Tag Archives: Bank Bonus

The Bank Bonus Saga……..

In September 2009, Prime Minister Gordon Brown said that there SHOULD be a “clawback” system for bankers’ pay.

In February 2013, the EU was POISED to cap banker bonuses.

In January 2014,  Prime Minister David Cameron said that a bonus COULD be clawed back but not basic pay.

In November 2014, Mark Carney, the Governor of the Bank of England said that bankers’ pay MAY need to be clawed back.

It would seem that life on the two planets which exclusively orbit only each other….Planet Bank  and Planet Westminster….life moves slowly and is mostly populated by Modal Verbs….a sort of Mañana in suits!

Meanwhile, Investment Bankers continue to gorge themselves…..and all we can do is ….well…..nothing.

The primary reason for the outrageously high payments to the designer-labelled barrow-boy City slickers is the over-simple reward system. The City rewards the “ups” but does not penalise the “downs”. That encourages short-term risk-taking. A trader can make a large bonus from the profit on a deal but when that deal collapses or the share price falls, there are no sanctions.

In the good old days when life was simple, every day was sunny and back doors were left unlocked, a Life-Assurance salesman (remember those?!) would be paid what was known as “indemnity commission” on any contracts that he sold…… (Incidentally, all the large Pensions and Life salesforces were trashed because of mis-selling! The job was then handed to the banks)

If the salesman sold a £100-per-month policy to a client , he earned say £1,000 in “up-front” commission. Over the next twelve months, the client paid his £100 per month and at the end of the year, the salesman’s commission had been paid for. However, if the policy lapsed in the meantime, the commission was “clawed back” pro rata. That simple system discouraged selling policies to high-risk clients who were likely to lapse their policies.

That method of advance payment was called Indemnity Commission…..a sort of loan against future earnings.

With the sophisticated systems that all financial services companies now operate, it would be simple to create a payment system which took into account the often negative consequences of trading. Bonuses could be paid but with a “clawback” period during which the deals which had been made would be monitored.

It is now time for those nice people at the Bank of England, the Financial Conduct Authority’s latest incarnation to bare their teeth and take control.

The argument of having to pay obscene bonuses in order to hire “the best” has been used before. “The best” used to mean the most aggressive and most ambitious and the most likely to take shortcuts.

We now have the opportunity to enter an era where “the best” means the best-qualified, the most knowledgeable and the most professional. NOT the most crooked.

Mind you, the opportunity has already been around for a few years…… Perhaps tomorrow……

Those Teflon Banks.

If the economy was purring along, companies were forming and not going bust, banks were lending properly (not statistically) and the government didn’t regard any GDP growth above zero as an achievement, most of us would not have any problem with those banker salaries and bonuses.

However, it is not sunny, manufacturing is down and we have a government which appears to be indulging in “Government by Accounting” as an increasingly panicked Chancellor justifies Welfare Butchery (in a newly-acquired Estuary English accent), to an assembled band of Morrison’s workers.

Meanwhile, senior bankers continue to pay themselves more than many of the largest and most successful corporations (the ones that make and export stuff).

As Chancellor Gideon might say these days: “Something ain’t right, innit?”

Since the largely-forgotten catastrophe of 2008, the incomes of many bank directors have increased by up to 60%!

So what else has happened to the banking industry since those far-off days? Oh yes………..they’ve had bailouts totaling BILLIONS, they have mis-sold an array of financial products and the Bank of England has handed-over BILLIONS  in Quantitative Easing for a variety of reasons, ranging from the perennial “rebuilding of Balance Sheets” to “Lending to Small and Medium businesses” to “Increased Mortgage Lending” ……(Notice I have placed those increasingly creative QE euphemisms in inverted commas!).

Admittedly, the effect of credit defaults on the banking system leading to those 2008 issues was devastating but the problems were self-inflicted and a direct result of the banks’ reckless leveraging with financial instruments, such as mortgage-backed securities and credit-default swaps.  Virtual money……just like Quantitative Easing.

The final straw should have been the LIBOR-fixing scandal…but the Quantitative Easing meant that the banks could easily afford the fines and legal settlements and still maintain those eye-watering incomes.

That wouldn’t be so scandalous if it were not for the fact that LIBOR is used to determine interest rates on student loans, mortgages and many other lending vehicles — and was “adjusted” in whatever direction benefited the banks’ bottom lines and the  resultant profits upon which many of those bonuses were based.

The question is – what do the banks have to do in order to stop being the government’s poster boys?

They certainly do not have the confidence of the ordinary investor, because , let’s face it, they don’t really NEED savers and depositors because they can either make cash by “adjusting” and then plundering the equities and bond markets or be given it by indulgent and clueless governments. Small businesses are wary of them because they (quite rightly) fear being ripped off.

There will be further scandals, more fraud, more “faux-outrage” from government Ministers but no meaningful legislation, culture change or reorganisation.

They are truly The Untouchables.

Featherbedding the Banks

What the bankers are holding

 

 

A report was published today by the New Economics Foundation about the “hidden subsidies” currently enjoyed by the British banking industry. It is evident that the language, techniques and accounting procedures used within the banking system are such that they obscure both the full extent of the support that banks are accepting from the taxpayer  and the comparatively small amount of “banking skill” that banks executives contribute to their own “profits”.

Since 2008,  known public support for the financial sector has been unprecedented in scale.

Since the Bank of England came to the rescue of Northern Rock in 2007, with a  £25 billion emergency borrowing facility, the sums have grown. Subsequent systemic bank failures meant that the public purse would have to support the whole financial sector, not just individual banks.

Many schemes of different types were introduced. They all  lacked transparency so that the amounts are still hard to summarise.  Together,the schemes  added up to £1.2 trillion of backing to the banking system, equivalent to about 85 per cent of the UK’s national 2009 income.

The UK  scale of intervention, in spite of the vast differences in GDP was comparable to that of the United States.

But is it possible that there is still more to the story?  Research from the Bank of England, the Office of Fair Trading, the Institutional Investors Council and Moneyfacts (which provides independent rate comparisons)  reveals a range of other hidden subsidies to the big banks.

Chancellor George Osborne’s recently announced bank levy is minuscule in comparison to all the bank subsidies which we do not know about. The Chancellor was pulling a very small rabbit from a very large hat. The Independent Commission on Banking has yet to publish a complete list of the de facto hidden subsidies currently being enjoyed by the banks. What we know so far amounts to no more than scratching the surface.

Increased scrutiny of the financial system in the wake of the banking crisis has shed light on a number of practices previously taken for granted, which now might be viewed in a different light. The sheer complexity of modern banking (itself one of the conditions that brought on the crisis) has worked to shield the sector from difficult questions. But with the dust of public interventions now settling, a number of anomalies are emerging.

The ‘Too Big to Fail’ subsidy. Having concluded that our major banks are “too big to fail”, the government now  provides a public guarantee. That effectively is insurance against a bank going bust. In business terms, this gives the banks a huge commercial advantage over other organisations. All commercial enterprises need to borrow money and the banks are no exception. However, they can borrow money much more cheaply than any other type of company because of the fact that the public is guaranteeing anything that they borrow.

Answers from leading auditors questioned by the Treasury Select Committee confirm this. The hidden subsidies save the banks a large amount of money – at least £30 billion annually– and thus helps them generate “unearned” profits. To put it simply, they save billions on the cost of their own borrowing and so make MUCH  MORE profit that they would have done without that taxpayers guarantee.

It also means that when the banks pay bonuses to senior staff for “performance”  as well as dividends to institutional investors, the rewards of  the public’s  “insurance”  are headed in the wrong direction. They should be coming back to the taxpayer.

 

The quantitative easing windfall subsidy.  When it was decided that the economy needed more liquidity (cash), the Bank of England pumped money in using the technique called “quantitative easing”. Many people refer to this as “printing money”. However, there is slightly more finesse within the system than a bit of  pressure applied to  a  printing press button .

Take Government Gilts, for instance.(Gilts are bonds issued by governments and they pay a fixed ate of interest twice a year. Governments use Gilts to raise money)

The Bank of England  is not permitted to buy UK  gilts directly from the Government as this is considered to be “monetising” government debt, or in other words directly funding government expenditure through “creating money” .

Instead the Debt Management Office first sells the gilts to banks and other investors and then the Bank of England buys them back from the banks at a higher price, with money that it has “created” . The bankers then reward themselves for completing these “deals.”

 That gives the banks “new” money plus a cut of every trade.

 

The ‘make the customer pay’ subsidy. Thanks to an apparent lack of forward planning (and understanding), the government has created a paradox which really has placed the banks “between a rock and a hard place”. They have been given two contradictory goals by the government. The first is to lend money (which is what caused the majority of their problems in the first place) and the second is to hold onto their money so that they can rebuild their capital.

The banks could manage this problem in any number of ways. However, they have taken the easy option which is to charge more when they lend and at the same time, pay less to their own savers and investors. The difference between what the banks charge their borrowers and pay their savers is known as the “interest rate spread” or margin.

So the government, by way of using the taxpayer to guarantee that banks cannot fail to repay their debts has meant that banks can now “buy-in” money cheaply and resell it at a vast profit. That also means that they don’t have to pay their private savers very much at all. Technically, they are punishing the very people who are subsidising them .

As a matter of interest, there was a time when banks and building societies had an operating margin  (Difference between what they charged  borrowers and what they paid investors) of 4%.That means that in today’s climate,  borrowers could be charged say 10% and savers could be paid 6%. That excludes mortgagors whose borrowings are secured – their rates could easily be of the order of 3% .

Although the banks have taken the “screw the client”option, they could  speed-up their recapitalisation through eliminating bonus payments and dividends. The banks’ hidden subsidy created through overcharging their customers is estimated at £2.5 billion per year.

 

The Fake Money Subsidy. The nature of money is such that when a bank grants  a loan, it does not have the money. It is allowed to create money to hand-over and makes a profit from the interest rate which it charges. That is another form of subsidy – as the government has  effectively given banks another  licence to print money. Money is “lent into existence”. The old days when banks only lent money left by savers have gone.

So if this is considered another subsidy, it is worth tens of billions per year.

The whole essence of the contemporary monetary system is the  creation of money out of nothing, through the medium of lending.

The government and the taxpayer are no longer dealing with individual banks. We are dealing with a very powerful cartel which not-only negotiates as a single organism but has left the very concept of “competition” far behind. Furthermore,  if you study the various interest rate charges and products, you may be forgiven for assuming  that price-fixing appears to be taking place.

The UK retail banking industry is unusually concentrated. Not only do the largest five mortgage lenders have a market share of 82%  but the range of providers was much diminished by the demutualisations of the late 1990s. This concentration of the market has all but killed competition.

 

Mortgages: Current mortgage interest rates, compared to the bank base rate and the rates at which banks “buy in” money suggest that the banks are profiting greatly from their mortgage clients.

Using figures from Moneyfacts on the average rates offered for the benchmark two year tracker mortgage since June 2007, we can see that rates have fallen from 6 per cent to 3.5 per cent.  But the Bank of England base rate has fallen by much more – from 5.5 per cent to 0.5 per cent. The mortgage interest rate spread has therefore increased from around 0.5 per cent to 3 per cent.

Some readjustment in mortgage pricing was necessary, but even taking a conservative view of long-term spreads as being around 2 per cent, the increase to 3 per cent since the crash represents additional interest revenue of around £1.6 billion per year from 2009 gross lending and a further £1.5 billion per year from 2010 gross lending.

Increasing the margin on new mortgages has certainly been a factor in bolstering bank profits since the crash. Furthermore, despite the reductions in base rates and wholesale funding costs, key lending rates have hardly moved since the crash.

It seems therefore that the burden of “rebuilding” bank balance sheets is being borne by bank customers and certainly NOT  by bank shareholders and their executives.

 

Sneaky Fees: It is not only in retail banking that the customer is getting a raw deal. A study by the Office of Fair Trading (OFT) into the equity underwriting market, published in January 2011, found that “the market lacks effective competition on price”. This  followed an earlier report by the Institutional Investor Council (IIC) which tracked how total fees for raising equity capital, using rights issues, had increased over the past decade.

It has risen from 2% per cent to as much as 4%. Within this, the amount kept by the organising investment banks in their roles as broker, underwriter and adviserhad risen threefold from 0.75 per cent to 2.25 per cent!   There appears to be little justification for bank fees trebling and would explain for instance why a bank such as  Barclays Capital (the investment arm of the bank is now generating more profit than its retail arm)

Investment banks have collected over £1billion in  “excess” fees and over 90% of that has been generated since the 2008 crash. 

Banking is the only business which, when in trouble increases its prices. It can do this because it has a captive audience.

 It therefore seems a nonsense for Government to state that it would be desirable for London to remain “competitive”  as a global financial centre.

There is nothing competitive about London except bank bonuses. Competition used to be viewed as being based on the cost to the customer and not the income of the company’s officers.

 

And so…….The really frightening statistic is that notes and coins represent only about 3% of the total money supply. The rest is created as new credit.

According to analysts. estimates, the largest four UK banks are set to report profits before tax for 2010 of around £22 billion between them. By 2012 this is expected to more than double to over £45 billion, as analysts predict a return to “business as usual” for Britain’s large banks.

The same banks had total staff costs for 2009 of around £37 billion, with over £7 billion being paid out in the form of bonuses that were concentrated amongst their elite.

The hidden subsidies to UK banks from taxpayers and bank customers are very similar in scale to current bank profits.

This indicates that far from being efficient, the UK banking sector is deficient and that overall levels of dividends and remuneration, including bonuses are far higher than is economically justified.

Diamond is forever

” These stiffs earn £65K. Wooooo! I’m so scared!!”

Barclays boss, Bob Diamond,  was today “grilled” by the Treasury Select Committee  and once again showed that he is slicker than frozen catshit on wet ice.

He, of course was not the ideal banker to be interviewed on certain topics, especially as Barclays did not source any funds from the British government during the banking crisis. Instead, they borrowed cash primarily from the Qatar Investment Authority (QIA) which was an existing Barclays shareholder.  Barclays had also held talks with  the Libyan Investment Authority and Russia’s VTB and Sberbank banking groups.

At the inquiry Diamond said (quite rightly), “No bank should ever be a burden on the taxpayer.” As someone who had run  Barclays Capital for 14 years, prior to being given the reins to the Barclays Retail operation, he had known where to source money when times became tough for Barclays in 2008.  He’d done it without any UK-focused sentimentality, whereas the rest of the industry ran to the Treasury for handouts. His exact quote: “Banks should be allowed to fail…It’s not okay for taxpayers to have to bail out banks.”

He was quite right. If a bank failed, it would be bought by another bank. Hopefully one with a competent Board and management.

Inevitably, that old chestnut, the banker bonus  reared its ugly head during rather tense exchanges but realistically, Diamond knows that he can earn what he damn-well pleases. Perhaps he wasn’t the ideal banker to defend bonuses. He has foregone his bonus for the last two years but there is little doubt that he can easily afford to do so. In 2007, he earned £21 million.

Barclays is not a government charity basket-case,  unlike the Royal Bank of Scotland whose CEO, Stephen Hester is set for a £2.5 million bonus. (As the government owns 83% of RBS shares, that will, in effect make Hester the UK’s highest paid Civil Servant).

Diamond expressed his belief in the Retail-Investment banking model, saying that the arrangement provided stability and was a “great starting position”. Many MPs believe that banks should be broken up  so that a clear distinction can be drawn between Retail (personal banking) and Investment (so-called Casino banking). In reality, they have always been separate operations and really only come together for accounting purposes.

It has taken the government a long time to come to the conclusion that they are totally impotent as far as banker bonuses are concerned and that they have effectively been told by the banks to “butt-out“.  As a concession though, the banks are expected to say that they are committed to lend more to small businesses. It remains to be seen whether this happens.

The banking industry claims that it is lending, whereas the business sector says that banks are not lending enough and when they do lend, it is at exorbitant interest rates with  borrowers having to jump through a series of bank-designed fiery hoops before banks do deign to lend.

However, Diamond said that demand for commercial loans had subsided.

Once again, Diamond demonstrated that our MPs, who are a motley crew of ex-lawyers, academics, union men and local councillors are no match for the denizens which swim the murky waters of the world’s banking system

PREVIOUS BOB DIAMOND

CHANCELLOR GEORGE OSBORNE’S VIEW ON BONUSES? BUSINESS AS USUAL

Vince Cable

Have you noticed how quiet Vince Cable is these days? He used to be the most vocal politician on the subject of both “Casino Banking” and the banker bonus. It seems that after being told never again to crap in the Coalition’s cosy little nest, he has had his wrist slapped and been muzzled.