Bad practices at investment banks suggest GFC lessons already forgotten: Gottliebsen

For most of the last year the world, and particularly the US, has been awash with liquidity and excess funds. The investment banks have made a fortune channelling this money into various products. But have they learned from their past bad practices which led to the global financial crisis?

Those practices were driven by their desperate desire for fees and income (to pay executive bonuses) and often caused them to forget the interests of their clients. They snowed the Congress so the legislation to curb them is inadequate. Some have learned and changed their ways but if the bulk of the investment banks are up to their old tricks again there is now a real risk that when the current excess liquidity dries up we will have to go through the whole torture again.

The transcript of a court judgement in the US crossed my desk last night which shows that Barclays has certainly learned nothing and, given that three private equity funds were involved in the deal that hoodwinked a large US public company, there is a good chance many big US and European investment banks are now headlong into fee generation irrespective of risk and client interests.

I have extracted some of the US court material but anyone wanting to read the full judgement should click here. The case is complex so I will not detail it but what Barclays did was easy to understand from the court transcript.

Late last year, Del Monte Foods entered into a merger with Blue Acquisition Group, which is owned by three private equity firms, Kohlberg Kravis Roberts, Centerview and Vestar. Barclays was acting on behalf of Del Monte.

According to the court judgement, Barclays “secretly and selfishly” manipulated the sale process to engineer a transaction that would permit Barclays to obtain lucrative financing fees from the bidders. On multiple occasions, Barclays protected its own interests by withholding information from the Del Monte board that could have led Del Monte to retain a different bank, pursue a different alternative, or deny Barclays a “buy-side” role.

Barclays did not disclose its behind-the-scenes efforts to put Del Monte into play. Barclays did not disclose its explicit goal, harboured from the outset, of providing buy-side financing to the acquirer. Barclays did not disclose that in September 2010, without Del Monte’s authorisation or approval, Barclays steered Vestar into a club bid with KKR, the potential bidder with whom Barclays had the strongest relationship, in violation of confidentiality agreements that prohibited Vestar and KKR from discussing a joint bid without written permission from Del Monte.

Late in the process, at a time when Barclays was ostensibly negotiating the deal price with KKR, Barclays asked KKR for a third of the buy-side financing. Once KKR agreed, Barclays sought and obtained Del Monte’s permission. Having Barclays as a co-lead bank was not necessary to secure sufficient financing for the merger, nor did it generate a higher price for the company. It simply gave Barclays the additional fees it wanted from the outset.

The actions of Barclays as described by the court go on and on but I think you have the message. When one top investment bank acts like this it usually means most of others are doing similar things. This represents a big long-term risk to our markets. Those who deal with such firms need to be constantly on the alert.

This article first appeared on Business Spectator.