Barclays (LSE: BARC) shares lost further ground Monday morning (2 March), after mortgage lender Market Financial Solutions (MFS) collapsed last week amid allegations of fraud. Down 5% on the day at the time of writing, the Barclays share price has now fallen 15% over the past month.
Other UK bank shares have been weak, mind, so this is presumably only part of the dip.
Barclays, with investments in MFS, spotted irregularities in the days before the lender slipped into insolvency last week. Allegedly there had been double-pledging of collateral going on. And it’s led to further fears surrounding asset-backed lending, which has been in a bit of a boom.
Barclays was among those providing £2bn in financing to MFS. Another, US lender Jefferies Financial Group, has seen its shares lose 29% in a month.
So what now?
We don’t know how this will work out for Barclays. But it sounds like it might have exposure of up to £600m. The immediate lesson for me is — don’t be complacent when it comes to banks.
Bank shares stormed ahead over the past couple of years. At the peak, Barclays shares had more than trebled in value in little more than two years. Lloyds Banking Group, which I hold, rewarded shareholders by more than doubling in the same timescale.
And, well, I was definitely starting to see the sector with too rosy a view. Banking sector all hunky dory now? Years of squeaky-clean profits ahead with none of the shady business of the past ever going to emerge again? Dream over.
It’ll happen again
There are no accusations of bad behaviour on the part of Barclays itself here. In fact, it seems it was one of the keen-eyed observers who helped pull the plug on this thing. Questions are already being raised, though, of poor underwriting standards. And this is in a sector where, in the US mainly, some regulatory standards have been significantly loosened.
Wherever there’s money to be made directly from money, enrichment attempts by financial firms might not always be, shall we say, as prudent as we’d hope.
I haven’t forgotten the car loan mis-selling scandal that hit Lloyds so recently. In fact, I was reminded of it this very morning by a leaflet from a local law firm touting for compensation business.
And Barclays has racked up its own share of regulatory financial penalties over the years for various misdeeds.
What should we do?
I’d say the key thing that we private investors can do is remain aware of the inherent risks of improper, and even fraudulent, behaviour in our chosen sectors. And remember what an intricate tangled web there is connecting all sorts of financial institutions around the globe. It only took a few tugs on some of the strings to trigger the 2008 banking collapse, remember.
And with that in mind, I still intend to invest in financial stocks. And I still rate Barclays as a potential long-term cash cow. I just think investors might want to consider waiting for this case to work itself out first, and see what the damage might be.
