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Banker-Bashing or Plain Old Common Sense?
Submitted by Leo Kolivakis, publisher of Pension Pulse.
David Stringer of the Associated press reports that U.K. to scrap annual bonuses for bankers:
British Treasury chief Alistair Darling said Monday that automatic annual bonuses for banking executives will be outlawed in an attempt to curb excessive risk taking in the country's huge financial sector.
Mr. Darling told the governing Labour Party's annual conference that new legislation to scrap the payments will be put to Parliament within weeks.
Leaders of the G20 rich and developing countries agreed last week to limit executive bonuses, but didn't set specific caps. Mr. Darling said bankers in Britain will in future be offered bonuses for their performance over several years, rather than over 12 months.
“We won't allow greed and recklessness to ever again endanger the whole global economy and the lives of millions of people,” Mr. Darling said.
He told the rally that new laws would include a claw-back provision and help to “end the reckless culture that puts short term profits over long term success.”
“It will mean an immediate end to automatic bank bonuses year after year, it will mean an end to immediate payouts for top management,” Mr. Darling said.
The plans, to be included in a new Business and Financial Services Bill, will be proposed formally in the Queen's Speech in December, the annual announcement of the government's legislative program.
Mr. Darling told the rally that Britain's economy has not yet recovered from the financial crisis but predicted the U.K. is likely to come out of recession by the end of the year.
“Germany, France and Japan are showing signs of growth. There are many independent forecasters now believing too that the U.K. is coming out of recession,” he said. “I think it is too early to say so with total confidence.”
Prime Minister Gordon Brown's Labour Party trails badly in opinion polls ahead of a national election that must be called by next June.
Mr. Brown said Sunday that his party could recover if the economy rallies and the public give him credit for averting a worse financial crisis.
“When the history of this period is written, this country and this party will be proud. Proud that the people who led the way in stopping recession turning into global depression were our government and our Prime Minister Gordon Brown,” Mr. Darling told delegates.
In recent weeks Mr. Brown has acknowledged that the government will need to cut public spending to reduce mounting government debts – but insists his Labour Party would protect key services.
Mr. Darling said the main opposition Conservative Party – which is widely tipped to win Britain's next election – would put the country's economic recovery at risk by making fast and sweeping cuts to spending.
“If we followed the Tory route now, recovery would be put at risk, prospects for growth damaged, borrowing would in the long run be greater. We cannot and must not let that happen,” Mr. Darling said.
Bloomberg reports that according to some analysts, Darling’s Bonus Call Is ‘Banker-Bashing’ Politics:
Chancellor of the Exchequer Alistair Darling’s call for greater regulation of British bankers’ bonuses amounts to “banker-bashing” and “pandering” to appease popular sentiment, according to London-based analysts and head-hunters.
Darling announced an end to “automatic” bonuses and pledged legislation to punish banks’ risky pay policies through higher capital requirements in a speech to the governing Labour party’s annual party conference today. Two months ago, Prime Minister Gordon Brown announced plans to hold back half of all bonuses for up to five years.
“This is a government on the cusp of losing the next election, and if banker-bashing is going to be popular they’ll do it,” said Simon Maughan, a banking analyst at MF Global Securities in London. “This is a classic case of knee-jerk political reaction to a crisis.”
Britain’s government is looking for ways to limit banker pay and acknowledge public anger as it attacks the practices it blames for causing the worst recession since World War II. With an election due by June at the latest, Labour’s percentage support is the same as the Liberal Democrats, Britain’s third- biggest party, and 15 points behind the Conservative opposition, a ComRes Ltd. poll today shows.
Darling will meet directors of Britain’s four biggest banks this week, asking them to change the way they compensate staff, his office said. That follows a Group of 20 agreement in Pittsburgh Sept. 26 to ensure banks restrain pay. Banks were told to avoid “multi-year guaranteed bonuses” and that a “significant portion of variable compensation” must be deferred, paid in stock, tied to performance and subjected to possible clawbacks.
‘Reckless Culture’
“Let me assure the country and warn the banks that there will be no return to the business as usual,” Darling told Labour party delegates in Brighton, southeastern England. “We will introduce legislation to end the reckless culture that puts short-term profits over long-term success.”
Any legislation to limit bankers’ bonuses needs to be mirrored by G-20 governments, or banks’ top performers may move abroad, according to Shaun Springer, chief executive officer of Square Mile Services Ltd., a London-based remuneration-advisory firm that provides services to 15 of the largest financial institutions in the City of London.
“There needs to be joined-up thinking and not just pandering to satisfy delegates at the Labour party conference,” Springer said. “We need to be thinking about the City’s financial evolution over the next decade, not Labour’s political convolutions over the coming months.”
‘Revolving Door’
“If these proposals are introduced I see a revolving door with people jumping to get out,” Howard Wheeldon, senior strategist at BGC Partners LP in London, said of Darling’s plans. “Do these guys not understand that this is a hugely competitive market and whatever we do to tighten the remuneration will only be to the benefit of our competition? Do they want any national income?”
Royal Bank of Scotland Group Plc, Britain’s biggest government-owned bank, declined to comment on Darling’s speech. Barclays Plc, Lloyds Banking Group Plc and HSBC Holdings Plc were unable to offer immediate comment.
Should Britain get ready for a mass exodus of bankers who are pissed at these new measures to curb their bonuses? Oh please, where are they going to go? Wall Street? They're next in the line of fire.
Bankers have had it good for far too many years, but politicians are ruthless and when it comes to votes, they'll screw the bankers in a second, even if they're feeding them. Is this really banker-bashing and shameless pandering to the masses or is it about time that governments start curbing reckless greed driven by the myopic focus on short-term profits?
Sure, Mr. Darling won't be the "darling" of London's financial elite, but his measures are hardly punitive. In particular, what is wrong with tying bonuses to the long-term health of a bank and paying bonuses over years, so they can be clawed back if not warranted by long-term performance?
After the financial calamity of 2008, that's the least they can do in terms of regulating banks. The next step is to get the same type of regulations to govern the bonuses at Canadian public pension funds, making sure that bonuses are based on risk-adjusted returns and subject to clawbacks if long-term performance falls short of expectations.
***UPDATE: A Banker's Comment***
A banker shared these thoughts with me:
Actually, bankers are leaving, and top graduates are going elsewhere! We have seen a surprisingly large number of mid level managing directors leaving the profession to do something else. Nothing wrong with that, in fact it may be healthy, but bankers have options, they may choose a less stressful life in other sectors, and they are making those choices. One friend recently commented, its cheaper than a divorce! Several I know have gone to academia; there is an aging "Professor" problem in most OECD universities. People have options; sure they will not make gazillions. But they will not have to work 100 hours a week.
Are bankers finally getting the meaning of enough?
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Banker-Bashing is for pussies.
It's Banker-Hanging we be needin', ARRRGH!!!
p.s., we need a free market in remedyin'.
Gordon Brown won't be happy till the already downtrodded Brits are wearing government approved uniforms, residing in social housing and holidaying on Gulags.
What was it Winston Churchill said about socialism's inherent virtue being a sharing of misery ?
Ironically, the institutions that the UK bailed out such as Northern Rock, Lloyds and HBOS were the placed were bankers WERE NOT receiving huge bonusses or in many cases any bonusses at all.
As per usual these places were staffed by retards taking outsized risks for very limited returns under the blissful ignorance of risk management departments eg. levering up AAA mortgages 45x.
Besides, RBS, king of the retard banks is offering some guy from ML GBP 7m guaranteed and the government is the biggest shareholder....what a fucking hypocrite you are Alistair.
In the boom days, Gordon Brown cheered the city at every opportunity and revelled in London's power as it jostled for the largest financial centre. Now his baby is bankrupt and he's bankrupted the country in bailing it out, meaning that his party's 12 years in power have been a failure and now he wants a scapegoat.
A bankrupt country and thousand of innocents dead in Iraqistan.
The problem is not banker bonuses. Humans are greedy and competitive by nature. Half of these traders and cdo merchants were straight out of university and had never seen a business cycle so they assumed this was the norm.
The problem was flawed regulation and flawed monetary policy. The banks took the biggest one-way bet on property and derivatives, which blew up and now Brits are bankrolling zombie banks, who spent the last decade squeezing every penny they could from British families.
As the populists tell the bankers specifically and executives generally; "What's it like to want".
BTW, good bit of work Leo.
It's easy to point the finger at bankers, but let's not forget that Corporate America has its share of overpaid CEOs.
But CEOs of 5 corporations don't control the world economy, are completely protected class, and when they lose money for too long they are generally fired.
Banking is not the same at all.
Banksters have been indecently coddled, permitted to rip off the globe with impunity, indeed, paid trillions in bonuses to do so.
Puhleeeze.
Regulations are only as good as the regulators. We had all the regulations we needed to prevent this disaster. How else can you explain Madoff? We had Glass-Steagal what happened with that? We had the SEC, where were they?
At the end of the day when all was said and done the market regulated itself. Unfortunately the market was not allowed to run it's course and banks were bailed out. As a result of banks being bailed out hedge funds were bailed out. Everyone was bailed out. That is not a market. If LTCM failed like it should have I bet my ass much of this would have been largely been avoided (not entirely but laregly) Same thing with Chrysler getting bailed out in 79'...made the whole industry weaker.
I don't think bankers really care. I heard about a new hot fashion brand in NY called Wallstreet Kingdom. Bankers buy these 500 dollar dress shirts simply to show they don't care. Laughing at people like Michael Moore and Darling knowing that eventually everything remains the same.
to check it out:
www.wallstreetkingdom.com
I don't think bankers really care. I heard about a new hot fashion brand in NY called Wallstreet Kingdom. Bankers buy these 500 dollar dress shirts simply to show they don't care. Laughing at people like Michael Moore and Darling knowing that eventually everything remains the same.
to check it out:
www.wallstreetkingdom.com
Wow. Imagine, putting the good of the country ahead of the insane greed of a few crony kleptocrats. Rings my chimes. If the incumbents leave the "profession", well, don't let the door hit you in the butt on the way out. Too many bankers, too many lawyers anyhow.
@ Anon 11:53 who wrote:
"The problem with the pay structure is it means that for many bankers, their annual living costs exceed their basic pay, so they prefer to do a deal and then move on before the shit hits the fan.
As for the big boys, what will happen is they will join or set up a boutique firm, which the bank will acquire, ensuring a big payday which will easily circumvent the rules."
So true and you did the right thing by putting your client's interests first. Most of the unscrupulous sharks on Wall Street would have closed the deal to get their big bonus. I commend you for doing the right thing.
I had an experience a few years ago where I had a potential deal closing a few weeks before the cut-off date for compensation. The revenue would be significant and I was told very clearly that getting the deal would make a huge difference to my year end comp (the division head was desperate to hit a target). Unfortunately, a problem arose and I had to make the decision to tell the client and lose the deal or ignore it. The problem would not have occurred until a few years later. I chose to tell the client, I had my bonus cut by 40%. Not telling the client would have cost several million, either to the client or to the bank, depending on how it was played out. I made a decision based upon the economic value, but the bonus system cannot take this into account.
Later, I moved into a deal restructuring team, i.e. one that fixes problems, and the frequency of deals done in the month before bonus calculation was extremely high. You could see how the desire to book the revenue in time had overridden all other motives, so mistakes were made either accidentally or deliberately.
The problem with the pay structure is it means that for many bankers, their annual living costs exceed their basic pay, so they prefer to do a deal and then move on before the shit hits the fan.
As for the big boys, what will happen is they will join or set up a boutique firm, which the bank will acquire, ensuring a big payday which will easily circumvent the rules.
"The problem with the pay structure is it means that for many bankers, their annual living costs exceed their basic pay, so they prefer to do a deal and then move on before the shit hits the fan."
This sounds like a problem with the personal budgets of the bankers, not with their pay structure.
***UPDATE: A Banker's Comment***
A banker shared these thoughts with me:
Are bankers finally getting the meaning of enough?
How many of these folks are electing to serve their nation in a uniformed capacity? Or in primary or secondary education? Start up a mirror of Doctors Sans Borders? Volunteering to set up real choices for the disabled war veterans that have survived their drive for international market share?
Are there 10 in the whole group?
Are you in touch with or know of statistical comparisons to be made for the last 20-25 years, say, between investment banking & retail banking, private equity, hedge funds, etc ?
Just how much money, in annualized total, are we truly discussing ? Hedge funds / private equity can pay whatever they wish, imo, if truly private firms.
Publicly-traded banks, on the other hand, have competing interests: paying to retain talent, taking appropriate level of risk to generate ROE, and generating income/growth to equity holders. This argument should also center on other "stakeholders"; publicly traded firms owe as much to equity or bond investors, whom without, in all seriousness these firms only exist on a ledger.
They just need to ditch any concept of limited liability for these clowns. Never mind regulating pay or clawing back bonuses - if they've run a bank or a pension fund into the ground their Palm Beach mansion and private jet should be up for grabs too.
As for private equity - with the mess Cerberus has made of Chrysler all it'll take is one more high-profile steaming pile like that and they'll come under fire too.
'Talent' seems to be a pretty inflated currency these days - how well would they do if it wasn't OPM they were gambling on?
It doesn't take genius after all, to 'buy' a company, load it up with debt, fire most of the employees, strip the assets and award yourself a big bonus in the process - it just takes access to huge loans, maybe a few political connections and absolutely no conscience.
What makes you think private equity and hedge funds won't also be heavily regulated? It's not as if they are out of the woods yet...
Many on Wall St run their own teams and profit centers. The reason they do it at a big bank is so they dont have the headache involved with accounting/compliance...etc. If they become heavily regulated, they will do it privately. If private equity or hedge funds become regulated they will do it for their own account (if they are traders).
All great traders can make lots for their own accounts, but they trade opm so they can leverage their talent. If you take away that leverage/earnings potential they will just trade their personal account and have none of the hassles. This is all from a money management perspective anyway.
Let's postulate that 95% of the banks move to Switzerland. Bankers commute for a few days a week, livin' large in the Swiss paradise, then come home 4 days a week and work out of their home office. Who pays what in taxes to the UK?
NY and NJ will be next, as folks who can, move to the few states with no federal income tax, and more and more business is transacted in low tax countries near the US, or offshore on business capable ocean liners. Such a process for medical services is already in the works.
Wait until the bill arrives for all this Obama deficit spending, and almost all business will be trying to dodge taxes.
People forget that the Reagan tax cut came along with the elimination of many tax shelters, race horses, oil wells, movies. Without those shelters, the only solution is to work in a tax-free zone, cheat on business expenses, and dodge taxes.
"People forget that the Reagan tax cut came along with the elimination of many tax shelters, race horses, oil wells, movies. Without those shelters, the only solution is to work in a tax-free zone, cheat on business expenses, and dodge taxes."
Of course, there's always the unthinkable option: pay your taxes like the "little people" have to...
Limiting pay will only make all the talent join private equity trading groups that dont have clients. So, all the banks and brokerage houses that are publicly traded will drop in price as their eps will plummet, and in turn that means mom and pops 401k drops in value and all the while the best talent on the street continues to make the same pay they did with the same risk.
Sorry folks, gotta be smarter that this to cap pay.
bullcrap...talent is fluid in most industries, let alone banking. What is it about banking that becomes so special only a 'selected few' can flourish.
EPS of these firms plumetted for the trailing 24-month period...because of the practices by investment banks / traders making poor decisions. Some, not all, failed or were absorbed by competitors. A few have begun to flourish again, a select few at that.
401K values go up, in my world, if resources become more evenly distributed to other sectors. Engineers can go back to doing what they're trained to, and not co-opting model techniques based on ill-conceived "projected outcomes".
Leo - you are quite right. The speech by Alistair Darling and his later interviews were laughable - no bankers should be quaking in their shoes. The only light on the horizon for those of us who think the 'industry' is pretty much a skimmer of other's efforts is that Lord Turner (head of the Financial Services Authority) has noticed that most of their 'services' simply move money around and offer no added value at all.
Sorry. All the men and women certainly cannot come home and they must be at places other than home where they can die for their country.
The greatest politician once said via action: Demand what your country can do for you and let other people die for your country.
Bankers are not the problem, they are the symptoms. Politicians are the problem. The only solution is pitchfork at the end of the rope.
Dear Leo,
I believe that regulating bankers' pay is not the crux of the problem.
The issues are whether:-
1. banks are transparent with the risks they take.
2. banks and their managers are held accountable for fraud.
3. banks are allowed to fail when they become insolvent.
In my view, facing these core issues squarely will create more confidence in the banking system than regulating bankers' pay. A functioning free market with strong enforcement of existing laws will probably determine the proper level of bankers' pay better than any additional government regulations could.
Vincent
All the workers, all presidents, all executives, all directors, all managers, all bankers -- yes, and all generals and all admirals and all officers and all politicians and all government office holders -- everyone in the nation be restricted to a total monthly income not to exceed that paid to the soldier in the trenches!
"Bankers have had it good for far too many years, but politicians are ruthless and when it comes to votes, they'll screw the bankers in a second, even if they're feeding them. Is this really banker-bashing and shameless pandering to the masses or is it about time that governments start curbing reckless greed driven by the myopic focus on short-term profits?"
Priority's are absent, I want the men and women home where they belong or carpet bomb the adversary to hell.