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Jim Armitage: Barclays and Montreal pension-fund fiasco | |
(about 7 hours later) | |
Outlook While Barclays has been grafting away with the regulators to keep down the cost of its various punishments, I hear it has just quietly paid $500m (£316m) to Canadian investors after a judge declared it behaved negligently and fraudulently over a complex financial bet it created, which exploded during the financial crisis. | Outlook While Barclays has been grafting away with the regulators to keep down the cost of its various punishments, I hear it has just quietly paid $500m (£316m) to Canadian investors after a judge declared it behaved negligently and fraudulently over a complex financial bet it created, which exploded during the financial crisis. |
The bank has been fighting for years to avoid paying up in the tangled case of Barclays Bank vs Devonshire Trust. | The bank has been fighting for years to avoid paying up in the tangled case of Barclays Bank vs Devonshire Trust. |
At one stage in the hearings, Judge Newbould described how he had “considerable doubt” as to the reliability of testimony from Barclays’ former senior executive Jerry del Missier. A final hearing at the end of August has paved the way for the bank to pay up for the losses a judge deemed its actions had caused. | At one stage in the hearings, Judge Newbould described how he had “considerable doubt” as to the reliability of testimony from Barclays’ former senior executive Jerry del Missier. A final hearing at the end of August has paved the way for the bank to pay up for the losses a judge deemed its actions had caused. |
At issue was the way Barclays ended a complex derivatives transaction aimed at providing Montreal council workers’ pension fund with low-risk exposure to the fashionable derivatives known as asset backed commercial paper (ABCPs). | At issue was the way Barclays ended a complex derivatives transaction aimed at providing Montreal council workers’ pension fund with low-risk exposure to the fashionable derivatives known as asset backed commercial paper (ABCPs). |
A company called Devonshire was established to create two ABCP investments with Barclays in 2006, with a view to creating many more in the future. Devonshire paid Barclays $600m for them. | A company called Devonshire was established to create two ABCP investments with Barclays in 2006, with a view to creating many more in the future. Devonshire paid Barclays $600m for them. |
However, the financial crisis quickly pushed the venture into meltdown: Canada’s ABCP market froze up as investors, stung by the subprime mortgage fiasco in the US, lost faith in the value of the underlying assets behind them. | However, the financial crisis quickly pushed the venture into meltdown: Canada’s ABCP market froze up as investors, stung by the subprime mortgage fiasco in the US, lost faith in the value of the underlying assets behind them. |
As part of the deal, Barclays had agreed that in the event of such a “market disruption”, it would pump money into Devonshire to keep repaying the ABCP loans. Devonshire had been paying Barclays an insurance premium for this service. | As part of the deal, Barclays had agreed that in the event of such a “market disruption”, it would pump money into Devonshire to keep repaying the ABCP loans. Devonshire had been paying Barclays an insurance premium for this service. |
However, when the meltdown happened, Barclays refused the emergency cash infusions, pushing Devonshire into default. | However, when the meltdown happened, Barclays refused the emergency cash infusions, pushing Devonshire into default. |
The two sides ended up suing each other, with Devonshire claiming Barclays went behind its back to negotiate directly with the Montreal pension fund, in a move that it knew would not succeed. Its gameplan all along was to try its luck against Devonshire in court. | The two sides ended up suing each other, with Devonshire claiming Barclays went behind its back to negotiate directly with the Montreal pension fund, in a move that it knew would not succeed. Its gameplan all along was to try its luck against Devonshire in court. |
While those doomed negotiations were going on, however, Barclays assured Devonshire they were proceeding well, so Devonshire continued to agree to repeated extensions of a standstill agreement. | While those doomed negotiations were going on, however, Barclays assured Devonshire they were proceeding well, so Devonshire continued to agree to repeated extensions of a standstill agreement. |
The judge said those assurances from Barclays were “misrepresentation” and “not only negligent, but fraudulent”, claims Barclays has always disputed. | The judge said those assurances from Barclays were “misrepresentation” and “not only negligent, but fraudulent”, claims Barclays has always disputed. |
Meanwhile, the judge had little time for Barclays’ claim that it had lost $1.2bn in the trades, saying that the actual loss was just $12,000. | Meanwhile, the judge had little time for Barclays’ claim that it had lost $1.2bn in the trades, saying that the actual loss was just $12,000. |
The case was one of many around the world in the small print of Barclays’ annual report and accounts. | The case was one of many around the world in the small print of Barclays’ annual report and accounts. |
Toronto lawyer Tom Curry of Lenczner Slaght Royce Smith Griffin, who fought the case for Devonshire says: “This trial illustrates that no amount of complex planning by a large financial institution can overcome basic legal standards for commercial conduct and good faith.” | Toronto lawyer Tom Curry of Lenczner Slaght Royce Smith Griffin, who fought the case for Devonshire says: “This trial illustrates that no amount of complex planning by a large financial institution can overcome basic legal standards for commercial conduct and good faith.” |
Its defeat is made all the more telling by the fact that other banks who had created ABCP deals agreed to a mass arbitration deal known as the Montreal Accord when the market froze. But Barclays refused to sign up, preferring to try its luck alone. | Its defeat is made all the more telling by the fact that other banks who had created ABCP deals agreed to a mass arbitration deal known as the Montreal Accord when the market froze. But Barclays refused to sign up, preferring to try its luck alone. |
Sounds a little like its strategy over the forex scandal, no? | Sounds a little like its strategy over the forex scandal, no? |
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