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

There are encouraging signs that shareholders are becoming more assertive in defending their interests.

The Financial Times reported on Monday that some of Britain’s largest institutional shareholders - including Standard Life, Legal & General and M&G - are working on a plan to bypass investment banks by creating a club to underwrite new issues of equity by small and medium-sized British companies, a move that could save hugely on fees.

What, you may wonder, took them so long?

Second only to taxpayers, investors have been the great patsies of the financial crisis, paying massive costs to a financial services industry which has, to put it mildly, not served them well.

Activist shareholders and investors could be a key force in fixing what is wrong with the financial system. Unleashing their power to act in their own best interests should be a main thrust of new regulation.

The British investor group, reportedly being assisted by mergers and acquisition advisors Lazards, would effectively cut out the middle men by agreeing to take up any unwanted new shares in an offering. This is an idea which if successful could save companies and their owners huge amounts in fees and at the same time deal a blow to investment banking profitability.

Fees charged by banks for equity underwriting in Britain have more or less doubled in the aftermath of the crisis to 3.5-4.0 percent of the amount being raised, with the lions share going to banks rather than to the institutional investors who sub-underwrite.

While banks may argue, and in part be correct, that this is because the past two years have demonstrated the risks of capital market underwriting, it is also patently because there are now fewer banks competing for this business.

To be sure, a club approach is better suited for small and medium sized underwritings and would face huge difficulties for a major share issue involving global investors. But if a test run proves successful it would place pressure on fees for transactions of all sizes.

Even before the crisis hit, fees for investment banking services seemed not to follow with the same fidelity the laws of economics which hold such sway in microchips, steel or even tax preparation.

And it’s not just investors, who consume investment banking products, who have been ill-served. Shareholders in companies, particularly in banks, have provided the capital but have not had their fair share of the fruits.

FOR WHOSE BENEFIT IS THIS ZOO BEING RUN?

That has led to bad decisions, decisions often designed to maximize the benefit to employees at the expense of the shareholders who run disproportionate risk.

Paul Myners, a British Treasury official with special responsibility for financial services, gave an absolutely scathing address last week to the Worshipful Company of International Bankers, assembled for dinner in the Mansion House in the City of London.

Myners, who is reported to be considering holding a competition inquiry into banking fees, took aim at the bonus and compensation culture in the industry.

“It could be argued that some shareholders in banks have been left holding not the ordinary shares they originally purchased, but a new form of subordinated, participating, non-cumulative equity that ranks behind rewards for the senior management, and executives of the firm in which they invested have a prior claim. This cannot be right,” Myners said.

“In case anyone needs reminding, the profits of banks belong to their owners; not their managers and traders.”

I imagine that the bankers were a little less worshipful on their way out then they were on the way in.

I would also argue that what Myners said about banking also holds true - to a lesser extent - in other publicly traded companies, where management is able to extract compensation out of proportion to their likely contribution.

Shareholders, and we are really talking about institutional shareholders, have allowed management to get away with it for years because they thought what they were supposed to be doing was outperforming the market by picking winners.

Much of what passed for skilled investment over the last 20 years has been little more than riding the waves of a debt-fueled economy which seemed capable of providing six to ten percent returns on an unleveraged basis.

Adding value too often meant little more than adding leverage to increase returns. When the current rally ends, as it surely will, investors should take a long look at their long term returns. What they will usually see is that they are poor.

A better strategy for the next 10 years may be to spend as much effort protecting your economic interest in what you own as you do in choosing what to own.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. )

– Alexander Smith is a Reuters columnist. The views expressed are his own –

Investment banks are going to have a lot of explaining to do. After the lows of 2008, and despite the mauling they’ve had from politicians and the public, 2009 is going to be a bumper year for those that lived to tell the tale. The banks have pocketed an incredible $16 billion in fees in the second quarter, according to Thomson Reuters first half data on deals and fee income, released on Friday. Click here for related news.

True, this is down from Q2 2008, when fees were almost $24 billion. But it should not come as a surprise to anyone who has been watching — often in disbelief — the huge amount of capital raising that has been going on in both the equity and bond markets.

Take the bond markets, where total first-half issuance — excluding financials — has already reached $598 billion, outstripping previous records for an entire year. If anyone pretends it has been tough selling these bonds, don’t believe them. The sales teams have been pushing at an open door, with fund managers buying anything they could get their hands on. The fees are good and so far this year, the risk has been limited.

The ones to suffer have been the loan desks, with syndicated lending hitting a 13-year low. But since this market has always been seen as a loss-leader to help sell other products, there are probably fewer tears being shed at the top of the banks involved.

The real star of the show, however, has been equity capital markets. Traditionally the poor cousins to the sexier and higher profile “rainmakers” in mergers and acquisitions, ECM desks have raked in underwriting fees of $7.6 billion in Q2 alone, almost half the industry total. As with bond issues, lead managing or underwriting such deals does carry a risk, but so far this year that has been limited as shareholders have lapped up the rights issues.

There’s no denying that many companies badly needed capital and that the banks have the expertise to get these deals done. The question that will increasingly be asked is whether the fee structure can still be justified. True, rights issues can fail, as underwriters of the 4 billion pound offering by British bank HBOS last year no doubt recall. But with banks charging bigger fees and pricing offerings at larger discounts, the rewards currently outweigh the risks.

One area of investment banking which is still in the doldrums is M&A, despite the best efforts of some of the brightest minds in the game to get dealmaking back on track.

The Thomson Reuters data shows global M&A revenues declined for a third consecutive quarter, with fees on completed deals down some 66 percent on the same period last year at just $3 billion. M&A activity — measured by the value of deals done — is down almost 45 percent so far this year, the lowest figure since 2003 and the sharpest fall since 2001. Click here for related news.

Of course, it is possible that these big fees will be wiped out by continued losses on the toxic assets that some investment banks still have on their balance sheets. But for an industry that was teetering on the brink last autumn, investment banking appears in rude health. With a second backlash already beginning as salaries rise and bonuses come back into fashion, the big investment banks — particularly those which still owe taxpayers money or government shareholders — will need to make sure their lines are well rehearsed.

– At the time of publication Alexander Smith did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.–

(Republished to clarify time period of data in fifth paragraph)

Patriotism, as Dr Johnson once observed, is the last refuge of a scoundrel. So when you hear words like “duty” drip from the lips of a senior executive at Goldman Sachs, you instinctively count the spoons.

You’d be right to do so too. Chief financial officer David Viniar’s observation that Goldman has a duty to repay the money it received last autumn from the U.S. government as part of the Troubled Asset Relief Program may be marginally less cynical than the apercu flung out recently by his boss, Lloyd Blankfein, that investment bankers should be paid less and shouldn’t be rewarded for failure.

But not much less.

And my, do Blankfein’s comments seem cynical in light of the bank’s first quarter results. After all, Goldman accrued 50 percent of its quarterly revenues (yes, that’s revenues) against payments it plans to make to its employees. That is broadly the same proportion that it paid out to them throughout the boom. No question, then, that Goldman’s bankers should do without to pay back the TARP money. With breathtaking cheek, Goldman has also used taxpayers’ cash to bail out Jon Winkelried, one of its wealthiest and most senior executives, after he lost too much money in its own hedge funds. And as for clawing back past rewards that turned out to be excessive — well what about that $70 million you got in 2007, Blankfein?

A SURVIVOR

But no senior Goldmanite ever says anything without a purpose. And so it is with Viniar. Goldman may have been through the wars like its rival investment banks — but it has survived. Because of its controversial hedging strategies (especially the enormous payments received from the taxpayer via AIG) it has thus far weathered the crisis better than rivals. Indeed it has been able to exploit a profitable niche borrowing money cheaply from the Fed and punting it on its own account. In the latest weekly data, for instance, the volume of Goldman’s principal equity program trades was 4.2 times the business it did for customers, according to the NYSE.. So much for serving the client. Meanwhile, along with its fellow survivors it has enjoyed the reduction in competition the slump has brought. It would like to make this reduction permanent.

“Mighty” Goldman is actually quite vulnerable to the changes that have taken place in the banking world. A large chunk of its shares are still held by employees, whose loyalty to the firm is unlikely to extend to bailing it out — even were they financially able to support a firm with $850 billion of liabilities. This is not a sound basis upon which to build a diversified financial services firm.

TARP STRATEGY

By repaying the politically-charged TARP money quickly, Goldman aims to draw a distinction between itself and other large recipients, such as Bank of America and Citigroup, which have no hope of paying back their government cash any time soon. Goldman can then get down to the serious business of lobbying Washington to widen the definition of activities that it is permitted to carry on while remaining a bank holding company. Deploying its $164 billion of resources to buy distressed debts with the financial backing of the U.S. Treasury is merely the start. In the long run, given its limitations, Goldman’s objective must be to persuade the government, in effect, to treat it as a “broker dealer” (a non-bank securities firm which is able to gear its balance sheet to a far higher level than any Fed-regulated institution) while continuing to enjoy the benefit of being a bank, including the yummy cheap funding. It is a sign of investors’ confidence in Goldman’s ability to swing this that it has been able to sell $5 billion of equity, at a mere 5 percent discount, much of it to new investors.

The strategy is an odd mixture of cunning and desperation. After all, Goldman genuinely needs to release itself from the TARP to ensure it can pay employees the vast sums they still expect. That requires a free hand to do what business it likes and to remunerate as it sees fit. Without those two preconditions, the firm could start to break up. Achieving either is not a certainty. Although the administration sees Wall St firms as important financial assets to serve U.S. companies around the globe, the AIG saga — especially the suggestion that Goldman may in effect have got paid twice by AIG because it hedged its counterparty exposure to the insurer by shorting its shares — is political poison. This is something Goldman should clear up before any decisions are taken about its future.

In any event, it would be a historic error to hand Goldman the “get out of jail” card it craves. American taxpayers may regard the repayment of a few billion of TARP money as a good result. But they should be careful what they wish for. They may pay a long-term price for Goldman’s “dutiful” act if it leads to a deal in Washington that results in higher prices for investment banking services and greater moral hazard.