Barclays

Summarizing last week's key economic releases in a few simple charts, as well as an overview of Barclays' macro outlook for the rest of the year.

Yesterday we asked just who the counterparties on Lehman's Repo 105 transactions were. Today we get our answer: the parties that Lehman used exclusively to mask its true leverage ratio were Barclays, Mizuho, UBS, Mitsubishi, Deutsche Bank, KBC and ABN Amro. This is accompanied by disclosure from the Examiner that these Repos, which should logically have been cheaper to Lehman due to the overcollateralization compared to regular matched repo (remember: 105 instead of 100 plus a minor haircut), in fact were pricier, prompting Lehman staffers such as Mike McGarvey to speculate that counterparties may "try to squeeze Lehman." This is quite a critical development ahead of the lawsuit between the Lehman estate and Barclays (a Repo 105 counterparty), which not only refused to bail out Lehman in the 11th hour, but to subsequently go ahead and in the definition of a fire sale acquire Lehman Brothers' North American brokerage operations for pennies on the dollar, coupled with some serious additional trickery on the side. Another oddity: none of the counterparties were US-based. Did US banks know too well about the imminent collapse of Lehman and thus refuse to participate in the Repo 105 window dressing game? Or, much more relevantly, was Lehman terrified by retaliation of its US-based peers, (be it CDS or stock-based) and as a result refused to open up its deplorable balance sheet to them?

A topic we have been investigating recently has been the sudden surge in direct bidding, at least as it pertains to the near end of the Treasury curve, and what the identity of the actual entity doing the buying may be. Explanations offered have ranged from China and Petrodollar accounts buying covertly, to primary dealers ramping up their activity to justify to the Fed that they are worthy for admission, all the way to the Fed conducting yet more 'under the radar' QE purchases. Today we present the opinion from Barclays, which provides another, fourth, view on things, theirs being the most benign one, namely that plain vanilla accounts have been purchasing Treasuries via the direct bid.

First Meredith Whitney, then JPM, then everyone else, and now Barclays. The firm that stole Lehman whacked its estimates of GS and MS, on expectations of a 7% decline (after a 6% increase) in equity volumes, due to a "lower ETF volume expectation as well as lower NYSE-listed volumes that benefited handsomely in 2009 from exacerbated trading volumes in highly volatile, low priced financial stocks that we expect to subside in 2010." This new assumption is making Barclays reduce EPS estimates across the board: "In short, estimates are coming down modestly driven by lower return expectations in both equities and fixed income, lower inflow expectations across both asset classes, and lower equities and futures trading volumes as well as debt and equity underwriting volumes. The downward adjustments are not large, but they do reflect the challenging comparisons that most of the companies in our coverage universe are up against in 2010following what, by all accounts, turned out to be a very strong year for capital markets companies in 2009."

Developing story: It was just a matter of time, as previously expected.

Ironically, on September 18th 2008 Lehman would undergo millennia of Chinese water torture just to get the sale done. How everything changes in one short year.

For those that remember the surreal weekend before Lehman filed chapter 11, Barclays was considered an eleventh hour white knight who would swoop in and buy the bank. These rumors were squashed after Barclays pussied out, saying it would not be able to afford Lehman without the Queen's, the Fed's and Santa Claus' blessings... Nonetheless, the bank did its diligence, and 4 days after Lehman filed, Barc used the smoke and mirrors of bankruptcy court to snatch the U.S. broker dealer for metaphorically pennies on the dollar, and literally $1.75 billion.

Barclays/Lehman chief market strategist Barry Knapp came out with a report this weekend predicting a 10% drop for the S&P in this quarter, with a low of 750 to come soon. Why the pessimism? As Barry succinctly puts it "We were recently asked - Isn't all the bad news out? Unfortunately, we believe the answer is - No."

After dropping as low as $6/share, BCS recovered most of its losses and traded as high as $8, before dropping again. Barclays management "We know of no justifcation for share-price decline". It also expects to report pre-tax profit well ahead of the $5.3bn analyst estimates...

Well, we shall see