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Barclays (LSE: BARC) shares lost ground on Monday morning (March 2), after lender Market Financial Solutions (MFS) collapsed last week amid allegations of fraud. Down 5% on the day at the time of writing, the Barclays share price is now down 15% in the last month.
Some UK bank stocks were weak, mind you, so this is only part of the dip.
Barclays, with an investment in MFS, noticed the irregularities days before the lender went into default last week. It is alleged that there were two mortgage agreements. And it led to more fears about mortgage-backed loans, which have seen little improvement.
Barclays was among those providing £2bn in financing to the MFS. Another, a US lender Jefferies Financial Companysaw its shares decline 29% in the month.
So what?
We don’t know how this will work for Barclays. But it sounds like it could have an exposure of up to £600m. The quick lesson for me is – don’t be complacent when it comes to banking.
Bank stocks have advanced over the past few years. At its peak, Barclays shares more than tripled in value in just over two years. Lloyds Banking Groupwhich I hold, has rewarded shareholders twice as much in the same time-scale.
And, well, I was beginning to see the industry as having a very positive outlook. Banking sector all dory hunky now? Years of clean profits ahead with no old dark business to resurface? The dream is over.
It will happen again
There are no allegations of wrongdoing on the part of Barclays itself here. In fact, it seems that it was one of the sharp-eyed observers who helped pull the plug on this thing. Questions are already being raised, however, about poor writing standards. And this is in a sector where, in the US in particular, some regulatory standards have been greatly relaxed.
Wherever there is money to be made with money directly, the enrichment efforts made by financial firms may not be, shall we say, as wise as we hope.
I haven’t forgotten about the car sales scandal that hit Lloyds recently. In fact, I was reminded of it this morning by a flyer from a local law firm recommending a settlement business.
And Barclays has racked up its share of regulatory financial penalties over the years for various wrongdoings.
What should we do?
I would say that the most important thing that we private investors can do is to stay aware of the dangers of wrongdoing, even fraud in our chosen fields. And remember that a complex tangled web exists that connects all kinds of financial institutions around the world. It only took a few pulls on some of the strings to trigger the collapse of the banks in 2008, remember.
And with that in mind, I still intend to invest in financial stocks. And I still rate Barclays as a potential long-term cash cow. I think investors might want to consider waiting for this case to sort itself out first, and then see what the damage can be.
