They fought the law, and the law won? At first glance, that is how Barclays’ $2bn (£1.4bn) settlement with the US Department of Justice may seem. The UK bank refused a deal with the DoJ 16 months ago but is now having to pay a large bill for polluting the financial system with mortgage junk – aka, residential mortgage-backed securities – between 2005 and 2007.
But resistance was not futile, which is the critical point. The sums are everything. Nobody will ever confirm figures, but it was widely reported that Barclays was offered a settlement at about $5bn in 2016. If so, chief executive Jes Staley’s threat to take the case to court was justified. The figure has more than halved.
Why, though, settle at all? Didn’t Staley argue at the time that the DoJ’s case was “disconnected from the facts”? Yes, he did, but you can’t blame Barclays for deciding at this point that it’s better to swallow some financial pain for the sake of certainty. Going the distance with the DoJ would be perilous.
The reaction in Barclays’ share price – it didn’t budge – suggests shareholders are also happy to take a $2bn hit. The sum is roughly what they expected and it has come at a moment when Barclays can plainly afford to pay. Back in 2016, a $5bn settlement could have forced a fundraising. These days, $2bn doesn’t interrupt Barclays’ dividend plans.
Staley deserves credit for playing the long game. There has always been a strong suspicion that DoJ has treated European banks more harshly than US counterparts when it comes to settling cases of mis-selling mortgage securities. Barclays was prepared to challenge the methodology and was right to do so. A chief executive cannot let a few billion dollars slip out of the door if he feels the sum is too harsh or the dice are loaded.
Staley’s standing rests entirely on the Financial Conduct Authority’s investigation into his attempt to unmask a whistleblower in 2016. Any adverse ruling will probably cost his job. But his handling of the DoJ case was correct.
£3.9bn sale of Nex Group is example of deal-making skill
Is Chicago-based CME Group £3.9bn purchase of Michael Spencer’s electronic trading and technology outfit Nex Group “a signal of tremendous support for Britain’s financial services sector”, as the seller declares, or another example of a US giant bagging an interesting piece of City infrastructure?
Spencer’s patriotic boast is probably fair. CME is the world’s largest exchange and if it had serious short-term worries about London’s status as the European home for trading in fixed-income securities it would not be doing this deal – or not at a price that looks juicy, certainly for Spencer, who will collect £670m for his stake.
That does not imply, of course, that Brexit threats to the City have gone away. It’s just that other areas of financial activity – especially fund management – look to be more directly in the firing line. And the long-term effect on the City of having EU financial regulation decided in Paris and Frankfurt remains the main story. The number of jobs being shifted immediately to the eurozone looks smaller than the scary numbers being advertised a year ago, but it’s the steady drip-drip over time that matters.
So, yes, it is good news for the City that CME has agreed to place its European headquarters in London. If Spencer made that a condition of the deal, well played.
Beyond the Brexit lens, though, this deal is mostly an example of Spencer’s deal-making skill. Back in 2016, when his former outfit Icap sold its voice broking business to Tullett Prebon for £1.4bn, the part that remained was disparagingly described as the “rump”. Spencer preferred Nex as a name and now this business is going for £3.9bn, a price that would have been hard to believe two years ago.
It is the UK’s biggest fintech, or financial technology, company on some measures. One can bemoan its passing into US ownership, but remember that Spencer assembled Nex by buying important pieces in the US, Sweden and Israel.