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Barclays and Guinness - Déjá vu?

by John Taylor

What have Barclays Bank and Guinness PLC got in common? Not a lot, it would seem. One is a British multinational bank and financial services company headquartered in London, the other is a huge brewer of stout and beer based in Ireland.

However, there is a connection. In the 1980s, four high-profile businessmen were jailed for taking part in an illegal operation to support the Guinness share price as part of its attempt to take over Scottish drinks and pharmaceutical company Distillers. One of the four was Guinness CEO Ernest Saunders who was eventually jailed for five years (although he served only 10 months of his sentence after a diagnosis of pre-senile Alzheimer's disease was accepted by the Court of Appeal, amazingly a condition he subsequently recovered from).

At the present time Barclays PLC – the holding company of the bank – and four former senior officials, including ex-CEO John Varley, are currently under investigation by the Serious Fraud Office (SFO) in connection with a secret deal done with Qatar in 2008 to support the bank's financial structure and stave off a government bailout.

As will be fondly remembered by finance buffs, 2007/8 was the time the UK government had to step in to avoid a Lehman Brothers style meltdown of the Royal Bank of Scotland and Lloyds Bank in particular. Barclays decided to avoid asking for government support and went to the market for additional funds. It raised £4.5bn in June 2008 and then a further £7.3bn in October from a number of investors including the state-owned investment fund Qatar Holdings. Barclays then leant £2.4bn to the Qatari government.

The important thing here is that the first fundraising arrangement was disclosed to the market as part of an approved prospectus but the second was not, in particular the loan to Qatar in October 2008. Consequently the nub of the case is that Barclays entered into undisclosed deals to prop up its share price by, effectively, lending money to itself disguised as various loans and investments filtered through Qatar.

Transparency is a cornerstone of good corporate governance. For example, Credit Suisse carried out its own fundraising with Qatar, also in October 2008, but disclosed everything to the Swiss regulator. So the implication is that by not disclosing, Barclays had something to hide.

Why does this matter? The public view might well be that after the events of 2007/8 nobody trusts bankers anyway, so who cares if yet more of them get found out and end up going to jail. It's only to be expected – fat cats lining their own pockets, etc., etc. After all, it was nine years ago – the world has moved on – we have Brexit to deal with so who cares if some bank boosted its balance sheet to prevent the government from propping it up and having a say on how it was run? Ancient history, surely?

Except that there is a principle here and an important one. If one investor is favoured over another, the market is rigged and the playing field is uneven. If companies of whatever size are permitted to get away with, essentially, lying about the true financial position of their business, where does that end? At what point does trust break down and the whole fragile edifice of investment and reward start to crumble?

And anyway, why should a company be so arrogant as to assume it can defy the regulations and enter into shady deals to avoid too much scrutiny and what they see as government interference in their activities? If these allegations are true, and they remain to be proved in court, what does it tell the observer about the corporate ethos of Barclays at the highest level?

At the time of the Guinness scandal the quality of the beer was not affected and it is doubtful that anyone stopped buying Guinness because the CEO was a crook. However, the ramifications for the city and the individuals involved were considerable. The scandal forced a rethink of regulatory and investigatory powers by the authorities, and all the defendants served time in jail, except one, Jack Lyons, who was considered too ill so was fined heavily and stripped of his knighthood.

Where might this end? It has so far taken five years to bring the case to court and if the SFO's case is proved, jail time and big fines will surely follow. Worse, from a governance perspective, will be calls for increased disclosure, stronger regulators and more state intervention.

Committing offences for short-term gain is foolishness in the extreme because the consequences of being caught can be longer lasting than the perpetrators would have envisaged, and the consequences much wider.

No doubt people will still bank with Barclays and their commercial customers will continue to do business with them. The impact of this latest scandal, however, should it be proven, may well do some serious damage. Not only to the tattered remnants of the reputation of bankers but to other entities, who may find that there are yet more legal and regulatory hurdles in their way because of the recklessness or arrogance of others now long retired from the scene of the crime.

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