Bankers’ bonuses – wrong target

Unless you’re a shareholder, point your gun elsewhere

During the last few days many of the large Investment Banks have announced staff bonuses. And in many cases these have been at, or near, record levels. This has led to public outcrys.

As a response, some governments have announced special taxes on these bonuses. And the triumverate of governments, central banks, and financial services industry regulators have all railed against the bonuses.

But why are the bonuses so high? Who should be the real target of the outrage?

Well unless you are a shareholder in one of these Investment Banks, it should not be the bankers. Bankers’ bonuses are just a transfer of wealth from Investment Bank owners (shareholders) to employees (bankers). Other than a miniscule drip-down effect introduced by higher earnings and dividends, there is no impact on the economy. And like all employees, all that the bankers are doing is getting as much out of their employers as they can do. This behaviour affects the average man in the street far more when sports stars do it (leading to higher and higher prices for admission tickets and replica kits) than when bankers do it.

But what allows bankers to demand such hefty bonuses? Extraordinarily high bank profits.

Just a year after virtual doomsday, and a blood-splattered Wall Street, Investment Banks are making hefty profits again. Why?

Because making profits in the last few months has been easier than taking candy from a baby.

Firstly, interest rates have been kept exceptionally low – near-zero in many developed economies. As a result, banks have been able to borrow costless money. And have banks suffered the same credit squeeze as other business? Not the big ones, not on your life. They have had money thrown at them in order to prime the pumps of the world’s economies (a task in which they failed, but that’s the subject of another post).

And secondly, banks have been handed “get out of jail free” cards on their bets that went wrong. Banks have been able to sell their toxic assets at prices higher than they could get in the market (i.e. more than they are worth, the difference in price being risk-free profit).

And who have been responsible for creating these ├╝ber-benign conditions? Our good friends the governments, central banks and regulators.

No wonder they are so keen to keep the attention on the bankers’ bonuses – it deflects attention from the banking profits that they have helped create – the real transfer of wealth from the average Joe to the large Investment Bank. Joe Taxpayer forks out to support the banking system, and in return finds the recovering banking system taking more money. Do you think Joe Taxpayer might get a wee bit angry if he realized? So better that he didn’t, eh?

2 comments

  1. Stuart says:

    And what about the “exit bonuses” (i.e. golden parachutes)? Shouldn’t people get upset about them? I am angry that the people at the top completely failed but were rewarded for it.

    • TheVoice says:

      Well I think there are shades of grey here. There was a dearth of knowledge of the banking business and financial markets in many of the failed businesses. Adam Applegarth, chief executive at Northern Rock, was not a banker. Nor was Andy Hornby, chief executive at HBOS. Maybe bankers are not required to keep a steady ship, maybe the ship can steer itself with a poorly-directed crew. But when the seas get rough? And when keeping a steady ship, can non-bankers scan the horizon for signs of storms brewing? Northern Rock was destroyed by a liquidity crunch, not a profitability problem – it did not make huge losses, it had the problem that it had lent money to homeowners for many years but was borrowing a large proportion of that money on a short term basis. So when it was not possible to borrow …

      For me, the argument that the tripartite authorities did not require liquidity stress tests just does not hold water – that is exactly the response of somebody who is not embedded in the industry. Every risk consulting firm presents (potential) clients with a business risk model that includes liquidity risk. Everybody in the industry knows that it exists.

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