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Protium affair betrays muddled thinking at Barclays Capital

Can the market trust Barclays’ numbers? The bank doesn’t like the question but only has itself to blame that it still comes up.

In 2009, Barclays sold a large package of its doubtful structured credit assets, wrapped by guarantees from equally doubtful monoline insurers, to a new outside vehicle company, Protium, lending it the money to buy the assets and entering a contract to have them managed by a troupe of departing Barclays Capital employees, presumably including many that put the garbage on the books in the first place.

Protium was capitalized with equity whose providers were not named but obviously included the traders themselves. Whether or not any executives remaining at Barclays had also contributed to its equity was not made clear. Sources inside the bank began talking up the idea that the departing traders would now be able to buy problem assets at huge discounts and ride them up in a market recovery, promising capital gains that could not have been recaptured at a publicly traded bank.

The rationale for the deal was that Barclays would not have to take regular P&L hits against the loan, as it would have had to against the underlying assets or the value of their monoline wraps if it retained them. The bank says it cleared the trade with its lead regulator and talked it over with shareholders in advance.

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