Barclays – Diamond in the Rough?

When the market was filling in the blanks for itself Barclays fell 9 percent in a session and trading in the stock was temporarily suspended. To read the rumor the Chairman and CEO where heading out of the door.

The market now has something real to work with. Barclays announced a 1.3 billion pound ($2.7bn) writedown due to its exposure to the credit markets. Given the market had speculated about nearly £5 billion – there was a relief rally in the counter at the open.

Does this rally in Barclay’s stock have legs? Well, the news was supportive, even after the writedowns the Barclays capital unit revealed net income and pretax profit for the 10 months to the end of the year ahead of the year before period. And, clearly, the writedowns to date are nowhere near the numbers revealed by US banks.

But, here’s the rub, and as our guest host for the morning Michael Browne pointed out, the continuing value of the CDO exposure remains dependant on prevailing market conditions. That was acknowledged by the comments in the Barclay’s release from President Bob Diamond, who talked about further risks from triggers that continue the drought in interbank business.

I’m afraid we are back to watching the news releases and waiting on an improvement in the interbank market.

Until then, when it comes to bank valuations I am reminded of US Defense Secretary Rumsfeld’s famous quote on the unknown.

As we know,
There are known knowns.
There are things we know we know.
We also know
There are known unknowns.
That is to say
We know there are some things
We do not know.
But there are also unknown unknowns,
The ones we don't know
We don't know.

As long as the banks can’t mark to market they will have to mark to model......and that still isn’t satisfactory.

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