Does the resignation of Bob Diamond present a buying opportunity?
Another week, another constituent of the FTSE 100 (UKX) falls from grace. This time it's the turn Barclays (LSE: BARC), after last week's settlement in the Libor scandal caused its shares to drop 15%. Both the chairman and chief executive have resigned in swift succession.
The shares at 170p now value Barclays at well under half of its tangible net assets. That's value territory, if the balance sheet is to be believed. So is now the time to buy?
Not so fast, would be my advice. Many investors piled into BP (LSE: BP) too soon after the oil group's share price reacted to news of the Macondo disaster in the Gulf Of Mexico... only to see the shares move lower as the ramification sunk in. Barclays own Macondo moment is possibly taking on the same character, with management departures and costly litigation to overcome before the shares start to recover properly.
This week, any slight recovery may well be premature, as the true story seems to still be evolving. That said, Barclays did steal a march by co-operating with the authorities and settling first. The impact on other banks, including Royal Bank of Scotland (LSE: RBS), which has dismissed 10 traders implicated in the scandal, has yet to emerge.
But it is looking as if there are actually two issues. Firstly, over a long period of time, Libor submissions were tweaked to help the positions of traders at Barclays and other banks. But at the height of the financial crisis in 2008, Barclays also low-balled its submissions to give the impression that its finances were sounder than they really were.
According to an anonymous insider reported in the Daily Telegraph, Barclays was paying 5% or 6% for funds while it was reporting Libor of 2%. If true, it wasn't just tweaking, it was downright misrepresentation -- and it was done at the behest of senior management to keep the bank afloat, not to line traders' pockets. That's a whole different dimension.
Barclays has a wall to climb before it gets over this crisis.
First, it risks management disintegration. The chairman and now chief executive Bob Diamond have been forced out, with the outgoing chairman now standing in for the immediately departing CEO. That's a management car crash if ever there was one.
Bob Diamond built the investment-banking division to be the most important part of Barclays and his loss will surely cost the bank dear. Though his departure was necessary to diffuse the reputational impact on Barclays, the board now faces a dilemma.
The board, overloaded with former investment bankers, is bereft of anyone with experience of retail and commercial banking. So Mr Diamond's exit naturally augurs well for the prospects of Antony Jenkins, the retail bank's respected head. But what would that signify for the investment-banking profits stream?
Furthermore, Bob Diamond had appointed a number of loyal lieutenants to key positions. They include Jerry del Missier, the recently appointed group chief operating officer, and Rich Ricci, head of the investment-banking division, both of whom worked closely with Mr Diamond in the US. Mr Diamond's departure may either lead to a number of further executive departures, or leave them isolated and mistrusted.
The threat of litigation looms. US lawyers have already begun lodging civil claims against the banks, and class actions might spiral as they did after BP's Gulf of Mexico accident.
Cenkos Securities (LSE: CNKS) has suggested that damages could amount to several billions each for Barclays and RBS, which could make a measurable dent in their respective balance sheets. Whatever the figure, litigation is likely to be lengthy, disruptive and expensive.
One certain consequence of the scandal will be increased focus on bank regulation. The Vickers proposals to ring fence retail and commercial banking from investment banking, which are expected to come into force in the UK in 2019, could be accelerated and/or tightened.
Investment bankers will be looked on with even greater suspicion, especially so when they are part of a universal bank. That's likely to hit Barclays disproportionately hard, given its greater dependence on investment banking, which represented 50% of profits during 2011 and the first quarter of this year.
And let's not forget why Barclays' shares are down 40% over the past year, when the FTSE 100 has lost just 2%. Indeed it was financial stocks, which comprise 20% of the index, that have pushed it into negative territory. The banking sector remains extremely vulnerable to the eurozone crisis and the risk of contagion.
Indeed, banking is an industry I've largely steered clear of, preferring to put my money in safer sectors such as the ones described in this free report from the Motley Fool: "Top Sectors Of 2012".
At some point, the market's fear will be overdone and Barclays may well be a bargain. As with BP, it would be wise to wait until both the full extent of the problem and how it will be resolved are clear. I think that's some time away yet.
One of Britain's top fund managers has also given banks a wide berth.But just where is dividend expert Neil Woodford investing today? All is revealed in this free Motley Fool report -- "8 Shares Held By Britain's Super Investor".
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Tony does not own any shares mentioned in this article.