Does anybody look good in the Fred Goodwin pension farrago? The man himself looks unfathomably greedy, and has certainly managed to cast fresh doubt (as if any were needed) on the sincerity of his "apology" to the Treasury Select Committee a couple of weeks ago. The Government looks both incompetent (for apparently not paying enough attention to this matter when it was showing Sir Fred the door a few months ago) and duplicitous (for trying to renege on what appears to be a valid contract). Dear old Robert Peston looks smarmy and mean -- when are we going to get the details about your pay and pension, Bobby baby? After all, you work for a company that's entirely dependent on taxpayer funds too.
The letter Sir Fred sent to Lord Myners on Thursday is so carefully worded that you have to wonder where the truth lies. Sir Fred (or rather his brief) is adamant that the pension is in line with RBS's normal practices, and it seems to have been given the nod by Lord Myners on that basis. However, it's not at all clear that the Government understood that those "normal practices" allowed RBS to give Sir Fred his full pension at age 50 instead of 60. This has the effect of doubling the value of the notional "pension pot" from which it's taken. If the Government can prove it didn't know that the RBS board would do this, its moral and maybe even its legal case against Sir Fred would be strengthened enormously. Otherwise, it would be a very disturbing precedent if the Government tried to find a way not to pay the agreed money to Sir Fred, as Prezza is demanding they should and Gordon Brown is hinting they will.
By the way, Sir Fred has helped to prove a point that I made in my recent posting about RBS's bonus scheme. ("RBS: Ridiculous Bonus Substitute"). Sir Fred has willingly "sacrificed" his contractual one year's salary-in-lieu and share options, worth a grand total of not much more than £1 million, for an £8 million boost to his pension pot. Well, you would, wouldn't you? Even further by the way, reports suggest that a lot of City bankers are asking for 10% base salary increases in lieu of bonuses, so it looks as if RBS's absurd deal for all of its staff is going to set a precedent.
I can't help noticing that all the politicians who are calling for Sir Fred to commit seppuku are entitled to very generous pensions of their own -- not as big as Sir Fred's, but fully indexed at taxpayers' expense. And most of the people who think it's fine to wash Sir Fred's financial linen in public are fantastically secretive when it comes to their own expense claims. Even so, I think Sir Fred is going to have to give something back, whether he likes it or not.
Friday, 27 February 2009
Tuesday, 24 February 2009
Protectionism is in the air
President Barack Obama may have watered down the Buy American provisions in his mega bailout bill, but there are still worrying signs that the US is pulling up the drawbridge. The President has just announced that the Defense Department is to review an existing contract to replace the Presidential helicopter, known rather oddly as Marine One. (Is it a floating helicopter? Anyway, it should actually be Marines 1 to 19, because that's how many there are in the fleet). In response to a question from, of all people, Senator John McCain, Obama said he thought his existing helicopter was "perfectly adequate", while admitting that he'd never had a helicopter before (still less, presumably, nineteen of them).
Here's the thing. The helicopter contract was awarded many years ago to a European consortium that includes Westland of the UK. What are the odds that this contract would have been cancelled if it had been won by a US company? How about if it had been won by a company in Senator McCain's home state?
This is not the first such example. Last year the Defense Department (then as now led by Robert Gates) cancelled a contract for airborne refuelling tankers that had been won fair and square by Airbus Industrie, over squeals of protest from Boeing. That company's lobbying to annul the contract paid off, and the business is to be retendered with new specifications. You have to suspect that they might just as well include in those specs "only US firms need apply", because there's surely little doubt about the outcome this time.
These are worrying trends. It will be interesting to see whether Lord Mandelson is as outspoken about this blatant US protectionism as he was about the refinery protest in Lincolnshire last month.
Here's the thing. The helicopter contract was awarded many years ago to a European consortium that includes Westland of the UK. What are the odds that this contract would have been cancelled if it had been won by a US company? How about if it had been won by a company in Senator McCain's home state?
This is not the first such example. Last year the Defense Department (then as now led by Robert Gates) cancelled a contract for airborne refuelling tankers that had been won fair and square by Airbus Industrie, over squeals of protest from Boeing. That company's lobbying to annul the contract paid off, and the business is to be retendered with new specifications. You have to suspect that they might just as well include in those specs "only US firms need apply", because there's surely little doubt about the outcome this time.
These are worrying trends. It will be interesting to see whether Lord Mandelson is as outspoken about this blatant US protectionism as he was about the refinery protest in Lincolnshire last month.
A new low for the Daily Mail
The UK's most loathsome paper manages to plumb new lows today (February 24), with a big banner above the front page headline reading "Why is it clever to be dumb?". On one side of those words is a picture of Gail Trimble, the young woman who just led her Oxford college to victory in University Challenge. On the other is a picture of Jade Goody.
The author of this pile of bile, one Harry Mount, says he has nothing against Jade Goody. He has a funny way of showing it, ranting against "a young woman famous only for being famous, and her wedding to a violent ex-con".
Jade Goody is the product of a broken home. She has terminal cancer, so her two young children are about to be orphaned. You'd think even the Hate Mail would think better of criticising her at such a time, but evidently you'd be wrong. Mount's article is despicable, and the paper's editor should be ashamed of himself for giving it such prominence.
The author of this pile of bile, one Harry Mount, says he has nothing against Jade Goody. He has a funny way of showing it, ranting against "a young woman famous only for being famous, and her wedding to a violent ex-con".
Jade Goody is the product of a broken home. She has terminal cancer, so her two young children are about to be orphaned. You'd think even the Hate Mail would think better of criticising her at such a time, but evidently you'd be wrong. Mount's article is despicable, and the paper's editor should be ashamed of himself for giving it such prominence.
Thursday, 19 February 2009
Allen Stanford's cheap publicity
Vijay Singh, Michael Owen, Jim Courier, the West Indies cricket team.....they all accepted largesse in one form or another from Allen Stanford, now unmasked as this month's Bernie Madoff. Here's the thing though: it seems as though a lot of them redeposited the loot into Stanford's "bank", so that in effect Stanford received their services for free. Good luck to them in getting their hands on the moolah now. Vijay, Michael and Jim will no doubt scrape by, but it's hard not to feel for the Windies cricketers, for whom the money was, or would have been, genuinely life-changing.
I've always believed that Roman Abramovich's involvement with Chelsea was about laundering himself rather than his money. Stanford's activities in Antigua, and his efforts to insinuate himself into world cricket, were similar in some ways, though choosing Antigua, with its recent history of violence and drug running, may not have been the smartest move. Besides, whereas Abramovich is about as low key as a multi-billionaire with six yachts can reasonably be, Stanford is, well, a bit of a git, and a flash one at that. The joy in the UK media at his sudden unmasking would be unseemly to behold, but for the fact that he so richly deserves it.
One interesting angle on this is that Stanford had to leave the US in order to build himself a dominant position in sport. In the land of winner-takes-all capitalism, professional sport is the closest thing there is to a co-operative enterprise. Sure, there are some big name owners with a taste for publicity: George Steinbrenner of the New York Yankees comes to mind. However, football, basketball and baseball are all organised in such a way as to ensure that rich guys can't build invincible dynasties. It simply wouldn't have served Stanford's purposes to buy into a small-market team, say Green Bay, and throw his money around there, and he didn't have enough cash to compete with the Abramoviches et al in European football. So he ended up in the West Indies, bankrolling a sport that he didn't even like.
The US authorities believe that Madoff and Stanford may be only the tip of a humungous iceberg of fraud. Reportedly there are more than 500 possibly dodgy schemes under investigation. On the TV show Hustle, they like to say that you can't con an honest man. Unfortunately it looks as if you can, as long as you have a banking license.
I've always believed that Roman Abramovich's involvement with Chelsea was about laundering himself rather than his money. Stanford's activities in Antigua, and his efforts to insinuate himself into world cricket, were similar in some ways, though choosing Antigua, with its recent history of violence and drug running, may not have been the smartest move. Besides, whereas Abramovich is about as low key as a multi-billionaire with six yachts can reasonably be, Stanford is, well, a bit of a git, and a flash one at that. The joy in the UK media at his sudden unmasking would be unseemly to behold, but for the fact that he so richly deserves it.
One interesting angle on this is that Stanford had to leave the US in order to build himself a dominant position in sport. In the land of winner-takes-all capitalism, professional sport is the closest thing there is to a co-operative enterprise. Sure, there are some big name owners with a taste for publicity: George Steinbrenner of the New York Yankees comes to mind. However, football, basketball and baseball are all organised in such a way as to ensure that rich guys can't build invincible dynasties. It simply wouldn't have served Stanford's purposes to buy into a small-market team, say Green Bay, and throw his money around there, and he didn't have enough cash to compete with the Abramoviches et al in European football. So he ended up in the West Indies, bankrolling a sport that he didn't even like.
The US authorities believe that Madoff and Stanford may be only the tip of a humungous iceberg of fraud. Reportedly there are more than 500 possibly dodgy schemes under investigation. On the TV show Hustle, they like to say that you can't con an honest man. Unfortunately it looks as if you can, as long as you have a banking license.
RBS: Ridiculous Bonus Substitute
Apologies for yet another posting on bank bonuses, but has anyone looked at the deal between the Government and Royal Bank of Scotland, whereby the bank agreed to limit its bonus payouts for 2008? Rank-and-file employees of the bank would normally have expected bonuses averaging about 10% of base salary. In today's climate, of course, such largesse is unacceptable, so instead of bonuses all the employees will receive.....a 10% salary increase!
RBS says it is pleased that its unions have accepted the deal. I'll bet the unions and their members are pleased too. Who wouldn't accept a salary rise of X pounds, which presumably you'll continue to receive as long as you stay with the firm, in preference to a one-off bonus of X pounds? If things return to normal in a couple of years, you can start to demand a bonus again, but you'll still have the higher salary anyway. Banks have been trying to increase the variable component of pay for years, and here's RBS single-handedly reversing the trend. No doubt union organisers at the other big banks, including those who have not accepted any government money, will have taken note.
The deal allowed RBS (and the government) to brag that this year's bonus payouts will be less than 10% of last year's. Oh yeah? And how much has the bank's total wage bill gone down, or does that not matter?
RBS says it is pleased that its unions have accepted the deal. I'll bet the unions and their members are pleased too. Who wouldn't accept a salary rise of X pounds, which presumably you'll continue to receive as long as you stay with the firm, in preference to a one-off bonus of X pounds? If things return to normal in a couple of years, you can start to demand a bonus again, but you'll still have the higher salary anyway. Banks have been trying to increase the variable component of pay for years, and here's RBS single-handedly reversing the trend. No doubt union organisers at the other big banks, including those who have not accepted any government money, will have taken note.
The deal allowed RBS (and the government) to brag that this year's bonus payouts will be less than 10% of last year's. Oh yeah? And how much has the bank's total wage bill gone down, or does that not matter?
Saturday, 14 February 2009
Bank stupidity
I'm finding it a bit difficult to understand the fuss created by Friday's announcement from Lloyds Banking Group that losses at its newly-acquired HBOs subsidiary are bigger than expected. Sure, the sums involved are huge -- about £10.8 billion -- but that's "only" £1.6 billion more than Lloyds had estimated back in November. In normal times it would surprise no-one that Lloyds was putting a high estimate on the losses; do that right after the merger and you can blame previous management, but do it a year later and it's going to be your fault. And what do you suppose would have happened if Lloyds had suddenly turned around and said the losses were lower than previously thought? Without doubt, the same politicians who are castigating the Government for engineering the Lloyds-HBOS deal would instead be criticising it for giving too much away to Lloyds shareholders.
The suddenly ubiquitous head of the Treasury Select Committee, John McFall, managed to get the new CEO of Lloyds to admit that Lloyds didn't do enough due diligence on the HBOS deal. That's largely disproven, though, both by the fact that Lloyds twice insisted on better terms before agreeing to the deal and by the relatively small increase in estimated losses that has now been revealed. Shadow Industry Minister Ken Clarke says the merger is a "disaster" for Lloyds. Good Lord, Ken, the deal only closed on January 19! LibDem money guru Vince Cable says Lloyds may well have to be nationalised.
Well and good, gents, but if you had been in Messrs Darling and Brown's shoes back in September, what would you have done instead? Nationalise HBOS right away, thereby placing all of the risk onto the taxpayer's shoulders, rather than trying to find a private sector partner to take on some of the risk and provide the expertise needed to fix HBOS? Put HBOS under, risking Lehman-style consequences for the UK financial syatem and putting tens of thousands of jobs at risk? The merger looked like a deal worth pursuing at the time, and it's still too soon to say it won't work, given time and patience, though the latter seems to be in very short supply.
So what happens next? Voices in the media are agreeing with Vince Cable that Lloyds will wind up in public hands. Alastair Darling hasn't explicitly ruled that out, but his comments seem to suggest that the Government is looking to get some of the bad assets off the books of all the banks in order to get lending going again. Yes, it's the good old "bad bank" again. And thanks to Friday's announcement, at least we have a better idea of how many bad assets there are at Lloyds Banking Group.
The suddenly ubiquitous head of the Treasury Select Committee, John McFall, managed to get the new CEO of Lloyds to admit that Lloyds didn't do enough due diligence on the HBOS deal. That's largely disproven, though, both by the fact that Lloyds twice insisted on better terms before agreeing to the deal and by the relatively small increase in estimated losses that has now been revealed. Shadow Industry Minister Ken Clarke says the merger is a "disaster" for Lloyds. Good Lord, Ken, the deal only closed on January 19! LibDem money guru Vince Cable says Lloyds may well have to be nationalised.
Well and good, gents, but if you had been in Messrs Darling and Brown's shoes back in September, what would you have done instead? Nationalise HBOS right away, thereby placing all of the risk onto the taxpayer's shoulders, rather than trying to find a private sector partner to take on some of the risk and provide the expertise needed to fix HBOS? Put HBOS under, risking Lehman-style consequences for the UK financial syatem and putting tens of thousands of jobs at risk? The merger looked like a deal worth pursuing at the time, and it's still too soon to say it won't work, given time and patience, though the latter seems to be in very short supply.
So what happens next? Voices in the media are agreeing with Vince Cable that Lloyds will wind up in public hands. Alastair Darling hasn't explicitly ruled that out, but his comments seem to suggest that the Government is looking to get some of the bad assets off the books of all the banks in order to get lending going again. Yes, it's the good old "bad bank" again. And thanks to Friday's announcement, at least we have a better idea of how many bad assets there are at Lloyds Banking Group.
Thursday, 12 February 2009
Wunch of bankers
It has been a bad week for the erstwhile great and good of the banking industry in both the UK and the US. On both sides of the Atlantic, senior bankers have been publicly flagellated by politicians for their perceived sins, while in the UK a former banker turned regulator has been forced to resign over suggestions that he fired a whistleblower.
Two executives from each of HBOS and RBS, now partly nationalised, appeared before a House of Commons committee in London at the start of several days of hearings into the financial crisis. All four made extensive use of the words "apologise" and "sorry", but failed to convince the assembled MPs (or, I daresay, most of the public) that they were truly contrite. All four seemed to be dismayed that things had gone so horribly wrong, but rejected any suggestion that it might have been their fault. To borrow from the US children's author Lemony Snicket, they appeared to see it all as "a series of unfortunate events".
This really doesn't wash. Most elements of a bank run themselves on a day-to-day basis, yet it's unlikely that any of the Gang of Four could actually do the job of a teller or a branch manager. Sir Fred Goodwin and his ilk are paid serious money to look at the big picture -- building a sound franchise, protecting the bank's capital and earning long-term profits for shareholders. The gung-ho push for growth at both HBOS and RBS in the early part of this decade was incompatible with these goals. If Sir Fred and his pals couldn't see that, they were unequivocally to blame for what happened next.
Media commentators on the four men's testimony have expressed frustration that it still seems unclear why they allowed these bad things to happen to their good banks. I've written before about the confluence of factors that made the crisis possible: cheap credit, the explosion of derivatives and so on. But there is still a story to be told about why those in charge failed to prevent it.
Banks are competitive institutions and senior bankers are competitive people, but there's a clear tendency towards groupthink. It's a standing joke in the industry that no Japanese bank will try something new unless all its competitors join in, but the same is true of bankers everywhere. If one bank seems to be making pots of money in a new business, the rest will pile in. The inevitable consequence is a series of bubbles, sometimes in more than one product at a time, like the unholy trinity of REITs, tanker loans and LDC lending that plagued the industry three decades ago.
The tendency to move as a herd is enhanced by the fact that bank directors are drawn from a narrow pool of senior business types. They all know each other, and when they meet at Glyndebourne or the Hamptons, they inevitably brag about their institutions' latest wheezes. In no time, senior management back at head office is getting an ear-bashing about how they're missing the boat. This may sound far-fetched or even childish, but I've actually seen it happen repeatedly though the years, usually with unfortunate results.
The current financial crisis reflected groupthink on a global scale, but with one new twist. This time, the most senior people at the world's major banks simply did not understand the details of the products they were taking on. Instead they allowed themselves to be talked into taking unquantifiable risks by hugely qualified but totally inexperienced specialists, secure in the knowledge that almost all of their major competitors were doing the same thing.
There were exceptions. I once heard a senior investment banker declare that he'd never seen a derivative he didn't like. Fortunately for that bank's shareholders, the CEO had never seen a derivative he fully understood, and stayed away from the riskier parts of the business. However, it takes real courage for a senior banker to admit he doesn't understand something when all his competitors seem to be making out like bandits.
While the MPs and their opposite numbers in Washington were tryingto get to the bottom of all this, a senior UK regulator abruptly quit. Sir James Crosby, second in command at the main UK industry regulator, the FSA, had previously been CEO at HBOS, which was recently forced into a merger with Lloyds TSB. A former executive of HBOS is alleging that he warned Crosby as long ago as 2002 that the bank was growing too quickly -- and was fired for his trouble. Crosby denies this, but the FSA has admitted that it too had expressed concerns about HBOS's business model while Crosby was still in charge. One can only imagine the expressions of horror at FSA headquarters when the Government forced Crosby on them.
One interesting aspect of this is that the FSA relies very much on whistleblowers to help it do its job. The regular money laundering training to which all bankers in the UK are subjected stresses the absolute duty of each employee to inform compliance officers if they have any concerns about how their firm is being run. Failure to do so is treated by the FSA as equivalent to covering up a crime. If Crosby really did fire a whistleblower, his presence at the very top of the FSA would constitute a remarkable lapse on the part of the Government.
Two executives from each of HBOS and RBS, now partly nationalised, appeared before a House of Commons committee in London at the start of several days of hearings into the financial crisis. All four made extensive use of the words "apologise" and "sorry", but failed to convince the assembled MPs (or, I daresay, most of the public) that they were truly contrite. All four seemed to be dismayed that things had gone so horribly wrong, but rejected any suggestion that it might have been their fault. To borrow from the US children's author Lemony Snicket, they appeared to see it all as "a series of unfortunate events".
This really doesn't wash. Most elements of a bank run themselves on a day-to-day basis, yet it's unlikely that any of the Gang of Four could actually do the job of a teller or a branch manager. Sir Fred Goodwin and his ilk are paid serious money to look at the big picture -- building a sound franchise, protecting the bank's capital and earning long-term profits for shareholders. The gung-ho push for growth at both HBOS and RBS in the early part of this decade was incompatible with these goals. If Sir Fred and his pals couldn't see that, they were unequivocally to blame for what happened next.
Media commentators on the four men's testimony have expressed frustration that it still seems unclear why they allowed these bad things to happen to their good banks. I've written before about the confluence of factors that made the crisis possible: cheap credit, the explosion of derivatives and so on. But there is still a story to be told about why those in charge failed to prevent it.
Banks are competitive institutions and senior bankers are competitive people, but there's a clear tendency towards groupthink. It's a standing joke in the industry that no Japanese bank will try something new unless all its competitors join in, but the same is true of bankers everywhere. If one bank seems to be making pots of money in a new business, the rest will pile in. The inevitable consequence is a series of bubbles, sometimes in more than one product at a time, like the unholy trinity of REITs, tanker loans and LDC lending that plagued the industry three decades ago.
The tendency to move as a herd is enhanced by the fact that bank directors are drawn from a narrow pool of senior business types. They all know each other, and when they meet at Glyndebourne or the Hamptons, they inevitably brag about their institutions' latest wheezes. In no time, senior management back at head office is getting an ear-bashing about how they're missing the boat. This may sound far-fetched or even childish, but I've actually seen it happen repeatedly though the years, usually with unfortunate results.
The current financial crisis reflected groupthink on a global scale, but with one new twist. This time, the most senior people at the world's major banks simply did not understand the details of the products they were taking on. Instead they allowed themselves to be talked into taking unquantifiable risks by hugely qualified but totally inexperienced specialists, secure in the knowledge that almost all of their major competitors were doing the same thing.
There were exceptions. I once heard a senior investment banker declare that he'd never seen a derivative he didn't like. Fortunately for that bank's shareholders, the CEO had never seen a derivative he fully understood, and stayed away from the riskier parts of the business. However, it takes real courage for a senior banker to admit he doesn't understand something when all his competitors seem to be making out like bandits.
While the MPs and their opposite numbers in Washington were tryingto get to the bottom of all this, a senior UK regulator abruptly quit. Sir James Crosby, second in command at the main UK industry regulator, the FSA, had previously been CEO at HBOS, which was recently forced into a merger with Lloyds TSB. A former executive of HBOS is alleging that he warned Crosby as long ago as 2002 that the bank was growing too quickly -- and was fired for his trouble. Crosby denies this, but the FSA has admitted that it too had expressed concerns about HBOS's business model while Crosby was still in charge. One can only imagine the expressions of horror at FSA headquarters when the Government forced Crosby on them.
One interesting aspect of this is that the FSA relies very much on whistleblowers to help it do its job. The regular money laundering training to which all bankers in the UK are subjected stresses the absolute duty of each employee to inform compliance officers if they have any concerns about how their firm is being run. Failure to do so is treated by the FSA as equivalent to covering up a crime. If Crosby really did fire a whistleblower, his presence at the very top of the FSA would constitute a remarkable lapse on the part of the Government.
Friday, 6 February 2009
Wedge me up!
Newspapers are giving a lot of coverage to the story that several UK banks (including RBS and Lloyds, both now part-nationalised) are planning to give bonuses to employees, just ahead of the expected announcement of restrictions on bankers' compensation. Is the bonus culture on its last legs?
Before I get into this, I should 'fess up that for at least the last 15 years of my banking career, bonuses of one kind or another accounted for well over 50% of my annual compensation. My base salary hardly changed at all in that period, as my employer steadily and very deliberately ratcheted up the importance of "variable comp".
Bankers (we're talking mainly about investment bankers here, rather than the High Street types) can offer a variety of reasons why they deserve huge bonuses. Your hours are long, your career is short, you're probably travelling half the time, you can get fired at any moment. Oh yes, you're also bringing in a lot of revenue for the firm. Companies paid bonuses because they recognised all of these things, and because they knew that the best people would quit if they weren't "properly paid". (To be honest, however, if I could have had £10 for every colleague who threatened to quit at bonus time but never actually did, I could probably have foregone any bonuses from the firm!)
If you want an indication of how entrenched the bonus ritual was, try this. Soon after I moved from Toronto to London there was a bit of a slowdown in the investment banking business. The President of the firm "asked" each of us to forego between 5% and 15% of our salary for six months to help out. But when December rollad around that year, bonuses were paid out as usual.
Excesses certainly crept into the bonus system in the last few years. We saw the introduction of the oxymoronic "guaranteed bonus", usually employed to lure a high-flier from a competitor. For some of the more obscure derivative products, bonuses began to be paid on the basis of assumed future returns, mant of which have proved illusory as the markets have unravelled. Now we see loss-making institutions, reliant on government support for their very survival, planning to pay out large sums to their employees.
There are various justifications being offered for this, though none of them is likely to cut much ice with the public. Some of the payouts are "guaranteed bonuses", which the banks are contractually obliged to pay. Others are payments to people whose individual businesses have remained profitable throughout the credit crunch. There certainly doesn't seem much likelihood of RBS paying big bonuses to its sub-prime team or its CDS originators.
All the same, it's legitimate to ask whether the bonus system has run its course. If banking is set to revert to the 3-5-4 model (borrow at 3%, lend at 5%, on the golf course by 4 o'clock), the big returns that paid for the bonuses will be no more. Most banks will stay away from the kind of arcane, high-risk products that allowed the bankers themselves virtually to set the size of their own bonuses, by exaggerating the expected returns to bosses who were in no position to prove otherwise. And the threat of quitting in a huff is going to have a lot less weight as the number of competitors dwindles. There will still be bonuses paid, but the gravy train has probably been derailed for a good long time. If you want to make big money in finance in the next few years, you're probably going to have to put some of your own money at risk.
Before I get into this, I should 'fess up that for at least the last 15 years of my banking career, bonuses of one kind or another accounted for well over 50% of my annual compensation. My base salary hardly changed at all in that period, as my employer steadily and very deliberately ratcheted up the importance of "variable comp".
Bankers (we're talking mainly about investment bankers here, rather than the High Street types) can offer a variety of reasons why they deserve huge bonuses. Your hours are long, your career is short, you're probably travelling half the time, you can get fired at any moment. Oh yes, you're also bringing in a lot of revenue for the firm. Companies paid bonuses because they recognised all of these things, and because they knew that the best people would quit if they weren't "properly paid". (To be honest, however, if I could have had £10 for every colleague who threatened to quit at bonus time but never actually did, I could probably have foregone any bonuses from the firm!)
If you want an indication of how entrenched the bonus ritual was, try this. Soon after I moved from Toronto to London there was a bit of a slowdown in the investment banking business. The President of the firm "asked" each of us to forego between 5% and 15% of our salary for six months to help out. But when December rollad around that year, bonuses were paid out as usual.
Excesses certainly crept into the bonus system in the last few years. We saw the introduction of the oxymoronic "guaranteed bonus", usually employed to lure a high-flier from a competitor. For some of the more obscure derivative products, bonuses began to be paid on the basis of assumed future returns, mant of which have proved illusory as the markets have unravelled. Now we see loss-making institutions, reliant on government support for their very survival, planning to pay out large sums to their employees.
There are various justifications being offered for this, though none of them is likely to cut much ice with the public. Some of the payouts are "guaranteed bonuses", which the banks are contractually obliged to pay. Others are payments to people whose individual businesses have remained profitable throughout the credit crunch. There certainly doesn't seem much likelihood of RBS paying big bonuses to its sub-prime team or its CDS originators.
All the same, it's legitimate to ask whether the bonus system has run its course. If banking is set to revert to the 3-5-4 model (borrow at 3%, lend at 5%, on the golf course by 4 o'clock), the big returns that paid for the bonuses will be no more. Most banks will stay away from the kind of arcane, high-risk products that allowed the bankers themselves virtually to set the size of their own bonuses, by exaggerating the expected returns to bosses who were in no position to prove otherwise. And the threat of quitting in a huff is going to have a lot less weight as the number of competitors dwindles. There will still be bonuses paid, but the gravy train has probably been derailed for a good long time. If you want to make big money in finance in the next few years, you're probably going to have to put some of your own money at risk.
Ignorant English oaf
I see that Jeremy Clarkson is in trouble for calling Gordon Brown a "one-eyed Scottish idiot" during a show in Australia. (It's a live stage version of Top Gear. I fear I may be compelled to spend all eternity there if St Peter turns me away at the Pearly Gates). Clarkson thinks that Brown is responsible for all the problems in the economy.
Leave aside for a moment the distastefulness of calling attention to Brown's disability, which is the result of a childhood rugby accident. Clarkson recently admitted in his newpaper column that hed'd taken all of his money out of UBS and invested it with....AIG, just before that company had a narrow escape from bankruptcy. He complained that AIG's annual report was full of terminology that he couldn't understand (which may not be much of a hurdle, in truth), but he still went ahead and put his money there. It doesn't sound like he's well placed to criticise Gordon Brown's financial prowess.
Leave aside for a moment the distastefulness of calling attention to Brown's disability, which is the result of a childhood rugby accident. Clarkson recently admitted in his newpaper column that hed'd taken all of his money out of UBS and invested it with....AIG, just before that company had a narrow escape from bankruptcy. He complained that AIG's annual report was full of terminology that he couldn't understand (which may not be much of a hurdle, in truth), but he still went ahead and put his money there. It doesn't sound like he's well placed to criticise Gordon Brown's financial prowess.
Thursday, 5 February 2009
Snow balls
This week's "snow event" has sent the British into paroxysms of self-criticism, egged on by most of the media. Let's get a grip guys! It's ludicrous to complain that local councils don't have snowploughs -- how much tax would the complainers be willing to pay for expensive equipment that might only get used once a decade? (It's analogous to the complaint that you often have to stand if you travel on trains in the rush hour. How much would you be willing to pay in higher fares for extra carriages that would sit idly in the yards for about 150 hours every week?)
It's also ridiculous to suggest that "other countries do this better". Just last week the Obama kids' school in Washington, DC was closed because of snow. Washington gets snow far more often than London, and if there's any major city in the world that deals with snow worse than the US capital, I've yet to find it. Even in truly snowy spots -- the US midwest, Canada -- weather-related school and airport closures are annual events. (Ever seen "Trains, planes and automobiles"?) Monday's snowfall in my part of the UK would certainly have been enough to cause disruption in Toronto, particularly if it had happened early in the season. It was a constant source of amazement to me that Canadians could completely forget how to drive in snow between one winter's thaw and the next winter's first snowfall.
This is not to excuse the UK authorities from all blame for the problems that the weather has brought. I saw one sarcastic comment from abroad about the amazing phenomenon of underground snow in the UK bringing the Tube to a standstill. Much of the Tube is, of course, above ground, and the all-subterranean Victoria Line ran normally. Still, Tube guys, if you're reading this, there's an easy solution. If it's forecast to snow overnight, run a train up and down the exposed portions of the line all night to keep them clear of snow.
On a smaller scale, even if local councils can't be expected to invest in snowploughs, a few shovels wouldn't break the bank. This goes for businesses too. Is there a single supermarket anywhere in the UK that has cleared its carpark? There's a legitimate 'Elf and Safety concern here, but perhaps the relevant bureaucrats haven't made it into work this week, because of the bad weather.
Last but not least, there's the hoary old canard that the snow is "costing the economy" huge amounts -- most of the figures I've seen this week have been in the range of £1 billion a day. Given that much bigger disasters -- 9/11, Hurricane Katrina -- proved to have a nugatory effect on overall economic activity, I don't know where this stuff comes from. It's not as if there is a certain lump of economic output that has to be created on February 5, 2009, failing which it is lost forever. Companies and people reschedule appointments and work a bit harder once the crisis has passed. And anyway, nobody seems to take account of the businesses that benefit from the problems. How much overtime are gritter drivers, police and others making this week? And as for the guy who owns the saltmine up in Cheshire, he's probably perusing Bentley brochures and planning a month in the Maldives.
It's also ridiculous to suggest that "other countries do this better". Just last week the Obama kids' school in Washington, DC was closed because of snow. Washington gets snow far more often than London, and if there's any major city in the world that deals with snow worse than the US capital, I've yet to find it. Even in truly snowy spots -- the US midwest, Canada -- weather-related school and airport closures are annual events. (Ever seen "Trains, planes and automobiles"?) Monday's snowfall in my part of the UK would certainly have been enough to cause disruption in Toronto, particularly if it had happened early in the season. It was a constant source of amazement to me that Canadians could completely forget how to drive in snow between one winter's thaw and the next winter's first snowfall.
This is not to excuse the UK authorities from all blame for the problems that the weather has brought. I saw one sarcastic comment from abroad about the amazing phenomenon of underground snow in the UK bringing the Tube to a standstill. Much of the Tube is, of course, above ground, and the all-subterranean Victoria Line ran normally. Still, Tube guys, if you're reading this, there's an easy solution. If it's forecast to snow overnight, run a train up and down the exposed portions of the line all night to keep them clear of snow.
On a smaller scale, even if local councils can't be expected to invest in snowploughs, a few shovels wouldn't break the bank. This goes for businesses too. Is there a single supermarket anywhere in the UK that has cleared its carpark? There's a legitimate 'Elf and Safety concern here, but perhaps the relevant bureaucrats haven't made it into work this week, because of the bad weather.
Last but not least, there's the hoary old canard that the snow is "costing the economy" huge amounts -- most of the figures I've seen this week have been in the range of £1 billion a day. Given that much bigger disasters -- 9/11, Hurricane Katrina -- proved to have a nugatory effect on overall economic activity, I don't know where this stuff comes from. It's not as if there is a certain lump of economic output that has to be created on February 5, 2009, failing which it is lost forever. Companies and people reschedule appointments and work a bit harder once the crisis has passed. And anyway, nobody seems to take account of the businesses that benefit from the problems. How much overtime are gritter drivers, police and others making this week? And as for the guy who owns the saltmine up in Cheshire, he's probably perusing Bentley brochures and planning a month in the Maldives.
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