Cayman helps Barclays dodge curbs on bad incentives

Yesterday we blogged Barclays Bank, in the context of an obscenely abusive lobbying comment about its tax arbitrage businesses. At the time, they had also just put out a statement concerning the restructuring of $12.3 billion in credit market assets by selling them to a new "fund" called Protium Finance LP.

In a statement Barclays announced, po-faced, that

"The Assets will remain on balance sheet for regulatory purposes."

Now most of us know very well what has been happening with off-balance sheet entities, as a key source of instability in financial markets, and this looks like a reassuring statement. Scroll down to the bottom of the statement, however, and note this:

"Protium Finance LP is a partnership registered with the Cayman Island Monetary Authority."

What is going on?

Let's start with "on balance sheet for regulatory purposes" above. Weasel words, as Gillian Tett notes in the FT:

"while the British bank is going to count the Protium assets as being “on balance sheet” for regulatory purposes, it is removing the assets from the balance sheet in accounting terms, since Protium is legally “independent”, based in the Cayman Islands.

"That means the bank will not need to report the mark-to-market value of those assets, or reveal the source of equity finance for Protium that supplements the Barclays loan. Nor will it need to control the pay of the people running Protium, since they do not count as Barclays staff."

Note the side-stepping of curbs on bankers' pay (which may be coming) via Cayman. And this is big money. As the FT notes (and for the purposes of making these next quotes clear, note that Protium, run by a U.S. investment company called C12, will supply $450m of funding, mostly from two mystery investors):

"If assets of $12bn went up in value by just 1 per cent, the Protium investors could have made $120m on their original $450m investment – a return of 25 per cent."

The Guardian adds:

"the transaction seems to drive a coach and horses through regulators' efforts to improve disclosure of bonuses and to clamp down on skewed incentives. . . . Is Barclays' remuneration committee allowed to examine the C12 principals' contracts? Probably not. Those would seem to be a private matter between C12 and the mystery folk in the Caymans."

And note that Barclays' ruse to distance itself from potentially toxic assets in Protium isn't all it seems. It certainly does take risk out of Barclays' front room -- but analysts note it leaves a "thin equity cushion" to absorb potential losses at Protium, and if that Barclays loan which is supporting this deal turns sour, as it might, the risk will come right back in through the back door.

Tett adds a word of warning, now, though.

"Barclays appears to be blazing a trail of sorts . . . the really dirty secret that currently bedevils the whole financial reform debate is that the more that regulators force banks to clean up their “front rooms” (ie regulated activity), the greater the risk that activity will flee to unregulated corners of finance – if nothing else because financiers have little desire to subject their pay to public scrutiny."

In short, Barclays has been dodging future regulation, courtesy of . . . the Cayman Islands!