value is the net present value of future returns to equity.

Most investors will ignore returns on book equity for this reason - they're usually not very meaningful. In fact, returns on the book value of equity and other residual reserves are only widely and meaningfully used nowadays for banks, where it's not possible to fund your balance sheet through 100% 'debt' (in reality liabilities such as deposits). Regulators, of course, ensure you have a minimum % of equity/reserves.

Russell

And have you seen how much profit they made in their announcement £11.6 Billion! Article here - http://www.in-business.org.uk/forum/showthread.php?tid=258

Tim Worstall

"Barcap, then, is not freakishly profitable - quite the opposite.
Which raises the question: why is it paying an average bonus of £95,000 per worker?"

Because they use an awful lot of capital to make that profit and very little labour.
Thus payments to labour can (and probably will be) high at a time when returns to capital are low.

anonymous

The author shows quite a limited understanding of investment banking.

In very simplified terms, one of the business activity of an investment bank is as a middle man. It borrows money to lend to others and take a fee for the service and for assuming the risk of default.

All the borrowed money (issue of bonds and other security instruments etc) gets added to the total assets and total liabilities which cancels off (there is a risk element... you can say its borrowed capital). The bank basically manages this risk of how well the assets cancel off against the liabilities.

That is the nature of Investment Banking. It is a special case and you can't just take read assets and liabilities for investment banks like for other industries as such is the very nature of the business.

The authors' conclusions are simplistic, drawing conclusions by comparing apples and oranges.

The reason why Investment bankers earn so much is because the profession is a scalable one. You don't need too many more people to earn much more profit. You need maybe 5 times less people to manage the same amount of money compared to a traditional bank. Thats because it doesn't take that much more people to manage between 5 million and 50 million.

If you look at the results presentation, Barcap has earnings per employee about 5X more than in traditional banking.

I'm not saying they should be paid that much. in fact I think if your job is easier to earn money, its not the skill. Its the position you are placed in. Shareholders should get the benefit. Not the bankers. But the bankers have the shareholders by the nuts as its not that hard for a banker to go off, start their own business and take a large portion of their clients along, so currently the only way is for the bank to pay them so much its not worth the risk to start their own business.

john smith

All investment banks have such a pattern if you look at the balance sheet. Its just how the business works.

Mark Jackson

Sorry I must be stupid but if what your say is correct
"The subsidiary made £2.46bn last year. However, its total assets at the start of the year were £1629.1bn. So its profits are only 0.16% of these assets. And they are only 1.1% of risk-weighted assets."

Then what is the point of all the employees, technology etc. Why don't they just hop across the road to another bank and get a far bigger return for just depositing the money on overnight accounts? Surley they could get a much bigger return than a piddly 1.1% Even I could do better than that and I can't even count!!

دار التميمي حمد

Then what is the point of all the employees, technology etc. Why don't they just hop across the road to another bank and get a far bigger return for just depositing the money on overnight accounts? Surley they could get a much bigger return than a piddly 1.1% Even I could do better than that and I can't even count!!


دار التميمي حمد

Then what is the point of all the employees, technology etc. Why don't they just hop across the road to another bank and get a far bigger return for just depositing the money on overnight accounts? Surley they could get a much bigger return than a piddly 1.1% Even I could do better than that and I can't even count!!


منتديات

oh dear, I'm at risk again of making a fool of myself .... but if you really did finance a venture 100% with debt and put down no equity, then any profit you make after servicing your debt would be an infinite return, wouldn't it? after all, what have you staked?

buricishcrugs

France captain Patrice Evra claims that coach Raymond Domenech dropped him from the squad for "no valid reason'' and denied him the chance to apologise to the French public by reading out the players' statement himself.
http://soccernet.espn.go.com/world-cup/story/_/id/800527/ce/uk/?cc=5739&ver=global

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