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.
There he goes again…
Ho 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.
The ritual pre-summit drumroll is designed to demonstrate to gullible French voters that their leader is standing up to “les Anglo-Saxons” (the American hyperpower and the perfidious British) and will not hesitate to say “non” in the manner of General Charles de Gaulle. His predecessor, Jacques Chirac, was also fond of these theatrics. But they pall with overuse.
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.
What the FT fails to mention is that, until a year and a half ago, Pickering was chief executive of JPMorgan Cazenove, the London arm of the great House of Morgan. In other words, someone with intimate knowledge of the City of London’s inner workings is saying: we charge too much.
Pickering’s next job will presumably be in a different industry. I wonder what his successor has to say on the matter?
Maybe it’s just conspicuous consumption on the part of companies. If they can afford to pay for the big names, they gain Wall Street credibility. Finance, as practiced today, is nothing but a confidence game propped up by the taxpayer. Now we know what will happen if we start looking to closely at the details. Meltdown!
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.
But after two years of global economic turmoil and with several trillion dollars of public money committed to preventing further panic, the costs of this approach have become all too clear.
What is less certain is what should come in its place. A market economy needs functioning banks and financial markets to intermediate capital flows and allocate credit. This useful activity will involve some useless speculation: it is hard to imagine a regulator — or anyone else — reliably drawing a line between the two.
Dear Mr.Peter,
Your article on Turner!s comments on markets especially from banks and similar financial institutions are worth.
What he said is true to some extents.
As per latest indications,many major western countries and from North American countries,economic revival are giving some encouraging results.
World recession is slowly erasing from our minds.
Now,this is a time for private investors,industralists,and stock market experts,depositors can raise their collars for better returns and for better per capita income,jobs generation,reasonable production,sincere labor participations for their personal welfare as well as contributor to national wealth.
Still,many affected nations can learn from China,India,Brazil and Russia for halting any future damages,panic in real estate and in stock markets.
Now,the word!swallow! will be erased in financial markets.
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.
None of these proposals are particularly new. The idea of ”clawing back” traders’ bonuses when they subsequently lose money was adopted by UBS last November. And most big investment banks were vesting bonuses over a three-year period even before the crisis struck. French banks are probably just relieved that Sarkozy is not putting an absolute cap on bonus payments.
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.
But US CMBS isn’t likely to be a big part of the bonus pool holdings since Credit Suisse dealt mainly in European CMBS. Though credit has been on a tear globally, looks like assets in the rest of the pool still aren’t so hot.
Colleague Alexander Smith has much more here.
Toxic bonuses, Credit Suisse’s one hit wonder
At 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.
Under the PAF scheme, bankers receive semi-annual coupon payments (of LIBOR plus 250 basis points) on the initial award value. And they can look forward to annual cash payments — depending on the performance of the assets — after five years.
This was smart PR by Credit Suisse, which paid bonuses to its senior staff without attracting quite the odium that other banks did. That was because it was felt to have lumbered the bankers with some of the toxic dross they were collectively responsible for originating, rather than leaving it all in the laps of the shareholders.
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.
That’s $2.2 billion of cash out. At BofA’s low point in Febrary, it was a fifth more than the value the deal’s terms placed on the whole of Merrill.
What’s more, what the SEC raises a lot of questions about the testimony BofA boss Ken Lewis gave to Congress on the subject in February.
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:
On November 3,2008, in a joint proxy statement soliciting votes from the shareholders ofboth companies, Bank of America represented that Merrill had agreed not to pay year-end performance bonuses or other discretionary incentive compensation to its executives prior to the closing ofthe merger without Bank of America’s consent. In fact, contrary to the representation in the merger agreement, Bank of America had agreed that Merrill could pay up to $5.8 billion –nearly 12% of the total consideration to be exchanged in the merger — in discretionary year-end and other bonuses to Merrill executives for 2008.
So who at BofA is responsible for hiding the truth about the Merrill bonuses? The credibility of BofA’s managment has completely evaporated as a result of the Merrill acquisition. The questions about whether the bank did adequate due diligence and whether it was bullied by regulators should have been sufficient for the board of Bank of America to oust Ken Lewis as chief executive. The regulatory embarassment over the Merrill bonuses ought to have erased any lingering doubts.
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.
– some may still shrug. Wall Street will be Wall Street.
Yet the madness of the bonus culture is starkly revealed by a chart in the AG’s report that details how the nine banks that received TARP funds paid out bonuses in 2008. The huge amounts of bonus money in some cases dwarfed firms’ profits. And it’s not just the size of the payouts, but how extensive they were.
Government Capping Compensation?
The government is not improving the lot of shareholders, but is escalating its own intrusion into the boardrooms of America.
http://pacificgatepost.blogspot.com/2009 /07/government-capping-compensation.htm l
Sweeping expansion of government incompetence into corporations is an invasion that will not be reversed. In the meantime, there is need for a fix in the process of corporate governance.
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The Wall
No law and regulator can stop determined crooks, criminals and immorality. We have laws against murder for centuries and look how many murders happen each day.
Yes Wall Street elites are determined to impose their criminal ideologies to the world.
Yes Wall Street continue to have a stranglehold on politicians.
Just like the Mafia.
But the Mafia was defeated. How? There is only one way. You completely wipe out their entire personnel from the godfather to the foot solders. That’s what the FBI did, under special laws passed by Congress whose only purpose is to destroy the Mafia.
Will this happen? Of course not. How will the politicians get re-elected then? While only a small number of politicians benefited from the Mafia money, virtually the entire political class can’t make it without Wall Street money. This has been, and will continue to be America until the country is purged.