Barclays reels from its costly Qatar cash call

John Varley was in his office on the 31st floor of Barclays’ headquarters in London’s Canary Wharf when he called a team of his executives heading for Qatar on the bank’s private jet with some alarming news.

The Barclays chief executive had just been told by the UK financial regulator what capital ratio the bank needed to reach in the next few months to escape a government bailout: 8 per cent. The team quickly worked out how much cash it needed to raise to reach that target. The answer was £13bn.

It was the second weekend of October 2008, only four weeks after Lehman Brothers filed for bankruptcy in the US, shaking the global financial system. The Barclays team was headed to Qatar on a mission to persuade the gas-rich state for the second time that year to invest billions of pounds to rescue the bank.

“The pressure was enormous,” says a person involved in the events that weekend. “We didn’t sleep for weeks. People forget how febrile the atmosphere was. Every day it seemed as though a different bank was going bust.”

Barclays, Mr Varley and its former team of top bankers may be facing sleepless nights for some time to come. The UK’s Serious Fraud Office took the unprecedented step on Tuesday of charging the bank, Mr Varley, Roger Jenkins — head of the investment bank’s Middle East division — and two other senior bankers at the time, Tom Kalaris and Richard Boath, with fraud over the deal that was struck with the Qataris.

Barclays is considering its position following the charges, while at least two of the defendants have said the case is misconceived and they plan to contest the allegations. Barclays and the SFO declined to comment.

While Barclays’ former leadership will be literally in the dock on July 3, the charges come as its current chief executive, Jes Staley, is facing shareholder disquiet over a separate regulatory investigation into his attempt to unmask a whistleblower.

The SFO’s criminal charges are the first in the world against a global bank and its leadership team emanating from the financial crisis. But rather than turning on what those executives did to bring down a bank, the case turns on what they did to avert its collapse.

Barclays undertook two emergency fundraisings in 2008 to stay out of government control: a £4.5bn round in June and another for £7.3bn in October. Qatari investors subscribed to both.

The country’s Gulf rival, Abu Dhabi, also took part in the October cash call. The bank faces a separate $1bn lawsuit from PCP Capital Partners, the firm founded by Amanda Staveley, who put the Abu Dhabi deal together.

But it is contemporaneous side-deals struck with Qataris worth £2.4bn — including a $3bn loan just as the October deal was closing — that attracted the scrutiny of the SFO, the Financial Conduct Authority and Ms Staveley.

On that October weekend of 2008, Mr Varley, who rose up the ranks to the top job four years earlier, was hunkered down in his office, steadfastly ignoring a government invitation to join rival lenders at the Treasury discussing a sector-wide bailout plan.

Instead, he was co-ordinating the bank’s frantic attempts to raise money. At that point, the Qatari-bound team in the private jet knew how much was riding on that evening. They were due to have dinner with Sheikh Hamad bin Jassim bin Jabr al-Thani, at the time the Gulf state’s powerful prime minister. Known by his initials, HBJ, he was also chair of the country’s vast sovereign wealth fund, Qatar Holding.

The UK and its highly leveraged banking sector were among the worst hit by the turbulence rattling the global financial markets that year. Royal Bank of Scotland squeaked through a £12bn capital raising in April, though it soon became clear that was not enough.

In June, Barclays had taken the precaution of undertaking a cash call that saw Qatar Holding and HBJ’s personal vehicle investing alongside Singaporean wealth fund Temasek among others. By July, HBOS’s attempt to raise £4bn from its shareholders had failed. Smaller banks were crumbling, too.

Then Lehman collapsed and widespread panic ensued. By the end of September, Gordon Brown, the UK’s Labour prime minister, decided that Britain had to create a £50bn fund to bail out the banks. Signed off on October 7 and revealed to bank bosses at a late-night meeting, the scheme quickly had its first customer. Within two days RBS, which had protested that it did not need more capital, was back at the Treasury.

It soon became clear that HBOS and the bank that was rescuing it, Lloyds, would have to be bailed out, too.

Mr Varley was apparently determined not to be next in line. “John could not accept the idea of a Labour government rescuing the bank,” says Paul Myners, City minister at the time.

That was a poor assessment, says Lord Myners. “That capital [from Qatar and Abu Dhabi] was incredibly expensive and extraordinarily dilutive to existing investors. The shareholders of Barclays would have got a far better deal had the bank accepted UK government money.”

But a government bailout would come with restrictions on bonuses paid to senior executives, and pressure to wind down its investment banking business. It would have also undermined its strategy of seizing on the crisis as an opportunity to propel itself into the top tier of investment banks by buying Lehman’s US operations out of bankruptcy.

That acquisition was masterminded by Bob Diamond, the American investment banker, who would replace Mr Varley as chief executive. Mr Diamond’s irrepressible outlook at the time was dubbed “Bobtimism” by his colleagues.

Mr Diamond was interviewed under caution by the SFO as part of its Qatari investigation. This is when individuals are read their rights before questioning, denoting a potential suspect rather than witness. The SFO decided there was not enough evidence to file any charges against him. Mr Kalaris, the head of the wealth management unit who reported to Mr Diamond, is one of the four individual defendants charged.

As a result of the Lehman acquisition, informal discussions were already in train in September with Qatar about further reinvestment in Barclays.

Barclays persuaded the authorities that it could raise £6.5bn in the market and sell its asset management arm to reach the £13bn figure.

A traditional rights issue from institutional shareholders was considered impossible; it would take too long and few fund managers had any appetite to pour money into banks.

The idea was to issue £3bn of preference shares by December 2008, then raise £3.5bn in equity in June 2009. But institutional investors were not keen on subscribing even to preference shares unless the bank boosted its capital ratio.

“It was a big ask, even at the best of times. And this wasn’t the best of times. It was very ‘Bobtimistic,’” recalls one former colleague.

A solution was to devise a debt instrument that would convert to equity in June — the deadline the bank had given to the Bank of England and the regulator — and which would pay a coupon until then. This was the genesis of the reserve capital instruments that paid a massive 14 per cent coupon, to which the Qataris subscribed in October.

Beyond the coupon, it was Barclays’ side deals with Qatar that prompted attention from investigators. They include an “advisory services agreement” that paid Qatar Holding for helping boost Barclays’ business in the Middle East. In June 2008, the ASA stood at £42m. The existence of the agreement was disclosed to the market, but not the amount of fees paid. In October that year, the ASA was extended by a further £280m. Before the fundraising closed, the bank also agreed to loan Qatar’s economy and finance ministry $3bn.

The SFO has investigated whether the bank secretly loaned the Qataris money to reinvest back into Barclays, removing any risk after they had already seen their June investment tank: shares worth 282p in June were worth 207.5p by October. The bank has previously said that its loan documentation prohibited any such reinvestment.

Neither the ASA’s extension nor the loan was disclosed to the market at the time of the October fundraising.

The October deal was structured predominantly as a debt issuance. Such deals have less rigorous disclosure requirements than rights issues.

Nine years on, the measures banks took to save themselves in 2008 are being re-examined. There may be questions whether the end really justified the means. This goes beyond just Barclays. RBS narrowly escaped an embarrassing civil trial over its £12bn rights issue through last-minute settlement discussions this month with shareholders. Lloyds’ takeover of HBOS is at the centre of another shareholder lawsuit due to go to trial in October.

Even the BoE is not immune: it was under criminal investigation by the SFO over whether its officials colluded with banks to rig liquidity funding auctions held at the onset of the crisis. The SFO decided on Friday to close the probe, finding no evidence of criminality.

For Barclays, October 2008 has cast a particularly long shadow. The SFO is separately investigating whether the bank “lowballed” its submissions to the Libor benchmark-setting process in order to give a false impression of its creditworthiness during those weeks.

If the case against Barclays, Mr Varley, Mr Jenkins, Mr Boath and Mr Kalaris comes to trial, it will probably be well over a decade after the events in question. There will also be the Financial Conduct Authority’s parallel regulatory case — put on hold, reopened and which will probably have to be put on hold once more pending any trial — to face.

People who have worked with Mr Varley say he is the least likely top banker to face jail time for wrongdoing in the financial crisis. One ex-colleague says: “Having the words Varley and fraud in the same sentence is just wrong.”