Bankers going to get their bonuses anyway

[jujumaman]

here

I don't know what to think about this.

We have a friend who works at another bank that has been bailed out by a foreign govt. He was telling us this weekend that he's planning to sue because he may not get his promised bonus of £2m or so, and will "only" end up with his salary which is prob around 250k

I know bonuses are intrinsic to banks' cultures but how - in these god awful times - can £2m bonuses be justified. My friend says his was the only division of his bank which made money last year, so why should he be penalised for others' faults? My feeling is every taxpayer is being penalised for others' faults and someone who is still earning an excellent salary should graciously accept it and be grateful he still has a well-paid job. But my dh tells me I'm being naive and that bankers will carry on getting these vast bonuses just as before. Not convinced by arguments in article I've linked to. Anyone with more knowledge of the city than me like to defend my friend's position (I v much like him personally.

Too be fair though I blame those who made the rules, not those who made the rules work to their advantage.

He should get out, my ex jumped from ANZ before it hit turbulence because they all get tarred with the same brush.

I guess my problem is knowing that my ex knew the shit would hit the fan 18 months before it did (and he was nothing special) I do not believe our great leaders did not know and could have jumped in earlier to prevent some of the losses at least, but no they let the bubble carry on inflating.

Re "Clinton democrats"

I didn't read that article (sorry - it looked very long) but it was probably referring to Clinton administration's deregulation of the credit derivatives market. It was one of the last things he did. The bill was massively lobbied by a Republican senator called Phil Gramm, who then quit the Senate and became a vice-chairman for UBS.

This deregulation set the grounds for derivative instruments with dodgy underlying assets to be bought and sold over the counter with no central authority to monitor the transactions or keep tabs on counterparties.

Deregulation also allowed non-financial institutions to write mortgages, among other things. Meaning, any old Joe could set up shop and give out mortgages, not caring whether or not you could pay it back, because he would in any case package those mortgages and sell them off to another institution. Who would then sell them off to another. Who would then repackage and sell them off to another.

Before I quit work in 2006, I was looking into which industries/companies in the US and UK to short when this credit crisis blew up.

I have to go now but here is what Warren Buffett said in 2002.

It might also help to understand that credit derivatives, and indeed derivatives overall, are a small part of the world of finance to which much hate on this thread seems to be directed at.

sorrento I agree. I saw this coming and I've only got a CSE grade 3 in Maths. But I did get a A+ O'level in Commerce. Business is arithmetics not rocket science. I watched the BBC programme on the subject and he showed a complex formula to explain how money can be made out of the sub-prime market. Trouble with that, the big bosses couldn't read it and everyone else kept stum know that it wasn't good. The forecasters kept giving the bosses Good new as they knew they would be sacked if they gave out the bad new and the real risks.

I'm sorry but why do some of you think that banks losing staff is a bad thing? It happens all the time. You make out that the skills that these workers have like your DHs is hard to come by and so we must move heaven and earth to keep them.

All industries have to manage staff attrition. Banks are no different. Big deal if they leave because they are not paid what they think they are worth. There are plenty of people out there who will happily fill their shoes. Despite what some of you think, the indispensable bank worker is a myth. Nobody is indispensable.

Okay. Let?s just work this through. Let?s say the government and the FSA agree with those people who say no bonuses should be paid to anyone at RBS or Lloyds. As I understand it, that means anyone, from counter-staff, to back office IT, to management accountants, to credit controllers, to fixed income analysts, to FX traders, to corporate financiers, leveraged loans desks, to executive management. All of them get their base salary only and no bonus this year, or quite possibly until the tax payer is paid back in full. What happens? Well, firstly there is saving on remuneration. The Sunday Telegraph estimates it at being about £1 billion at RBS for this year ? given that only a fraction of (according to the Sunday Telegraph) is being paid out in cash and the balance in options and shares, let?s ambitiously say that £500 million is paid out in cash (although I?d guess the figure would be some way lower given the bonus structure they?re looking at). So, as tax payers, we?re up £500 million a year, maybe less. What happens then?

Well, all those people who are either (a) good at what they do or (b) work in areas not directly affected by the credit markets (and which therefore have enhanced the profitability of the bank) decide to see what other work there is. Answer, not much. But for (a) the really good people there certainly will be work, probably at one of the many international institutions not answerable to the British tax payers, be it European, American, Asian or Middle Eastern and for (b) those working in sectors not directly affected by the credit markets and which continue to deliver profitability, there will also certainly be work, probably at one of those same institutions. So now we?re at year end and where are we.

We?ve saved £500 million. That?s nice, although it?s only about 2% of the tax payer?s current exposure to RBS. On the other hand, the best people in divisions which are struggling have left. And the divisions which have been performing have seen people leaving on masse. But we press on regardless, knowing we?re doing the right thing. We?re at the end of the next year, where are we then I wonder?

Well, we?ve now saved £1 billion, hooray! (Although still probably only a tiny fraction of our exposure) But what else? Hmm, it looks like the rest of the bank is staffed with the underperformers in the City. The once profitable departments have been decimated so they?re barely generating any money. And in the credit markets, well, they?re doing even worse than before! But worst of all, ABC Banking Corp over there is now doing rather nicely (staffed by the better people from RBS, Lloyds and Barclays) and beginning to be able to deliver rather nice returns to its shareholders. And what about us, the British tax payer? Hmmm, well we?ve put in £20 billion plus, saved ourselves £1 billion but strangely we?ve been left with the dregs of the City and profitablity is still several years away? if it comes at all. False economies anyone?

Nobody is saying anyone is indispensable simply that if you expect someone to do a particular job, you need to pay them what is broadly the going rate. I don't accept that anyone who is in possession of their faculties would join RBS for remuneration roughly 70% less than their competitors pay.

Even though my DH works at RBS, I'm not that bothered about the current situation. He gets no bonus, he goes elsewhere. Not a big deal for us but it hardly seems a sensible strategy as far as the taxpayer recovering their investment is concerned.

Great post Ceslavie. I would also add that by following that strategy, you have just delivered a wonderfully lucrative business opportunity into the laps of Goldman Sachs et al. They must be licking their lips at the opportunities that all this will hand them.

I have skimmed, but not read properly, this thread, but wanted to ask, as something on the World Service prompted me - what if bonuses were not paid in cash, but rather in shares in the company, which couldn't be cashed in straight away, but had to be held for (say) 3 years? My gut feeling is that that would surely be an incentive for trying to ensure that the business as a whole was successful and remained solvent. Or is that just naive?

One problem with your scenario Cestlavie. There is a world wide recession and therefore the financial markets all over the world are suffering so where exactly will these people go when they are going to have compete with all those losing their jobs too? Certainly not to America, Euorpe, Asia (Japan is seriously struggling and China is going to implode if it not careful) or even the Middle East so where does that leave them?

There is this thing called supply and demand and when you have an over-supply of resource, you can pick and choose and therefore restrict salaries too.

I'm sorry but if an organisation is being propped up by the taxpayer, until it is outperforming and can pay its own way and pay back what it owes, bonuses cannot be justified.

You cannot play at being a fully fledge capitalist at the same time as expecting the taxpayer to bankroll you.

Most banks pay around 30-60% of bonuses in shares which cannot be sold for a period of 3 and sometimes 5 years.

Lehman paid the highest proportion of bonuses in shares of any investment bank and it was 40% owned by staff when it went bust so it didn't seem to help them much.

Ah. Thanks, chocolatedot. I'd suspected it would be more complicated than it first appeared.

Spokette, already this recession is leading to a huge new array of opportunties in financial markets. For example, the clampdown on bonuses is leading to a whole lot of new brokerages being set up where sales / traders get a direct slice of the commission they earn. Elsewhere, the plunge in sterling is already prompting foreign investors to look at picking up UK assets cheaply which will result in fat M&A fees.

In any event, even the biggest pessimist doesn't expect the downturn to outlast the 8-10 years it will take to rebuild RBS.

The share options are tax free after the 3/5 year period so frankly they make a fortune out of those, violin is getting smaller and smaller.

Tax free??? Not in this country they're not.

My DH doesn't even work in banking and if he holds onto his share options for 3 years they are tax free, if he takes the cash they aren't.

He must work for a comany with assets of less than £30m which is eligible for the EMI scheme.

There used to be an NIC tax saving that the company (not the employee) would get if they did share options, but that loophole was closed years ago.

And most banks DO operate these schemes, so the ragers will be pleased to know that many bankers will not only lose out this year, but have already lost in the region of half of last years' bonus (and a quarter of the 2006 bonus too...)

Spokette, as I mentioned, clearly there aren't many jobs around. That being said, there are still a number of institutions hiring selectively and not in small numbers - if you're not convinced (and don't want to scan the FT to be convinced) think how fast pieces of Lehman Bros were snapped up by Barclays and how much they paid individuals and key departments to stay on board. If you pick and choose, the best people and best departments will disappear.

Yes, of course you're right, there certainly are fewer opportunities but don't mistake a crisis in the credit markets for a crisis in all markets or all financial sectors. If you don't believe me, look at how Barclay's investment banking division did outside of the credit markets. In their results today, Barclays announced Barclays Capital made £1.3 billion and there "were record performances in interest rate products, currency products, emerging markets, prime services and commodities." Doesn't sound like those sectors are doing too badly. Personally, I'd quite like RBS to keep making money in those sectors if it's all the same to you. Reduces the tax payer's risk a little.

And yes, absolutely, if you're in debt capital markets or leveraged finance there will be very few opportunities, but you can bet that the best at RBS will be poached by other banks all the same.

No - From Revenue and Customs - Company Share Option Plan (CSOP). The company gives employees the option to buy shares at a future date, but at the current market price. Share options can be worth up to £30,000 at any one time, and no tax is charged on the increase in share value between option and allocation. To qualify for this tax break, options must be held for at least three years.
Dh takes his bonus as share, he benefits three years later, if that's not how it works in banking i'd be very surprised.

You pay CGT on a CSOP when you sell and nothing on an EMI scheme. In any event, all share options granted to employees in banks in the past 5 years are pretty much worthless.

Doesn't work like that in banking I think because it has to be optional (ie employers have to actively opt for it as an alternative to receiving cash value) and not compulsory - if complulsory the company has to pay tax on the value of the option upfront. And then you pay CGT on the gain on disposal at the back end.

At most banks your bonus is given as X% now, and then Y% given in one, two and three years time (typical example would be 50% given in cash now, the rest converted into the equivalent value in shares at today's date with one third of the number of shares being paid out in one year, 1/3 in 2 years, 1/3 in 3 years) - the deferred payments are paid at the actual number of shares X the current market value at that time, and are taxed fully when paid out as normal income tax.

I bet if they looked hard enough at the bonus schemes there are get-out clauses - they were drafted by bloody expensive lawyers, FGS, there MUST be a clause which allows the employer not to pay in extraordinary circumstances.

As for 'people need their bonuses' - not if their firm has been bailed out by the taxpayer, they don't. Paying bonuses with that money is theft, pure and simple.

Louise in Harrogate will still have a job I expect chocolatedot. You seem to forget that if it wasn't for the taxpayer and the government bailing RBS out though, she wouldn't have a job (and neither would your husband either). And if the banks are allowed to fail, there will be more and more quality bankers chasing fewer and fewer jobs. Your husband might be one of the lucky ones. I hope for your sake he is.

I don't for one moment "forget that if it wasn't for the taxpayer and the government bailing RBS out though, she wouldn't have a job (and neither would your husband either)". Without wishing to sound like a broken record, the point is that if the government wants to rebuild RBS and repay taxpayers, they need to retain the staff. They are not going to do this if they pay staff 70% below the going rate.

As it happens, I wish the government hadn't bailed the bank out. My husband would have beenfar better off spending the last 6 months at a firm which offered some sort of future.