Barclays’ (LSE: BARC) (NYSE: BCS.US) “dark pool” fiasco has sideswiped the bank, damaging its reputation and destroying customers’ trust. In addition, the bank is now under scrutiny by multiple regulators and hefty fines could be around the corner.
Nevertheless, many questions remain unanswered, such as, is Barclays’ future now at stake and how much will this fiasco cost the bank?
The lawsuit
At the end of last month, it was revealed that Eric Schneiderman, the state of New York Attorney General, had filed a lawsuit against the Barclays. This lawsuit concerned Barclays’ dark pool trading venue, which the attorney general claimed, had been favouring high-speed traders.
Further, there was plenty of evidence to suggest that Barclays knew what was going on, although the bank failed to stop the practice.
Emails and statements from those working at Barclays, revealed that the employees knew the dark pool was not working in the best interests of clients. One Barclays trader even referred to the pool as a “toxic landfill”.
Breaking up
Almost as soon as the news of the lawsuit was released, Barclays began losing clients. City sources reported that broker-dealers around the world were severing ties with the bank.
Those turning their back on the Barclays included Deutsche Bank, the Royal Bank of Canada, Sanford C. Bernstein and Voya Financial, some of Barclays’ largest clients. Other dealers received multiple requests from clients asking them to cut connections with Barclays.
And the bank also lost support from investors around the world immediately. For example, Barclays had planned to issue bonds worth $1.5bn this month, which investors were eagerly awaiting — the bank had received over $4.5bn worth of bids for the deal.
However, as soon as the dark pool news broke out, the bond issue was pulled, indicating that demand for the bonds had evaporated.
Bad news
There’s no denying that this is bad news for the bank. Indeed, Barclays relies upon a small collection of clients for the majority of its investment banking income. 1,000 investment banking clients generated two thirds of the division’s income during 2013.
What’s more, investment banking is a large part of Barclays’ business. Even though the first quarter of this year was a bad time to be in investment banking, Barclays’ investment bank still contributed 39% of the group’s profit before tax. The investment bank reported pre-tax profit of £668m during the first quarter, compared to total group pre-tax profit of £1.69bn.
As a result, the loss of even a few of Barclays’ investment bank clients could have a significant impact on the bank’s profit.
Unfortunately, it appears as if the clients of Barclays’ investment bank are fleeing in droves. This does not bode well for the company’s future.
