Brown, Banks & Bonuses

Constantly Furious highlights some comments by Gordon Brown at the Royal Institution about bankers bonuses, "“This year we have seen a welcome reduction in the proportion of revenues global investment banks have paid out in bonuses." CF has his own take on that; I'm going off in another direction.

It's absolutly hard coded in the psyche of people who work for investment banks to work for, secure and protect their bonuses. This ingrained instinctive behaviour is as predictable as watching a thirsty animal be drawn to water.

Correctly assessing that there would be a fuss over bonuses, partly promulgated by Westminster to deflect criticism of MP's, banks started to adjust pay scales more than 12 months ago. That is, basic pay rates were ramped up by multiples which were not seen even during Big Bang in the eighties. It is now not unusual to find jobs on trading floors paying basic salaries between £200k-350k which eighteen months ago would have been at the £80-150k level.

The quid pro quo here is that there would be less employee dependance on bonuses and therefore a dampening of risk. I'm not so sure about that and anyway, the core issues which led to the crisis have yet to be addressed. The compensation thing is, at best, a red herring and even then it's being spun by the Prime Minister who appears to look but cannot see.

Many banks simply can't believe their good luck. Having driven themselves into brick walls at 70 mph they now find themselves astride the biggest "carry trade," in history. That is, banks have been able to take almost unlimited loans from Central Banks who have in turn purchased many of their toxic assets. Much if not most of the loans have been used to purchase government bonds to allow governments to give their economies some oxygen. This then, gives the banks a guaranteed profit and allows them to rebuild their balance sheets. Without the inconvenience of having to lend to small businesses at anything except draconian rates, and keeping zombie projects and businesses limping along so they don't have to make write offs, the banks can look good, justify the lofty salaries and still have a bonus pool. This is a giant shell game.

The disadvantage is that their fixed costs have gone through the roof, they've hired aggressively to position for an upturn, which is highly suspect, and there have been no meaningful reforms.

Having been through one round of rescuing banks that are, "To big too fail," you might be forgiven for thinking that the solution would be to make them smaller and increase competition. Well, we've made them bigger in fact........ much, much bigger. Little has been done to increase transparency or accountability. Swaps and SIV's are used to hide leverage and true capital structures and nothing has yet been done to regulate over the counter derivatives which must be traded on exchanges, no ifs, no buts.

The bottom line is that banks have used the tools available to them to stabalise and in many cases improve individual compensation from pre crisis levels. This however, is not the right subject to focus on. Shareholders and the taxpayer have not been rewarded with either meaningful reform or protection from future systemic risk and that should be a worry for us all.

Meanwhile, check this out..................... Save Greece!