The Barclays share price and the credit crunch

Going down: Barclays' share price from Feb '07 to Nov '08

So about two years ago I got talking to a friend’s mother who had inherited Barclays shares, because I am the sort of nerdy person who talks about shares at dinner parties. She had no thoughts on the bank’s future. She simply owned a bit of it.

I suggested to my friend that she might nudge her mother towards diversifying out of Barclays. Not because of any worries about the share price, but because:

• Her mother clearly wasn’t following the company’s business, and if you’re crazy enough to own just one share you really ought to watch the business like a hawk.

• Even though I don’t give individual advice about shares, it would surely be cruel not to cough and mention that having all your shares in one company, even one as ancient as Barclays, is a rather risky strategy. Banks go bust.

Where did all her money go?

Fast-forward to this week, when I was asked by my friend why the Barclays share price was all but missing a zero off the end. Sure, she’d seen some noisy financial news on the television, but what did this have to do with her shares?

Argh! Where to even start?

Rather than changing the subject, which any normal person would have done, being a share nerd I asked whether any of the Barclays shares had ever been diversified into the wider index. They hadn’t. And then with a heavy heart got to work creating the chart above, and the explanation you’ll find below.

Barclays’ shares and Western capitalism on the rack

Investors in Barclays have had a terrible 18 months, just like the owners of any bank shares, or indeed of almost any shares at all. (In fact, just like anyone who doesn’t run an insolvency business or write a business blog for the BBC.)

The Barclays share price has fallen 78% since its all-time high of 790 pence on February 23rd 2007. As I write, it’s trading for 179 pence a pop, after hitting 156p a week or two ago.

Who needs penny shares or profitless dotcoms when you can lose your money investing in a 300-year-old institution like Barclays?

Caught in the credit crisis

The credit crunch is what’s done for the Barclays share price, just as it has done for the value of financial companies across the world. Asset write downs, falling profits, and fear and loathing between the banks have destroyed investor confidence, and the few brave or misguided voices who believe the worst is over are being comprehensively shouted down.

Still, it could be worse.

In the UK, the likes of Northern Rock, Bradford and Bingley, and Alliance and Leicester have all been taken over by rivals or the UK Government, while the UK’s largest mortgage lender, HBOS, is about to be gobbled up by Lloyds TSB, which itself has seen better days.

You can roughly track the grim march on both sides of the pond from the Barclays share price graph.

Meanwhile, the US has seen all its investment banks go bust, sold off or hastily turned into traditional holding banks so they can be bailed out by Federal Reserve, while ginormous players in the mortgage space like Washington Mutual, Wachovia, and Fannie Mae and Freddie Mac have effectively bitten the dust as independent companies.

You can roughly track the grim march on both sides of the pond from the Barclays share price graph. The credit crunch has been a once-in-a-century ride (we all hope) so let’s relive it one more time. (The numbers below correspond roughly to the appropriate point in time on the chart above):

1. Happy days for bankers: Barclays releases its final results on the 20th February 2007. Profits are up 35% to more than £7 billion! (That’s £7 billion for shuffling paper about in increasingly obscure ways. Amazing.)
   (Barclays share price: 790p on 23rd February 2007).
2. Sub-prime starts making banks nervous: Over in the US, Bear Sterns tells investors they’ve lost money in two of their key hedge funds due to sub-prime bets gone wrong, when rival banks refuse to bail them out. Federal Reserve Chairman Ben Bernanke says sub-prime losses could top $100 million. (He must be a glass three-quarters full kind of guy). By early August, European banks have started to shy away from lending to each other, despite 200 billion euros of liquidity injections from the European Central Bank.
   (Barclays 614p on August 31st 2007).
3. Run on a bank: The rate at which the nervous and/or cash-constrained banks will lend to each other (known as three-month LIBOR) hits a nine-year high: at 6.7975% the rate is more than 1% above the official base rate. It’s a crippling burden for institutions reliant on wholesale lending, and sure enough, on the 14th of September, news that a crippled Northern Rock requested emergency financial support from the Bank of England causes savers to queue (politely) in the streets to withdraw their cash. £1 billion is taken out, despite (or because of) assurances from the authorities that their money is quite safe.
   (Barclays: 596p on September 14th 2007)
4. The authorities intervene (part 1): The UK government halts the Northern Rock run by guaranteeing savings, leading to a modest recovery in bank shares. On the 18th September the US starts cutting interest rates, by 0.5% to 4.75%. Meanwhile the Bank of England does a U-turn, announcing a £10 billion auction to try to ease the three-month LIBOR. Bank shares stage a modest recovery. Is the worst over? (Don’t shout if you know the ending…).
   (Barclays: 655p on 5th October 2007).
5. No, the worst is not over: October 2007 sees Blue blood Swiss bank UBS announce $3.4 billion of losses from US sub-prime loans, proving decisively that ‘their’ problem is over here in Europe, too, mainly because they sold it to us. In the UK, mortgage approvals hit a three-year low in November, raising the spectre of a British sub-prime crisis. An announcement from US president George Bush of plans to help a million homeowners steadies things at the start of December, before it all heads south again – despite unprecedented coordinated action from five key central banks who pump hundreds of billions of whatever they’ve got into the market.
   (Barclays: 566p on December 7th 2007).
6. Northern Rock nationalised: Nobody wants the former FTSE 100 lender’s loan book, and the Government belatedly announces it will take Northern Rock into public ownership on February 17th. Meanwhile Barclays releases its final results, spookily repeating its 2007 profits of more than £7 billion. It’s soon clear that an intern didn’t simply photocopy last year’s annual report, and there’s even a dividend hike of 10%.
   (Barclays: 427.50p on February 15th 2008).
7. Fed releases $200 billion into the market: Fear once again rears up in the market (and not only because all the leading authorities on financial TV are freaky bald guys), and investors in Barclays forget all about their recent results to send the share price downwards. The US authorities inject $200 billion into the market on March 7th, but it’s no help for investment bank Bear Sterns. On March 17th it’s acquired by JP Morgan for $240 million. Just 12 months ago it was worth $18 billion.
   (Barclays: 425.50p on March 7th 2008).
8. Barclays shrugs off grim data: Despite continuing terrible news, the Barclays share price rises as investors rally to banks seen as too big to fail. On April 21st, the Bank of England unveils a £50 billion plan to enable UK banks to swap their dodgy mortgage debt for UK government bonds. Not for the first time, seemingly positive news also heralds the resumption of a falling Barclays share price.
   (Barclays: 496p on April 18th 2008).
9. UBS launches a $15 billion rights issue: On May 22nd, the Swiss bank UBS announces plans to raise $15 billion via a rights issue. It has now made $37 billion of writedowns due to its holdings of US mortgages (presumably loans on shacks in the Louisiana Bayou, but maybe on once-prime bank office real estate, the ways things are going).
   (Barclays: 386p on May 23rd 2008).
10. Fannie Mae and Freddie Mac on the edge: Despite having a year to get to grips with it, investors suddenly fear the collapse of the two key US mortgage lenders, Fannie Mae and Freddie Mac, sending financial shares around the world further down. On July 13th, US mortgage lender IndyMac fails – it’s the second largest bank failure in US history. The US authorities eventually reveal on July 14th that they will support Fannie and Freddie, as the markets had always assumed they would but had started to doubt. Talk of ‘moral hazard’ returns to the newspapers. (A luxury we’ll forget by November, when even car manufacturers start baying for bail outs).
    (Barclays: 267.75p on July 11th 2008).
11. UK Chancellor Darling says the UK economy is facing worst crisis for 60 years: He makes the comments in an interview with The Guardian on August 30th. While the economic data is grim, most feel the worst really is over, and Barclays even stages a rally. (The UK’s Chancellor is laughed off as not getting it. In a little over a month, he’ll be revealed as one of the few who did.)
    (Barclays: 353p on August 29th 2008).
12. The authorties intervene (part 2), (until one day they don’t): Shares fall, again. On September 7th Fannie Mae and Freddie Mac are officially bailed out by the US government, after US authorities conclude that letting them to collapse would pose a “systemic risk to the entire system” (i.e. land us in it, in a hole, with more of it being thrown in on top of us). Throughout the rest of September, each day’s news and the resultant stock market gyrations get crazier. On September 15th Lehman Brothers files for bankruptcy protection, after it fails to find a buyer and US Treasury Secretary Hank Paulson decides he’s had enough of bailing banks out. The market looks into the abyss, and doesn’t like its reflection. Merrill Lynch is acquired by Bank of America for $50 billion, as investment banks realise they can’t survive on their own. On September 16th, Paulson has found his wallet again, bailing out AIG, an insurance giant for $85 billion. September 17th sees Lloyds TSB agreeing to takeover rival HBOS after a run on the latter’s shares. (An episode made particularly scary for many of its customers by its website falling over, denying them access). To avoid another similar run, the FSA bans shorting of bank shares. On September 25th, the giant US lender Washington Mutual, having been crippled by mortgage defaults and sub-prime woes, is sold to JP Morgan. At last, on September 29th, the US rustles up in principle a $700 billion fund to buy up bad debt, while in Europe three countries intervene together to save Fortis. Barclays hangs on in there; it even swoops to buy some of Lehman Brothers to augment its Barclays Capital division. Barclays is widely perceived as one of the winners, while hapless Lehman staff carry cardboard boxes stuffed with their possessions and secrets out of their offices on the rolling news channels.
    (Barclays: 366.50p on September 26th, 2008).
13. Oops… US lawmakers reject the $700 billion bailout package (for a minute): Battle-scarred investors ended September thinking they’d seen it all. They soon learned they hadn’t. In the UK, Bradford and Bingley is nationalised, while Iceland is takes control of its third-largest bank, Glitnir. In the US, Citigroup takes over the fourth-largest lender, Wachovia, in a deal backed by the US authorities, who now appear determined to avoid another Lehman Brothers. The US Congress takes a more can’t-do approach to financial stability, however, rejecting the $700 billion package, and in turn the US stock market falls 700 points, its largest daily points fall ever. (Investors phone their elected officials, who strangely decide maybe they can reach a compromise, after all). Barclays shares hang on in there, hitting a local high on October 3rd – the day the US government finally approves that bailout bill -but then rumours hit that Barclays has sought funding from the UK government. It’s untrue and denied, but the damage is done, and shares begin a steep slide. With banks being bailed out across Europe, investors fear the worst, and by October 8th the UK government has had enough; it announces a £50 billion bailout fund for banks that can’t meet its newly toughened capital requirements, all but forcing them to take state money in what amounts to a semi-nationalisation of the banking system. The mood is so heavily against bankers, that even the posher street interviews on the Six O’Clock News find people wanting to see bankers’ bonuses slashed and wings clipped. Charles Dickens would have had a field day.
    (Barclays: 207.50p on October 10th 2008).
14. Barclays turns down Government money: Iceland pretty much goes bust, locking up thousands of UK saving deposits as its Central Bank puts up the allegorical ‘Gone Fishing’ sign on the metaphorical door. But Barclays announces it will head to sunnier climes to secure the required capital it’s required to raise, spurning UK state investment. At first investors are pleased by this apparent show of strength (and the chance of future dividends, which will reportedly be denied to the diluted shareholders of part-nationalised banks for some time). But at the start of November Barclays reveals the terms of its £7.3 billion fund-raising from the Middle-Eastern States of Qatar and Abu Dhabi, which on the surface seem far more costly than getting the money from Gordon. (Tax loopholes may mean it isn’t). Some Barclays shareholders believe directors simply want to keep their snouts in the trough, free of Government restraint, and Barclays shares are sold off hard – belatedly falling further than their bailed-out brethren.
    (Barclays: 179p on October 31st 2008).

Where next for Barclays’ ever decreasing share price?

Since I wrote all that (and then collapsed in exhaustion, fell asleep, woke up, briefed my pal and recovered to type it here), another day’s trading has seen the Barclays share price fall to 168 pence.

If I hadn’t just typed out that long recap of the credit crunch, I might be thinking 168 pence looks like the bargain of the century. But as it is, in this dire financial climate, who knows?

While LIBOR is finally getting into line, I suspect it’ll still be impossible to judge any bank’s soundness until US house prices stop falling. I won’t trust analysts’ predictions until I start to hear that people are outbidding for Florida condos again. Then, any banks still standing will begin revaluing their assets upwards, fast.

We might be in for quite some wait for that though. I don’t give advice, but I do wish she’d sold those shares, or at least diversifed into a broader high yield portfolio.

Update: Read why Barclays shares fell to 48 pence then soared 72% in January 2009.