Barclays: accounting trickery is not enough

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Barclays is going to report a profit in its forthcoming accounts. We know: it has already said so. And how did it achieve this feat? By abusive accounting, of course.

Sure it has written down some assets (although no one in the market seems to believe they have done it properly). But they've also used the rules of fair value accounting to write down their own debt too. As the Sunday Times notes:

In the second half of last year Barclays is likely to admit to write-offs of potentially £3 billion to £4 billion against the carrying value of assets and loans. However, it will set these off against a series of exceptional gains. There will be some £2.6 billion against a fair-value adjustment in bonds that the bank has issued. There will be a further £1.5 billion benefit from negative goodwill resulting from the acquisition of the US operations of the American investment bank Lehman Brothers.

In plain English, it means that its liabilities in terms of overvalued assets are matched by writing back other assets. It implies its underlying performance is strong and that the bank is still making good money. In addition to this, the Financial Services Authority has relaxed the tier-one capital ratio from 10% to 6%. This has created a £20 billion cushion to help Barclays weather the storm.

That is the reason why the bank is saying it doesn't need to raise additional capital.

Note though: Barclays owes exactly as much as it ever did. It's just used trickery to revalue its obligations. The situation will reverse as Barclays' debt approaches maturity. Today's profit will be tomorrow's loss in that case - meaning in my book that provision for that loss should be made now - completely negating this wholly false book keeping exercise.

This is an example of the misinformation that Sir David Tweedie and the International Accounting Standards Board promote under International Financial Reporting Standards and yet no one seems to be profiling him as a major contributor to the credit crunch. They should. He was the man who let these banks book profits they had never made. He was the man who let them book their securitisation off balance sheet. He was the man who therefore allowed the massive growth of the securitisation market.

He got a knighthood for that. Right now financial services knighthoods are the surest signs of who the villains are. Perhaps he, Fred Goodwin and the others who were lauded should be stripped of them as symbols of the contrition they should, but apparently do not, feel. But I can't see it happening.