Barclays to write down $2.7 billion on subprime lending

Well, it appears that the subprime mortgage mess has hit another big bank. From Marketwatch:

LONDON (MarketWatch) -- Britain's Barclays on Thursday became the latest bank to disclose write-downs from subprime lending and the related credit crunch, taking a charge of 1.3 billion pounds ($2.7 billion), a far lower provision that rumors in the markets had suggested.

From July to October, the bank's Barclays Capital investment-banking division will take write-offs and charges stemming from a combination of the impact of rating agency downgrades on a broad range of collateralized debt obligations and the subsequent market downturn, the bank said.

Bob Diamond, president of Barclays Capital, said the write-down calculations were "conservative," and outside observers largely agreed.

"This looks as close to the kitchen sink as managements are allowed to go in the IFRS (accounting rules) era," said Alex Potter, an analyst at U.K. brokerage Collins Stewart.

In the update, brought forward by two weeks, Barclays says it still has 7.3 billion pounds of exposure from unsold underwriting positions in leveraged finance and 19 billion pounds of exposure to its own, on-balance-sheet conduits. Barclays said those conduits have been able to fund themselves through issuing commercial paper.

Now the current exchange rate reports that one British pound equals $2.0483 U.S. dollars. This means that the 7.3 billion British pounds that Barclays had exposed in unsold underwriting positions equals $14.952 billion in U.S. dollars. I'm not sure if Barclays is overexposed on these unsold underwriting positions, but if the number of American home foreclosures continue to increase due to the shifting of higher interest rates on adjustable-rate mortgages, then I'm guessing that Barclays will be reporting even more losses and write-downs over the next year or so.

There is another interesting detail in this Marketwatch story:

The update goes some way to soothe rattled investor nerves over Barclays' exposure. The U.K. bank had been seen as particularly at risk since it originated many of the structured vehicles that are now encountering difficulties. It also had exposure through the purchase in March of Equifirst, a U.S. subprime lender.

Now in August, 2007, Equifirst reported that they will cut an unspecified number of jobs out of the 1,400 people employed in the North Carolina firm. Barclays purchased Equifirst in April, 2007 for $76 million--right at the point when the subprime mortgage industry was starting to collapse due to the rise in delinquencies. Barclays originally agreed to purchase Equifirst from Regions Financial Corp. for $225 million back in January 2007. Barclays may have wanted to get into the subprime housing bubble back in January 2007, and offered Regions Financial a fat price for Equifirst. But as the housing market started slowing, Barclays may have had second thoughts on the deal, or Regions Financial may have needed the money from the sale quickly, so the deal was renegotiated for $76 million. Now Barclays may be sitting on a subprime mortgage lender with billions in subprime loans that will need to be written off as losses.