Barclays suffers from indigestion after U-turn on Protium deal

WHEN Barclays gave the name of Protium, an indigestion medicine, to an accounting trick it pulled off in 2009, the bank hardly imagined it would be forced to re-absorb most of the $12.5bn (£7.5bn) of assets that it had moved off balance sheet within 18 months.

That was short-sighted, according to analysts who yesterday dubbed the scheme a “smoke and mirrors” operation that had damaged the bank’s reputation and forced it to fork out £246m as a “sop” to a group of its former employees. That includes a $270m cost and a £83m pay-off to investment firm C12 Capital Management.

C12, led by former BarCap executives Stephen King and Michael Keeley, was spun out of the bank in 2009 to take over a $12.5bn asset portfolio that Barclays saw as undervalued.

To avoid marking it to market and taking a loss, then-CEO John Varley authorised lending $12.6bn to C12 to buy the assets, turning them into a loan on Barclays’ balance sheet. But in an embarrassing U-turn and after sparking the interest of regulators, the bank has bowed to “the inevitable” according to Evolution Securities’ Arturo de Frias, and paid off C12 to reverse the scheme.

The reversal is due to Basel III rules, which require the bank to put aside more capital than it expected against the Protium loan. That means Barclays needs control of the assets to sell them off as fast as possible. “We now have much greater control,” said chief financial officer Chris Lucas yesterday.

But analysts were scathing, saying it was short-sighted to overlook the likelihood of Basel III’s impact. “Protium caused immense confusion, left a bad taste and now they’re unwinding it anyway,” said one analyst.