Barclays' brave bet
There are contrasting stories from a couple of the global super-banks this morning.
Credit Suisse suffered a first quarter loss after suffering £2.6bn of write-downs on its credit-market exposure. And what's disturbing about Credit Suisse's performance is the scale of the mark-downs it has incurred on leveraged finance (largely loans to private-equity deals) and commercial mortgages.
Credit Suisse's £850m of write-downs on leveraged finance and £400m on commercial mortgages is further confirmation that imprudent lending and investing was not confined to US subprime and collateralised debt obligations. The inevitable hangover has arrived following the frenzied obsession to do private-equity deals at almost any price in 2006 and 2007.
And in that context, today's Financial Times reports that Deutsche Bank is reducing its exposure to private-equity loans is not exactly reassuring. Deutsche has been providing buyers of those loans with finance to do the deals at below market rates - which implies that it retains an exposure, even if it avoids having to incur a write-down. Too clever by half?
In fact, there is evidence that investors in banks' shares would prefer banks to simply own up to the sins of the past and atone for those sins - as battered Royal Bank of Scotland has been doing.
Also, regulators and ministers have been explicit that they want banks to rebuild their battered foundations by raising capital, as the "quid" for the "quo" of all that financial support central banks have been providing to the cash-strapped banking system.
It doesn't seem wholly unreasonable for banks' shareholders to make a contribution, given the unprecedented monetary commitment being provided by taxpayers (through central banking operations) to underpin banks' commercial activities.
So what about Royal Bank's great rival, Barclays? There was, and is, an expectation on the part of the British authorities that it will raise capital.
What will John Varley, Barclays' chief executive, say in response to his shareholders at the annual meeting later today?
Well, his remarks - which were published at 0700 BST this morning - look like a pretty unambiguous "hop off" to those who think it needs a big rights issue.
He says that the bank remains profitable, even though March was a difficult month. And he says that the bank's capital ratios - the measures of its financial strength - are more-or-less where he wants them to be.
Varley is not saying "no, nay, never" to raising cash by selling new shares - but he is saying "not now".
It's a brave statement. Barclays, through Barclays' capital, has very substantial exposure to sub-prime, collateralised debt obligations, monolines, loans to private equity, and all the toxic stuff that did for Royal Bank.
But there are degrees of toxicity. And there is evidence that Barclays' holdings of the poison are less noxious than Royal Bank's (Barclays perhaps has a bit more collateral underpinning the direct subprime lending; the loans to private equity may be a bit more senior in the pecking order of debt; the subprime underpinning the CDOs may be the older vintage that's less loss-making; and its hedges may be smarter).
However, with Sir Fred Goodwin, Royal Bank's chief executive, just about clinging on to his job after having made a clean breast of it, John Varley's position would not be strong if shareholders felt he had misjudged his bank's need for capital.
And, as I said, since the Treasury, the FSA and the Bank of England are united in their view that our banks as a group need to err on the side of having too much capital rather than too little, Varley would be a very lonely and isolated banker if he's got this one wrong.
That said, there would also be a substantial reward for him if Barclays survives the current downturn without raising new equity capital. His reputation, and that of his bank, would be significantly enhanced.
It's a big bet, at a time when such bets are not really in vogue. But you have to admire Varley's confidence, because he'll be aware that it's his job that's been staked.