Here’s the deal: Barclays has a mess on its hands that is not going to go away anytime soon no matter how many executives resign. In fact, the LIE-BOR situation has been exacerbated if anything and has spread to Germany where Deutsche Bank is now under investigation. What’s going on is that regulators and market participants are beginning to take a good hard look at banks and their tangible common equity relative to total assets.
Glass-Steagall is long gone. It shouldn’t have been destroyed in the first place. What is happening is a paradigm shift in which the public will demand that Barclays break up its traditional banking unit from its investment banking unit (Barclays Capital).
This trend will continue all over Europe and eventually, may reach the U.S. But think about this for a minute: Barclays currently has a market capitalization of about $20 billion. It has around $2.1 trillion in gross net exposure to derivatives. In other words, the bank is well undercapitalized. We think that should a spinoff occur, Barclays Capital alone would need $20 billion in addition capital, which will be difficult to raise.