£7.6bn Protium scheme in Cayman Islands named in damning Barclays report
From This is Money
“Arrogant and obsessed with winning at all costs: Barclays’ moral flaws laid bare in damning report”
By Ruth Sunderland
Barclays dished out staggering bonuses of nearly £3million every year to 60 investment bankers between 2002 and 2009 – an incredible £170million between them on top of their salaries – as many ‘lost all sense of proportion and humility’, a withering independent report concluded yesterday.
The lender fostered a ‘winning at all costs’ culture which saw its moral values put on the back burner as it went in pursuit of profits, with arrogant bankers believing they were immune from ‘ordinary rules’ of society, according to the report into the bank’s defective ethics by top lawyer Anthony Salz.
This tendency to push the rules to the limit was epitomised by its controversial tax avoidance unit – the Structured Capital Markets division – which masterminded a £7.6bn Cayman Islands smoke-and-mirrors scheme known as Protium to minimise tax bills.
In his weighty analysis of the moral failings at Barclays, Salz highlighted Protium as an example of its ‘corporate character’, which he portrayed as edgy, arrogant and obsessed with winning at all costs.
Protium was a prime example of its habit of lavishing ‘unusual’ financial incentives on favoured casino bank staff. And the board misjudged the potential damage Protium could do to its reputation by taking an approach that confirmed the regulators’ scepticism about its assets and accounting practices, Salz found.
City regulators raised concerns with Barclays’ board in February 2012 about a breakdown of trust with the bank over incidents including the Protium scheme, designed to transfer toxic assets off its balance sheet and make it appear healthier.
Executives from the FSA told Salz they conveyed their view that Protium ‘was a complex transaction with which they were very uncomfortable’, but that Barclays (down 8.2p to 289.3p) went ahead anyway.
Salz found that the bank could have reduced the effect the toxic assets had on its balance sheet in a much simpler way, by switching them from one loan book to another, where they would not have to be marked down in value.
The clear implication of his report is that the bank chose the Protium route in order to deliver vast rewards to a group of 45 bankers it wanted to manage the toxic loans.
Protium was dreamt up by the bank’s notorious Structured Capital Markets division, whose raison d’etre was to minimise tax bills. It was run by supposedly ‘independent’ management team known as C12, which would receive a fee of £26m a year.
In reality, this was a group of 45 employees who had been overseeing the assets within Barclays. They were allowed to leave the bank and set up their own company, with a £7.7bn loan granted on cheap terms over a decade by Barclays.
Protium was owned by C12 and two anonymous hedge funds that between them put in an investment of £300m. They anticipated a mouthwatering equivalent to 18 per cent a year, with any residual value also going to them after the loan to Barclays was repaid.
It meant that C12 and the other investors stood to gain handsomely if they could wind down the toxic asset exposure at a profit – but that the bank remained at risk if things went wrong. Barclays’ disclosures did not put a figure on those ‘residual values’ in any of its disclosures, Salz said.
In April 2011 Barclays took back £6bn of the assets onto its own balance sheet after the FSA imposed onerous conditions on the deal. The bank had to pay an £55m ‘break-fee’ to C12, and also agreed to buy out the anonymous third party investors for £180m as well as investing £500m in another C12 fund, Helix.
At the end of last year the bank was nursing net losses on Protium of £205m.
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