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Comment: What price to pay for Barclays’ toxic assets deal?

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For all those convinced that the culture of risk embodied in hedge funds was a prime cause of the financial and economic meltdown of the past two years, yesterday’s headlines provided more than a frisson of outrage: Barclays Bank has provided a group of 45 departing employees with some USD12.6bn to take a bundle of “toxic assets” off its hands through an investment vehicle in the Cayman Islands. 

With up to USD450m in backing from two hedge funds, the former Barclays bankers have set up C12 Asset Management in New York, which in turn will manage the portfolio of assets including residential mortgage-backed securities and instruments issued by monoline insurers through Cayman-domiciled Protium Finance.

C12 will earn management fees of USD40m over the next 10 years. Barclays will receive interest from Protium amounting to 2.75 per cent above Libor. The hedge funds will earn interest of 7 per cent annually on their investment, plus any value left in the Cayman vehicle once the Barclays loan has been repaid in full. The shift of assets will not remove any risk from Barclays’ balance sheet, but it replaces assets of volatile value with loans that should, all being well, provide a steady stream of income without balance sheet disruption.

So everyone gains? Possibly, but the deal has no shortage of critics. The transfer of assets may give Barclays stability but involves surrendering any future improvement in the market value of the assets, which could be considerable. But perhaps more damaging is the perception, however unfair, that once again bankers and other sophisticated financial folk are siphoning off value in exotic tax havens while ordinary investors, like the bank’s shareholders, take the hit.

This is in all likelihood a highly simplistic and slanted viewpoint. But it is a deal that seems to mirror the financial sleight of hand that created the crisis in the first place, and that it will notably benefit a select group of the bank’s – now former – employees to a degree commensurate with the years of excess that we are supposed to have put behind us.

There are already stories enough about senior people quitting banks for less public parts of the financial industry to escape any clampdown on bonuses in Europe and elsewhere. Inevitably this deal will be viewed in some quarters in the same light.

That a pair of hedge funds also stands to benefit from any upside in the value of the assets, and that the deal is being set up in the tax-neutral jurisdiction of Cayman, is not in itself in any way reprehensible, but it may well serve to inflame the prejudices of critics who will see the deal as evidence that nothing has changed from the bubble years.

Barclays’ desire to replace a volatile group of assets with a stable one makes plenty of economic sense, but whether it does the financial industry as a whole any favours in the court of public opinion, at a time when government and regulators are considering what restrictions to place on the activities and money-making capabilities of firms and their employees, is another matter.

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