The Great Debate UK

Bankers’ bonuses: the fish stinks from the head

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copelandl- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -

The awful thing about lynch mobs is they so often hang an innocent man, leaving the guilty totally untouched.  In the case of the banks, the danger is acute.  As I have already argued, hedge funds and private equity are being unfairly targeted, especially in Europe. But there is another, even less popular class which is likely to end up in the firing line, for no good reason and with consequences which could be damaging for all of us.

Broadly speaking, the banks pay 6- and 7-figure bonuses to two quite different sorts of people. First, there is a layer of what we might call technocrats: the striped-shirted traders of legend, with their loud voices and even louder dress codes, along with the managers who try to control them, the quants who invent complex trading strategies and price exotic new instruments, and a variety of others with specialised skills. Since they are rewarded in proportion to the profit they generate for their employer, which can usually be measured with considerable accuracy, their bonuses are often very large indeed. The question is: should we treat these professionals who trade on their expertise and who heavily outnumber senior management in the same way as their bosses? Not as far as I can see.

However unpopular these market professionals might be, I can see no reason whatever for intervening to limit the rewards their expertise earns for them. Arguments about “justice”, “fairness” and “ethics” are irrelevant, especially when they rely on judgements about lifestyles.

Banks too big to fail, but not too big to change

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Chris Morling, MD money.co.uk- Chris Morling is managing director of money.co.uk. The opinions expressed are his own. -

With Britain’s biggest banks widely tipped to report record profits this month debate over banking reform rumbles on.  But why have proposed reforms ignored the concerns of the retail banks’ disillusioned customers?

from The Great Debate:

Watch banks for clues on Greece

-- James Saft is a Reuters columnist. The opinions expressed are his own. --

As odd as it sounds, concerns about the effects of a euro zone sovereign crisis on Europe's still poorly capitalized banks may prove to be the tipping point that leads to a swifter bailout of Greece.

While discussion of contagion may seem very 2008, the problems with Greece, which faces a huge fiscal deficit, are becoming tougher for euro zone authorities to leave uninsured.

Glass-Steagall Lite, brewed by Volcker, served by Obama

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Laurence Copeland

- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -

Let me say at the outset that I am far from enthusiastic about either of President Barack Obama’s major policy initiatives: healthcare reform and the banking reform plan announced on Thursday.

from Breakingviews:

Europe’s banks will suffer less from U.S. tax

-- Margaret Doyle and George Hay are Reuters Breakingview columnists. The opinions expressed are their own. --

European banks should suffer less than their American counterparts from the Obama administration’s proposed bank tax. The president’s proposed levy on banks’ wholesale funding requirements will hit all banks with a big presence on Wall Street. But assuming that U.S. banks will be taxed on their worldwide operations, the levy will hurt them more. This could be a major bonus for European investment banks -- as long as their own governments don’t follow suit.

from Breakingviews:

Bank liability levy may not be foolish

A levy on bank liabilities would get the industry squealing - especially if it approached $120 billion. But the Obama administration isn’t crazy to float the idea. A well-crafted tax could help recoup bailout costs while also giving banks an incentive to behave more sensibly. It doesn't have to apply just to the United States, either.

Populism aside, the main rationale for a levy is that the size of a bank's liabilities is a goodish proxy for the risk it poses to the financial system - as well as the benefit it received from the cheap money central banks doled out to offset the credit crunch. It’s reasonable that banks should pay for help from their lenders of last resort.

from Breakingviews:

Four factors to determine bank returns

larsen.jpgWhat is an acceptable return on equity (ROE) for a bank? That question is likely to dominate the debate among executives, investors and regulators in the coming year. After the spectacular losses of the crash, there is no doubt that banks' future returns should be lower than the super-charged profits earned during the credit boom. But if ROEs fall too far, the consequences could be severe.

Returns are already on the way down: just look at Goldman Sachs. Between November 2007 and September 2009, the Wall Street bank's tangible common equity swelled by 74 percent. In 2007, its best-ever year, Goldman earned a 38 percent return on that equity. This year the bank is expected to report the second-highest profit figure in its history. But its ROE is likely to be just half its level of two years ago.

from The Great Debate:

In praise of smaller banks, less volatility

-- James Saft is a Reuters columnist. The opinions expressed are his own. --

If we want a world with safer banks, we need to be prepared for the consequences; lower growth over a painful medium term but the promise of making it up over the long run as we suffer less devastating financial blowups.

A banking system forced to operate with more capital and a higher proportion of safe, liquid assets is one that will shrink and charge more for credit, potentially retarding growth as we transition to a different mix of financing.

from UK News:

Send in questions for city minister Paul Myners

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BRITAIN-MYNERS/

City Minister Paul Myners is among a handful of people with first-hand experience managing the financial crisis over the past year.

On Dec. 16, at 9 a.m. British time, Myners will deliver a speech at an exclusive Thomson Reuters event in London on a proposal the government says will strengthen the City's role as a global investment banking hub. He will also announce a series of policy measures designed to enable an effective resolution for failing firms.

from The Great Debate:

UK bonus tax both cynical and justified

(James Saft is a Reuters columnist. The opinions expressed are his own)

A cynical election maneuver it may well be, but Britain's plan to impose a punitive tax on bonus payments is also reasonably well crafted and in broad terms justified.

Facing a monumental budget deficit and an election in months, British Chancellor Alistair Darling announced a plan to slap a 50 percent payroll tax, payable by banks, on their bonus payments in excess of 25,000 pounds to a given employee.

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