Woolly Boolly Willy

Oh dear, Our Willy has some ideas about banks and bonuses.

Now as the global economy stabilises and the IMF lifts its growth forecasts for 2010, conservative voices are calling for a so-called exit strategy – freezing the stimulus and beginning a programme of retrenchment to allow the private sector to resume its starring role and avert any mild danger of inflation. This is one area where Gordon Brown speaks with conviction. He told the finance ministers and central bankers yesterday that it would be ludicrous to stop the stimulus before it is half- way through and only months into stabilisation. He is right.

Hmm, I dunno, you know? If given the choice between a newspaper columnist and a votestealer on the one side and a Nobel Laureate for economics on the other, who should we believe on a technical matter of economics? Willy and Gordo? Or Gary Becker? Becker is saying that low interest rates, quantitative easing and all the other monetary tricks have done their work. The \”stimulus\” is in fact nothing of the sort, it\’s simply a march of the State into yet more of the private sector economy.

It\’s true that other Nobel Laureates (Stiglitz, Krugman) are on the pro-stimulus side, but we should be considering their arguments, no, not taking Willy\’s endorsement of one side or the other as the last word on the matter?

Right-of-centre European politicians – President Sarkozy and his finance minister, Christine Lagarde, supported by the right-of-centre Swedish prime minister, who is currently president of the EU, and German Christian Democrats

Err, it\’s a little difficult to call all of those \”right of centre\” on matters economic. Statists the lot of them, wouldn\’t know a free market if it came up and bit them on the bottom. A little bit of rhetorical legerdemain from Mr. Hutton there.

The bonus culture works on a London/New York axis, with financiers having a sense of entitlement to astonishing earnings that have no economic justification in terms of value creation or relation to profitability. In the US, for example, Merrill Lynch lost $27bn in 2008: 700 employees received bonuses in excess of $1m.

Err, yes….for not all areas of the bank lost money. There were large areas of it that made very decent amounts of dosh: it\’s in those areas that the bonuses were paid. Imagine, for example, that a bank had a uranium trading operation (as Lehman in fact did) or an ammonium perrhenate trading one (as several do…APR is mixed with platinum to make the cracking catalysts for oil refineries. It\’s, you\’ll not be surpised to find at prices of $5,000 a kg or so, something that is recycled and traded.). The people working in them are movable not between those specialties and say, mortgage bond trading, but between the APR trading rooms of the bank they are at and the APR trading rooms of other banks. If they make a decent profit at their work why shouldn\’t the bank award them a bonus to stop them moving, along with the profit they might make next year, to the bank down the street?

Willy is making the mistake to think that \”bankers\” are just \”bankers\” while the reality is that there are a myriad of trades, occupations and specialties which exist within those companies we call \”banks\”.

AIG, the world\’s biggest insurance company, paid 377 members of the financial products division that lost $40.5bn (provoking AIG\’s bail-out by the US government) $220m in bonuses.

Yes, and we know about that one. Those bonuses were offered so that the people who actually had half a chance of doing so would stay and help to unravel the books. Anyone really want hundreds of billions of derivatives contracts to be unravelled and settled by the tea boy, who would have been the only person left if bonuses were not on offer?

Here\’s the bit that Willy\’s not told you:

After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.

You and I have never met or spoken to each other, so I’d like to tell you about myself. I was raised by schoolteachers working multiple jobs in a world of closing steel mills. My hard work earned me acceptance to M.I.T., and the institute’s generous financial aid enabled me to attend. I had fulfilled my American dream.

I started at this company in 1998 as an equity trader, became the head of equity and commodity trading and, a couple of years before A.I.G.’s meltdown last September, was named the head of business development for commodities. Over this period the equity and commodity units were consistently profitable — in most years generating net profits of well over $100 million. Most recently, during the dismantling of A.I.G.-F.P., I was an integral player in the pending sale of its well-regarded commodity index business to UBS. As you know, business unit sales like this are crucial to A.I.G.’s effort to repay the American taxpayer.

Yup….that was one of the people offered those appalling, horrendous, bonuses by AIG FP. He worked for a year, for $1, to help in clearing up a mess that was none of his making, so as to reduce the losses to the taxpayers. The promise made to him was that, if he were successful in minimising those losses, his $1 would be topped up by a bonus.

I think we can officially say now that, as Obnoxio would suggest, that Will Hutton is a weapons grade cock end.

Witness the £30m guaranteed bonus Barclays has offered to a team of investment bankers it is poaching.

What on earth is wrong with a guaranteed bonus? It\’s exactly the opposite of what everyone is complaining about!

Here\’s the story: bankers get to make one way bets with other people\’s money. If they win on their highly leveraged and very risky bets then they get huge bonuses. If they lose the shareholders or taxpayers pick up the bill. OK, now say we\’ve a guaranteed bonus, that is, we\’ll pay you this much if you\’re still coming into the office in 365 days time. Does this give the banker the same incentive to take hugely risky trades? Err, no actually, it provides the opposite incentive. He gets the money whichever way so he\’s not being encouraged to take those one way bets. So if the opposition to the bonus culture is being driven by a concern for the incentives to take risks (as we are told it is) then everyone should be in favour of guaranteed bonuses because they remove that incentive.

That Willy is still against them shows either that he\’s against such sums for other reasons or that he\’s not acute enough to spot the point. Probably both in fact.

And 90% of investment bank profits is not directed to strengthen balance sheets or to shareholders in dividends, nor to customers in lower fees, nor to taxpayers – it goes as bankers\’ bonuses.

Snigger: profits are what you make after you\’ve paid your staff Willy. If bonuses are part of staff compensation (which, however much you might not like it, they are in banking) then you cannot include bonus payments as being part of the profits of banks. Anyway, the number is wrong. It is not true that 90% of gross profits are directed to staff bonuses. It is that the amount paid in bonuses often amounts to 90% of the sum reported as net profits. To clarify further: a bank reports £100 in profits and £90 in bonus payments. We are not therefore saying that £90 of the £100 profit is being paid out in bonuses. Rather, that there\’s £100 in profit over here and over there is the £90 that we\’ve already paid out in bonuses before we calculate that £100 profit.

The threat of an exodus of bankers is nonsense. No bank trading outside the G20 in financial centres such as Dubai, Hong Kong or Dublin could muster the capital or scale to pay mega bonuses.

Gosh, that\’s an interesting assertion. Back in the 1950s/60s, the Americans made a similar one. No one would trade US $ bonds outside the US because, well, there just aren\’t that many dollars, nor people who want to invest in dollars, outside the US. So we can slap a witholding tax on the interest from US $ bonds then and it\’ll make no difference. That\’s how the Eurobond market started, that huge market centered upon London. It is certainly true that Dublin or Dubai won\’t grow huge banks next year: but an awful lot of things can happen over decades given the right (or wrong) incentives.

5 comments on “Woolly Boolly Willy

  1. Another solution to the bonus culture
    would be to impose no limits, but make them symmetric, i.e. whatever percentage and upper limits (if any) the trader gets of any profit they make, they have same liability for any losses. I would also remove the option of bankruptcy for any trader suffering such losses.

    Finally, beyond some amount of deposit insurance and protection for underlying transaction processing operations (BACS etc), government (i.e. the taxpayer) should be constitutionally banned from providing any support for a failing bank.

  2. Given the recent reneging on subordinate debt by RBS, Northern Rock, et al, it’s pretty clear that the taxpayer guarantees are worth a lot less than people thought.

  3. Well, let’s be marxist. Any profit made by a company not paid to the worker who produced it is surplus value, and thus exploitation of the worker. So, in the socialist scheme of things these people shouldn’t just be getting bonuses, they should be getting much more than that, every penny that they made for the bank in fact.

    The Huttons and Murphys and so on are demanding that the workers have even more of their surplus value expropriated. They are thus greater exploiters than the capitalists. Are they not?

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