Talk about courtroom drama.
From the closing arguments of Lehman’s suit against Barclays (that’s the one alleging an $11bn ‘windfall’ asset grab when Barclays snapped up its best bits in 2008):
(Bloomberg) Final details of the distribution of billions of dollars of assets as part of Barclays Plc’s purchase of Lehman Brothers Holdings Inc.’s brokerage unit were never approved, the judge in the bankruptcy case said.
“Let me be clear about one thing, Mr. Boies,” U.S. Bankruptcy Judge James Peck told Barclays’ lawyer David Boies yesterday. “I never approved the clarification letter”…
Which has a) made Judge Peck sound a little bit like Columbo and b) inspired some speculation that Barclays is now losing this case, and needs to settle fast. Or start losing Lehman-acquired assets.
As the FT reports, the bank’s best hope is for Peck to conclude that Lehman had no suitor other than Barclays at the time, and that its lawyers never objected to the non-approved clarification letter.
And if Peck doesn’t decide in Barclays’ favour…
Matthew Lim of Matrix had a good backgrounder and assessment of the risks on Friday:
Barclays has largely consolidated the Lehman assets with its own, save for £2.3bn (i.e. $3.5bn), which Barclays believes is owed to it by the trustee. Of the £2.3bn, Barclays has recognised £1.8bn as a receivable on its balance sheet. Management has considered this £1.8bn as increasingly ‘at risk’, which is part of the reason why risk-weighted assets increased so much in Q1 2010.
Barclays contests that the process had been legally approved by the bankruptcy courts and has therefore not provisioned against any losses (except the £0.5bn remaining out of the £2.3bn expected from the trustee that has not been booked as a receivable, which can be considered a form of provision). In a possible scenario (albeit one which we consider unlikely), Barclays could lose the £1.8bn in assets that it has booked as a receivable, representing 38% of FY 2010E pre-tax profit. In an even more unlikely worst case scenario, Barclays could lose nearly $10bn. Each $1bn of potential losses, in this regard, would equate to 12% of FY 2010E pre-tax profit, or 1.3% of year-end 2010E shareholders’ equity. Total potential losses could therefore be substantial, representing over 10% of shareholders’ equity…
The worst case impact is that Barclays needs to write off the total value of the $10-11bn of assets that it has already booked, minus the minor $0.5bn that it has has not yet booked as a receivable. If we assume Barclays is impacted by a round $10bn (i.e. £6.4bn), then this would represent 88% of FY2011E pre-tax profit and 12% of 2011E shareholders’ equity, so rather substantial. We expect at this time that perhaps Barclays could be forced to make a write off of $3-5bn (i.e. returning some assets to Lehman, and being forced to reverse the write-ups on some assets that it previously bought), which would impact 2011E shareholders’ equity by 4-6%…
Which would also be, erm, rather substantial.
Note, by the way, that even the most bearish analyst takes on BarCap’s future have tended to emphasise that the Lehman acquisition was still a ‘transforming deal’ that put Bob’s wonder into the investment banking stratosphere.
What goes up…
Related links:
When a good deal comes back to haunt you – FT Alphaville (2009)
Reflections on the Barclays/Lehman deal – FT Alphaville (2008)