Commentaries

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The Fed’s phony war on bonuses

Any attack on bank bonuses is going to be a reliable crowd pleaser. So a Federal Reserve proposal to meddle in Wall Street pay would make a good deal of political sense.

But Fed officials are almost certainly aware that this populist flourish will do little to control risk-taking or stabilize the financial system. There are far simpler and more effective ways to clamp down on reckless bank behavior than seeking to micro-manage bank pay structures.

First, the Fed is certain to be outmatched.

In one corner you have a central bank that has been notoriously spineless on regulatory matters. The institution is crammed with officials who have traditionally seen themselves as defenders of the banking system and advocates of laissez faire.

Even some top Fed officials admit they would need a culture shift in order to take on more regulatory responsibility.

There he goes again…

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sarkobamaHo hum! Another G20 summit, another Sarkozy walkout threat.

The French president’s menaces to throw his toys out of his pram have become a regular feature of the run-up to each meeting of the world’s leading economic powers, making them a much debased coinage.  Sarko’s strops are now as routine a precursor to G20 gatherings as the vacuuming of red carpet or the deployment of flower arrangements.

In April, he vowed to storm out of the London G20 summit and refuse to sign the final communique unless France and Germany got their way on binding regulation of all financial markets. He declared victory and dropped the threat before the meeting even began. This time, according to his chief-of-staff, the issue at stake is binding curbs on bankers’ bonuses. It is a strange cause for a conservative politician to be pushing, but with Sarkozy, the emphasis is on politics rather than ideology.

Investment banker admits: we overcharge

On the FT’s letters page, Robert Pickering tackles the familiar theme of bank profits and bonuses. The reason banks pay their employees so much, he argues, is because they make large profits. But why are their profits so large? 

The real marvel is that customers, both corporate and institutional, continue to be willing to pay so much for essentially commoditised services in a ferociously competitive marketplace served by multiple providers, thus generating these outsized profits.

Turner is right to take on swollen banks

So the watchdog can bark after all. Adair Turner, chairman of Britain’s Financial Services Authority, says the financial sector has “swollen beyond its socially useful size”. That is a striking statement for any financial regulator, particularly one that counts promoting London’s financial centre as one of its goals. Identifying the problem, however, is the easy bit. Reversing decades of financial expansion will require global agreement on tough new rules, and the determination to make sure they are consistently enforced.

Turner’s comments, in a debate hosted by Prospect magazine, underscore the extent to which the crisis has upended the received wisdom among policymakers. For years they assumed markets were self-correcting, that financial innovation brought lasting economic benefits, and that regulators should think twice before getting in the way.

Sarkozy walks the walk on bonuses

Nicolas Sarkozy’s plans to reform bank bonuses are out, and for once there appears to be some substance to the French President’s flamboyant style:

Reuters reports:

President Nicolas Sarkozy unveiled new rules for French banks to limit traders’ bonuses on Tuesday and said he would fight to persuade other G20 leaders to adopt the same position.
He said on pay in French banks would now be more closely tied to results.
“From now on, the trader must wait three years to cash in all of their bonus and if in the two years following, their activity loses money, he will not have his bonus,” he said.
Sarkozy, who was speaking after meeting French bankers, said the state would not give mandates to banks who refused to follow the rules and that the head of BNP Paribas had already agreed to put them in place.

Credit Suisse toxic bonus pool not that hot

The 17% return on the Credit Suisse toxic bonus pool so far this year, as reported by the Wall Street Journal, surely soothed hard feelings among bankers who were outraged in December when the bank told 2,000 of them that  bonuses would be linked to the performance of risky leveraged loans and commercial mortgage-backed  securities dumped into a pool called the partner asset facility.

But compared with gains in the U.S. commercial mortgage-backed securities market, it’s not looking too hot. AAA CMBS have moved from around 60 cents at the beginning of the year to about 80 to 85 cents on the dollar while the riskier BBB- tranche of the CMBX is showing gains of around 50% over the last two months, according Richard Parkus at Barclays Capital Deutsche Bank, who gives the government and its TALF and PPIP programs full credit for the gains.

Toxic bonuses, Credit Suisse’s one hit wonder

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Credit SuisseAt the height of the financial crisis, Credit Suisse came up with a clever idea to offload dodgy assets without having to sell them at knock-down prices. It stuffed $5 billion of them into a bonus pool for its bankers.

The Swiss bank’s scheme — which includes leveraged loans and commercial mortgage backed securities — exposed 2,000 senior Credit Suisse bankers to the value of those toxic assets. They were given 70-80 percent of their equity compensation in the form of so-called “partner asset facility” (PAF) units linked to the performance of the assets. The rest of the bonus was in the form of share units.

Come on Massey: man or mouse?

Bank of America’s settlement with the Securities and Exchange Commission sheds some light on the shambolic merger agreement the bank struck with Merrill Lynch last autumn, and how it neglected to inform its own investors of the monster bonuses it then allowed Merrill to carry off.

The word “allowed” is the mot juste here, by the way. The key schedule to the merger agreement (undisclosed by BofA but revealed by the SEC) makes it clear that BofA authorised what was in the end a payola of $3.6 billion in accelerated bonuses to Merrill bankers, 60 per cent of which was paid in cash.

John Thain was right

John Thain has been pilloried for the billions of dollars in bonuses paid to Merrill Lynch employees despite the firm’s $27.6 billion loss for 2008. He has taken the brunt of the criticism because Bank of America has said that the decision to pay $3.6 billion in Merrill bonuses before the end of the year, before the deal closed, was solely Thain’s. The former Merrill CEO has protested, telling the Wall Street Journal in April that “the suggestion Bank of America was not heavily involved in this process, and that I alone made these decisions, is simply not true.”

It turns out that true to his reputation as a straight-arrow Boy Scout, Thain was telling the truth. BofA was not forthcoming on the bonus process, according to the Securities and Exchange Commission, which says that the bank made “false and misleading statements” about bonuses in its joint proxy statement on the deal. The S.E.C.’s complaint, which BofA agreed to settle by paying a $33 million penalty, says:

Crazy money

Wall Street pay is so extreme, so removed from what nearly everyone else thinks is within the boundaries of reasonable compensation, that one can be jaded by the continued talk of sky-high bonuses. Even when the absurdity of the pay practices are pointed out — as it is in a new report from the New York attorney general’s office:

..even a cursory examination of the data suggests that in these challenging economic times, compensation for bank employees has become unmoored from the banks’ financial performance.

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