A Stark Warning To Barclays PLC From The 1929 Stock Market Crash

It’s been a great year for shares to date. The FTSE 100 is up nearly 14% — even before counting dividends – and at last, the late 1999 peak of 6,930 is within sight again. 

But one leading UK firm hasn’t joined the party. In fact, with its shares down more than 4% since the start of the year, it looks like Barclays (LSE: BARC) (NYSE: BCS.US) didn’t even get the invite.

Just too cheap

You might find this surprising. Most agree that the worst of the financial crisis is behind us, and there are signs that the global economy is picking up steam. Barclays’ US rivals in investment banking such as J. P. Morgan and Goldman Sachs are up 25-30% this year, while closer to home its domestic consumer banking competition has also had a banner year — Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) is around 50% higher.

But after rallying nicely in the first five months of the year, Barclays has steadily headed lower, leaving the bank looking like one of the cheapest stocks in the FTSE 100. The P/E for this year is just over 10, and it will fall to 8.5 for 2014 if analysts’ expectations are met.

Meanwhile, the dividend is tipped to rise over 60%! That’s far better than you can expect from the market as a whole.

Barclays seems even cheaper if you look at the balance sheet. At the end of October the bank reported tangible net assets per share of 323p. At today’s 250p, Barclays is priced at less than 0.8x those tangible net assets — suggesting investors don’t even believe the bank is worth its liquidation value.

Crashing bore

What gives? Has the market temporarily misplaced its pocket calculator, or is there any method in this apparent madness?

The answer is that Barclays has been embroiled in multiple legal spats in recent years, from LIBOR fixing to questions about its 2008 fundraising to a still-embryonic probe into currency manipulation. Investors are skittish that it could face further big fines down the line, which will hit profitability and its financial reserves, and could mean that a discount to assets is warranted.

So can Barclays expect any let up in this crisis on all fronts? I think the lesson from the 1929 stock crash is — not yet.

Here’s J. K. Galbraith writing about the fate of banks in the aftermath of that calamitous plunge that ushered in the Great Depression:

“There is little reason to think that the power of the great bankers, while they were assumed to have it, was much resented. But as the ghosts of numerous tyrants, from Julius Caesar to Benito Mussolini will testify, people are very hard on those who, having had power, lose it or are destroyed.”

Galbraith goes on to explain that:

“Such was the fate of the bankers. For the next decade they were fair game for congressional committees, courts, the press, and the comedians.”

The parallels between 1929 and these years following the 2008/2009 financial crisis are clear. Bankers have again been widely blamed — rightly or wrongly — for the more recent collapse, and the public is in no mood for clemency.

I suspect Barclays will eventually pull through, and that in buying today you’re getting a discount to a lot of bad news on the legal front (though it’s hard to quantify what a currency fixing scandal could cost the big banks) — but it’s likely to be a choppy ride.