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The social cost of runaway bank pay
If only the economy were bouncing back as fast as banking compensation.
Even as the first anniversary of the collapse of Lehman Brothers draws near, bankers and traders are now grabbing a larger share of their institutions’ net revenue than they did during the boom years. The leading U.S. banks are on track so far this year to pay their employees $156 billion — more than in sunny 2006.
Politicians have focused mostly on whether the bonus structure can be changed to discourage bankers from making reckless bets with their shareholders money. But a bolder solution to excessive banking pay is necessary. It starts with a simple question: Are bankers paid too much? The answer is a resounding yes.
Everybody enjoys a bout of cathartic outrage over the pay of reality TV personalities and sports stars. At root, however, we must accept that these salaries are determined by the free market. The same is not true of investment banking.
Even those banks not currently financially dependent on the largesse of the federal government clearly benefit from an implicit guarantee. Governments of every political hue have clearly demonstrated that they are unwilling to let large institutions fail. This enables financial institutions to take risks that a toothpaste manufacturer could not. Bankers took full advantage of this subsidy before the crisis and are starting to do so again.
A report by London-based Smithers & Co., while issued before the crisis, shows how that dynamic continues to work. Smithers found that the median nominal return on equity in banks towered above those in other sectors.
“With higher leverage than other industries they could achieve 20 percent returns compared to an average of 8 percent elsewhere,” Andrew Smithers said in a telephone interview. The downside of the banks’ high returns is high risk, much of which is born by taxpayers. This has become more dangerous since offsetting regulations limiting risks were dismantled.
Aegon raises money to repay the taxpayer
LONDON, Aug 13 (Reuters) – As stock markets rally, a chief executive’s thoughts turn to getting the government off the shareholder register.
The strongest U.S. banks have already shrugged off the TARP, with its tiresome restrictions on executive pay. In Britain, Lloyds Banking Group has toyed with a jumbo capital raising as a way off the hook of the British government’s fiendishly complex asset protection scheme.
In the Netherlands too, the financial sector is looking to shrug off the bonds of state assistance. Dutch insurer Aegon is the latest with a plan to pay back government loans.
However, wriggling out altogether won’t be easy. The Dutch government has structured its rescue operation so that recipients have to pay a hefty tax to get out altogether.
The Dutch state lent Aegon 3 billion euros last October during the worst part of the crisis. When Aegon repays the money it has to pay a 50 percent surcharge, turning 3 billion into 4.5 billion euros. The surcharge doesn’t change whether Aegon keeps the money for one year or 20. And there is no final redemption date on the loan.
This may seem an odd structure as it seems actively to discourage recipients from repaying the money early. But there is some method in The Hague’s madness. Finance is a strategic sector for the Dutch government. It wanted to ensure that financial firms requiring assistance took it for long enough genuinely to repair their balance sheets.
Why is Aegon so keen to repay this perpetual zero coupon capital, one might ask? Well, it is only zero coupon so long as Aegon doesn’t pay its shareholders a dividend. If it does the loan bears interest at 8.5 percent.
Time for Britain to close the GAPS
Britain’s asset protection scheme, invented to protect the banking system, is morphing into a bureaucratic monster. It’s time to kill it off. Though state support is still needed, there are simpler ways for the government to prop up its ailing lenders.
More than seven months after it was conceived, and five months after Royal Bank of Scotland and Lloyds Banking Group signed up to use it, details of the APS have still not been agreed. The sheer task of sifting through 585 billion pounds worth of loans to be insured by the government means any final agreement is months away.
The only winners from this mess are investment banks, accounting firms and the public sector, which has spawned another quango. The Asset Protection Agency is supposed to monitor the assets in the scheme and make sure that the banks — which are on the hook for only 10 percent of losses on insured loans above a “first-loss” portion — do not diddle taxpayers.
The APA has found an acting chief executive in Jeremy Bennett, a former Credit Suisse banker. But Bennett has let it be known he does not want the job on a permanent basis — hardly a ringing endorsement for the APA as it hunts for recruits.
The uncertainty is undermining the banking sector and delaying the economic recovery. Companies that have borrowed from RBS and Lloyds are struggling to renegotiate their debts because the banks want to know which loans will qualify for the scheme. Even once the scheme is up and running, the APA’s involvement could delay decision-making, forcing companies that might otherwise have been saved out of business.
Indeed, the entire concept of the APS as an insurance policy for banks is false, because insurance only makes sense if there is a reasonable chance it will not be claimed. Both Lloyds and RBS are rapidly burning through the 20-plus billion pounds in “first loss” buffers they negotiated in the spring and are likely to start demanding government cash some time next year. This will reveal the real function of the APS, which is for the government to recapitalise RBS and Lloyds through the back door without resorting to full nationalisation.
Enough. The government should scrap the APS and adopt a different approach. One far simpler option would be for the state to promise that it will maintain the capital ratios of RBS and Lloyds at a certain minimum level. As losses on existing loans were realised, the government could inject fresh capital in return for shares. This approach would guarantee the future viability of RBS and Lloyds, while sidestepping the complexity involved in setting up the APS. It would also have a similar effect on the public finances, because the government would only have to put up cash as it was needed.
You are not a loan, RBS ads remind customers
Is the Royal Bank of Scotland softening up the public and politicians ahead of its results on Aug 7th with a series of newspaper advertisements telling us how many loans it is dishing out?
The 70-percent state-owned bank is expected to post a pre-tax profit of 1.2 billion pounds for the first half of the year, according to a Reuters poll of analyst forecasts.
RBS is going to need to show British taxpayers that their investment is doing more than just helping the bank back into the black — particularly following criticisms that along with other banks it has not passed on the money the government has made available to it.
The RBS ads, carried in The Guardian newspaper, personalise the bank’s lending by naming some of the businesses it is supporting.
Along with a full-page letter to RBS shareholders from CEO Stephen Hester, the ads say that businesses have benefited from over 100,000 loans from RBS this year and that the bank is providing more than 5,000 loans to UK businesses every week.
While RBS says it is making 9 billion pounds of net new mortgage lending available to its retail customers over the next 12 months and has committed to making 16 billion pounds of new net lending available to UK businesses over the same period, nowhere does it say how much of this it has lent so far.
Let’s hope the bank has worked out the figures by the time of its results, after all they are bound to be asked.
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The Wall
Much is made of the large bonus’ payed to bankers, because apparently they take huge risks. Do they? I would suggest they take no risk at all as all their actions are underwritten by the tax payer.
I found this: scroll half way down to see the image -sums up what I feel about bankers.
http://www.saatchi-gallery.co.uk/showdow n/index/233180