“Barclays (LSE: BARC) (NYSE: BCS.US) hit 230p on Wednesday — its lowest level for a year. Is ‘upside risk’, as analysts call it, greater than downside risk at the British bank? The premise remains the same: Barclays is a broken machine. The answer is also the same: Barclays is a macro play.”
I filed those couple of paragraphs with the Fool editors last night. I didn’t know what was coming next.
Good Morning, Barclays
The press: “Barclays accused of dark pool fraud,” was the BBC headline today. We’ll get back to this in a moment.
Market reaction: Barclays stock has been on its way down since early trading today. It has lost more than 5% of value on Thursday and currently trades at about 217p, which is its lowest level for a year. More downside is apparent.
Build-up: Events that occurred in the two days before the dreadful news that emerged late last night deserve attention to assess the Barclays investment case. Let’s start from here.
Interest Rates
As I recently argued, if interest rates in the developed word rise later than expected, Barclays stock will underperform the market — and if volatility spikes, its equity value will fall. Forget about volatility, which is way too low right now. Enter expectations for interest rates.
“Sterling headed for a second day of losses against the euro on Wednesday, ahead of a Bank of England report expected to take measures to cool the housing market and potentially ease pressure to raise interest rates,” Reuters reported yesterday. “On Tuesday Carney pushed back slightly against expectations the bank will raise rates before the end of this year, saying the economy still has slack to work through.”
Barclays had lost 2.7% of value between Tuesday and Wednesday. It was badly hit even before the news of the Dark pool lawsuit from the New York State’s attorney general Eric Schneiderman. This is because if interest rates in the UK don’t rise, the net interest income of Barclays may “grow as a result of a lower cost base, but it will be exposed to a series of risks among which litigation risk is by far the most unpredictable,” I said last month.
The accusation now is: ‘a systematic pattern of fraud and deceit’. How much is the bill for that?
The Dark Pool
I have been writing extensively in recent times about dark pool issues and high-frequency trading. Virtu Financials Inc. had to pull its IPO earlier this year, and that didn’t surprise me a bit.
Under the spotlight is Barclays’s alternative trading system, LX Liquidity Cross. Every $1bn of litigation costs would hit Barclays’ tangible book value by 1%, several analysts have suggested, but I reckon the impact could be more damaging. In the US, BNP Paribas will reportedly plead guilty to a criminal charge of violating the International Emergency Economic Powers Act and will pay up to $9bn.
Banks are cheap, though. Yeah, right.
