The Big Opportunity...

This week has seen Barclays resolutely attempting to avoid coming into contact with a UK government bail-out package. Barclays have been determined not to follow the path of Lloyds TSB, HBOS, RBS and Bradford & Bingley, to the extent that they are willing to a) really annoy existing shareholders and b) offer what looks like a golden deal to a sovereign wealth fund from Qatar instead.

Why would they want to do this to avoid taking UK government investment?

In order to shore-up its capital position Barclays is looking at the following headline terms in the £7.3bn deal with the Qatar Investment Authority (QIA):

1) £3bn of paper issued to QIA and Abu Dhabi Investment Authority - paying a coupon of 14% over a fixed term running to 2019, accompanied by an issue of warrants, exercisable at below Thursday's closing share price at any time over five years. Given the volatility of Barclays stock, applying normal valuation measures, these warrants are worth at least £750mm to the Middle Eastern investors.

2) A further issue of £4.3bn of short-term convertibles, paying 9.75% until they convert (before next June). The conversion price into Barclays shares is at a 25% discount to the closing price on Thursday.

3) Assuming full conversion, the Middle Eastern investors will have 31.2% of the bank.

Now consider the terms on offer from HM Treasury:

1) 10-11% coupon on preference shares, no warrants (i.e. no gift currently valued at £750mm; that's a few schools/ hospitals)

2) Existing shareholders (many of whom are British taxpayers) would get the chance to buy new stock at historically depressed prices when according to management, the underlying business is holding up remarkably well.

3) Both shareholders and the rest of us would get a full fledged prospectus, given the London market as a whole some idea that Barclays balance sheet is as strong as the board insists.

Can the benefit of avoiding having the government on your shareholder register really be so great that you are prepared to effectively pay 50 per cent more for your capital? What the exact reasons are for this isn't clear, perhaps Barclays wants to ensure that there is no interference in protecting its compensation structure which along with its competitor banks has been so widely criticised, or they want to keep their books out of the intellectual scrutiny that might be applied by the Daily Mail if the British taxpayer was a big owner.

I'm not so much concerned as to why Barclays would choose to go down this route, as interesting as that may be. What is at issue is whether as a UK taxpayer the government is going to get the best deals for the taxpayer money they are investing. The sum total of global government sponsored bail-out packages amounts to $3.5 TRILLION so far. That's a lot of money. How it's spent can do a lot of good, and potentially a lot of harm.

In most cases around the globe it's questionable as to whether it's in the hands of those who know what they are doing. Those funds are being put on the credit card of the next several generations, and if current governments can't secure good deals in these negotiations then taxpayers globally will be paying the price for it at some stage in the future. This commentary is prevalent across the press currently - full of scare-mongering about how this $3.5trillion is going to 'disappear'.

Personally I sit on the other side of the fence. As I see it, there is an unbelievable opportunity here to generate great returns for taxpayers if governments invest their money wisely. If I had the opportunity to invest in the Barclays deal that QIA is getting i would take it...14% fixed return, warrants, cheap convertibles; i can borrow 5.5% from Barclays right now...time to bring back the leverage! I would like my taxpayer money spent on this, rather than spent on some inefficient public sector job creation scheme to create 'new' unsustainable jobs to fill the void of job losses in the private sector.

What is worrying though is that there is an understandable fear from these private sector institutions that government sponsorship will turn them into inefficient public sector organizations. I notice today that the government appears to be getting that message in the UK. The £37bn worth of direct equity investments by the UK government into UK banks will be "held at arms length with no direct boardroom representation". The 2 men who have been handed responsibility for managing these investments, have said "We must operate on a commercial basis at arm's length...our job is manage the taxpayer's investments, not to manage banks." I look forward to the Daily Mail commentary on this: "Scumbag bankers who stole our money, won't be made to pay, in government climbdown" etc. etc.

What is more worrying for the rest of the world is that the UK actually appears to understand things better than any of its peers, even though they still aren't getting the best terms available for taxpayer investments. In the USA, the myriad bailout packages that have been touted all seem to be confused in what they are trying to achieve. It's surprising, as if Hank Paulson had run Goldman Sachs with such confused thinking he would have been out of his job pretty quickly. The same sort of deals mentioned above are available to the US government from US banks. If they want to shore up the financial system, they should be taking these sort of deals and not spending taxpayers money on the sort of weak assets that the TARP plan was aimed at.

Banks who made mistakes, and have poor assets on their books should suffer through their share prices. The government should take preference shares in these institutions so that further writedowns are attributable to existing shareholders first, and as these institutions start to recover gains will be attributed to taxpayers investments in the form of these preference shares.

The TARP program that has now been thrown out, to me was not dissimilar to any plans to bail-out the US auto industry. The "Big 3" (General Motors, Ford and Chrysler) have been problem children of the capital markets for a long time; they only survived the past 10 years because credit market conditions were as crazily good as we now are fully aware. Instead of fixing the roof while the sun was shining they embarked on crony capitalism, lobbying government for artificial support for visionless business plans...and getting it. As Thomas Friedman of the NY Times writes "The blame for this travesty not only belongs to the auto executives, but must be shared equally with the entire Michigan delegation in the House and Senate, virtually all of whom, year after year voted however the Detroit automakers and unions instructed them to vote. That shielded GM, Ford and Chrysler from environmental concerns, mileage concerns and the full impact of global competition that could have forced Detroit to adapt long ago."

As Friedman also points out there are sustainable business plans within the auto-industry: from www.autochannel.com - "ALLISTON, Ontario, Canada - Honda of Canada Mfg. officially opened its newest investment in Canada - a state of the art $154mm engine plant. The new facility will produce 200,000 fuel-efficient four-cylinder engines annually for Civic production in response to growing North American demand for vehicles that provide excellent fuel economy".

That could have been a tale about General Motors, but is not. Don't waste taxpayers money on these guys. Do something powerful, innovative and profitable with that money now that there is this big opportunity.