Barclays Is Still Paying for Qatar's Bad 'Advice'

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Barclays is off raising $9.2 billion to shore up its capital, and the prospectus has a rather awkward disclosure, which is that British regulators are planning to fine Barclays $79 million because the last time it raised a bunch of capital it maybe lied to shareholders to cover up the bribes it paid to Qatari investors to buy its shares. But that was, like, almost five years ago, so surely there are no hard feelings?

What else was happening five years ago? Bad things is the short answer; there are longer answers. Barclays needs the billions it's raising now to comply with capital requirements; it needed the billions it raised in late 2008 to survive.

It was not alone in this. If you're a bank and things have gone terribly wrong for you, one thing you might want to do is raise some money by selling stock. This can be hard because everyone tends to know that things have gone wrong for you, but they have trouble knowing how wrong, so their sensible inclination is to assume the worst. Markets for lemons, etc.

One partial way around this problem is to raise a big chunk of money from a single, deep-pocketed investor. That investor gets to do due diligence, look you in the eye, and generally get a better than average sense of your situation. And then you can use him as an foundation to raise public money: "See, we can't be in that bad shape, we raised all this money from Investor X." Many extra points if Investor X is Warren Buffett but, in a pinch, Blackrock or Fairfax or Temasek or even the Qatar Investment Authority will do.

The problem here is that the big investor will want to buy shares below where you want to sell them. For good reasons. One, he's putting in a lot of money and want some sort of volume discount. Two, he's done due diligence and looked you in the eyes. Your eyes are bloodshot and shifty. Why would he trust you with his money unless you give him a good deal?

Okay, fine, so you give him a discount. But you don't want to give everyone who buys shares in the offering the same discount. The investor who took a chance on you when no one else would, who put in a big order to anchor the book, who loaned you his halo so you could get the deal done: Sure, give him a discount. The schlub who bought 100 shares because he heard the deal was going well? He can pay full price.*

This tends not to work though; there are exceptions but frequently the schlubs want the same deal as the anchor investor, fair or not.

Financial engineering is not powerless in the face of this problem. What you gotta do is, you build a structure where Investor X is not obviously buying shares at a big discount, because the thing he's buying is more complicated than "just a bag of shares." So, for instance, Investor X could buy a perpetual preferred stock callable at 10 percent over par after five years with at-the-money-ish warrants to buy common shares. You can translate that into "common stock at a ___ percent discount," but the translation is debatable and not immediately intuitive to the schlubs.

That particular thing happens to be the thing that was done a lot during the financial crisis, starting with Warren Buffett's investment in Goldman Sachs.**

This is the right way to do it. There are other right ways but the important elements are:

  • it's complicated,
  • you disclose it, and
  • nobody can quite figure it out even once you've disclosed it.

There are loads of wrong ways to do it too! The simplest is just:

  1. Investor X buys shares from you at $100 per share.
  2. You write Investor X a check for $20 per share.
  3. You tell everyone about thing 1 but not thing 2.

Heyyyyy that's pretty much what Barclays did:***

The [UK Financial Conduct Authority] has investigated certain agreements, including two advisory services agreements entered into by Barclays Bank with Qatar Holding LLC in June and October 2008, respectively, and whether these may have related to Barclays' capital raisings in June and November 2008.

The FCA issued warning notices (the "Warning Notices") against Barclays and Barclays Bank on September 13, 2013.

The existence of the advisory services agreement entered into in June 2008 was disclosed but the entry into the advisory services agreement in October 2008 and the fees payable under both agreements, which amount to a total of £322 million payable over a period of five years, were not disclosed in the announcements or public documents relating to the capital raisings in June and November 2008. While the Warning Notices consider that Barclays and Barclays Bank believed at the time that there should be at least some unspecified and undetermined value to be derived from the agreements, they state that the primary purpose of the agreements was not to obtain advisory services but to make additional payments, which would not be disclosed, for the Qatari participation in the capital raisings.

That's a lot of money for advice, so you can understand why the FCA might think the payments were not so much for advice as to reduce Qatar's effective price to participate in Barclays' capital raising.**** It should be pretty obvious why that's a no-no: If you're telling the world that you're raising capital at 100 pence a share, but secretly rebating 10 pence a share, then you're painting a rather misleading picture of your financial position.*****

If they'd paid me, I dunno, a tenth of that amount, I would have been happy to give them some advice. I'd have started by pointing out that, if they wanted to get Qatar to invest in their shares at a high headline number but with a less obvious discount, there were probably better ways to do that than a secret side agreement. More complicated ways, sure, but that's what you have advisors for.

* I mean, y'know, compared to the anchor guy. Obviously everyone buying stock in any public offering is probably getting a discount to last trade, that's just supply and demand. The question is just whether you can give the anchor guy a better deal.

** It became popular enough that it was frequently done without a regular public common-stock deal alongside. Most notably this is sort of the structure that Treasury used to invest TARP funds in banks; it's also the structure that Bank of America used years later for its Warren Buffett investment. These deals were done without contemporaneous public offerings but the principle is the same: if your stock is trading at $100, you don't want to announce that you sold shares to Buffett or Treasury or anyone else at $60, since that's going to undermine confidence a bit. So you sell stock at $100, but you Structure.

Incidentally I was at Goldman at the time but had nothing really to do with their Buffett deal and have no inside information; the above is my first-principles speculation rather than, like, announced Goldman policy.

*** I mean, they disagree, they're contesting the fine, etc.

**** Here is Paul Murphy:

So, Bob Diamond and his Middle East point man at the time, Roger Jenkins, hired one or more unnamed Qataris to provide advice to the bank, agreeing to pay £64.4m per year for five years.
We are not told what exactly these talented/connected individuals were advising on, so it is difficult to assess credulity here.

***** Other possible no-no elements include (1) if the advisory agreement was with a different entity from the fund that did the investing -- i.e. if it was a straightforward bribe rather than a hidden discount on the shares and (2) if, as has been vaguely alleged in the past, Barclays financed Qatar's purchase.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matthew S Levine at mlevine51@bloomberg.net