Well done, lads

From Which4U:

Bonus payments for UK workers rose by 3% in the 2011/12 financial year, with those in the finance sector pocketing the most. The amount paid in bonuses reached £37 billion, an average of around £1,400 per worker, said the Office of National Statistics (ONS).

Of this £37 billion, over a third – £13 billion – went to employees in the finance and insurance industry, a 9% fall from the previous year. This equates to roughly £12,000 per employee, from £13,500 the year before.

Though bonuses remain significantly lower than the levels seen before the onset of the financial crisis, employees in finance and insurance continue to do well in a stagnant economy.

I'm not even sure that the last paragraph is true. A third of £37 billion is £12 billion, and before the 'financial crisis', bonuses were running at about £9 billion a year

Fun with JP Morgan

There are plenty of stories about JP Morgan bank losing £2 billion on some stupid bet, but the interesing question is, who took the other side? That money doesn't just disappear into thin air.

According to CNBC:

... as a trader for JPMorgan in London was selling piles of insurance on corporate debt, figuring that the economy was on the upswing, a mutual fund elsewhere at the bank was taking the other side of the bet.

The trade contributed to more than $2 billion in losses for JPMorgan, which disclosed the loss last week. The hedge funds, including Blue Mountain Capital and Blue Crest, have profited handsomely thus far as the markets move against JPMorgan.

But perhaps one of the most surprising takers of the JPMorgan trade was a mutual fund run out of a completely different part of the bank. The bank’s Strategic Income Opportunities Fund, which holds about $13 billion in client money, owns about $380 million worth of insurance identical to the kind the “London whale” was selling, according to regulatory filings and people with knowledge of the trade. It is unclear how much the fund made.

The good news is, whoever takes the winning side of the bet gets a big bonus and whoever takes the losing side gets a smaller bonus, or none at all. So it's in the interest of bank employees and hedge fund managers, taken collectively, to make as many stupendously large bets with other people's money as possible on anything that looks even vaguely plausible; whatever happens, their overall wealth increases and everybody else's overall wealth goes down. But I am sure that all these traders and experts are far too honourable (or too stupid) to ever cook up such a scheme.

Will Hutton speaks with forked tongue: shock.

Will Hutton in The Guardian on the subject of Stephen Hester's £1 million salary + £1 million bonus for meeting targets at the Royal Bank of Scotland:

There is no inbuilt sense of proportionality in pay: no determined effort to link exceptional reward with exceptional contribution; no rigorous effort to separate out the luck of being in the right place at the right time from genuine effort and innovation; no mechanism to require executives to have some stake at risk, or some "skin in the game" to use Warren Buffett's phrase; and a process in which the guiding principle is to give in to empty threats from executive teams.

It is a one-way street in which executives in any circumstances always get more bucks or mega-bucks – never fewer bucks.

And the by-line reads: Will Hutton chaired a government inquiry into top pay in the public sector, published in 2011

Now, Hester turned down the bonus, but a base salary of £1 million is still an outrageous sum of money for just running what is effectively a government department, there is no particular skill involved. To be fair to Hester, RBS is a huge organisation (150,000 employees) and while he was in charge, it appears to have made modest profits and hasn't gone bankrupt or anything.

So let's look at Will Hutton's record shall we?

He was paid (or paid himself) around £180,000 a year for running a quango called The Work Foundation (formerly The Industrial Society), which had 43 employees and went horribly bankrupt in 2010.

A former chief executive of Barclays Bank spills the beans...

From a splendid article which appeared in the FT in late 2009

There are three types of bankers: those that can count, and those that can’t...

Observers of financial services saw unbelievable prosperity and apparently immense value added [in the years leading up to the crash]. Yet two years later the whole industry was bankrupt. A simple reason underlies this: any industry that pays out in cash colossal accounting profits that are largely imaginary will go bust quickly. Not only has the industry – and by extension societies that depend on it – been spending money that is no longer there, it has been giving away money that it only imagined it had in the first place. Worse, it seems to want to do it all again.

What were the sources of this imaginary wealth? First, spreads on credit that took no account of default probabilities (bankers have been doing this for centuries, but not on this scale). Second, unrealised mark-to-market profits on the trading book, especially in illiquid instruments. Third, profits conjured up by taking the net present value of streams of income stretching into the future, on derivative issuance for example.

In the last two of these the bank was not receiving any income, merely “booking revenues”. How could they pay this non-existent wealth out in cash to their employees? Because they had no measure of cash flow to tell them they were idiots, and because everyone else was doing it. Paying out 50 per cent of revenues to staff had become the rule, even when the “revenues” did not actually consist of money.

Via HPC, who got it from a link from a link this article, which went back to this article, which in turn links to the one in the FT.

Hesta La Vista, Bonus

I felt like a million dollars. So I took it.

Lord Turner is half right

From the BBC:

Bank bonuses contributed to the financial crisis but were not its main cause, head of the Financial Services Authority Lord Turner has said. The chairman of the City watchdog said there was a need to "move beyond the demonisation of overpaid traders". Instead he said "ill-designed policy" had been "a more powerful force for harm than individual greed or error"...

Lord Turner welcomed Basel III rules agreed earlier this month which force banks to increase the amount of capital they hold - including raising the core capital ratio to 7%. The rules have been designed to try to prevent a repeat of the heady credit-fuelled boom seen in the last decade.

Agreed that excessive bonuses are primarily the shareholders' problem.

But he's half wrong, of course - these ridiculously low capital ratios were a symptom of and not the cause of the 'financial crisis'.

The real cause was nothing more complicated that the fact that vast numbers of people have been tricked into believing that buying land or housing and watching its potential selling price increase could make them wealthier. Of course it is possible for small numbers of people to win out from Ponzi schemes like this, but overall we always end up worse off when the bubble bursts.

But it appears that the banks (and their bondholders) bought into the dream that the land price bubble represented real wealth and were prepared to lend ever higher amounts of money secured on it. So it's not so much that they didn't have enough 'core capital', what they had was too many liabilities ('non core capital' i.e. bonds).

In any event, the fact that banks had very low capital ratios in the past can easily be fixed retrospectively by allowing normal market forces and insolvency rules to take over, which ultimately lead to some form of debt-for-equity swap. We're not talking huge amounts either - to get from a core capital ratio of 3% to 7%, all the bank has to do is convert just over 4% of its liabilities into equity.

Does anybody have any suggestions on how we could tweak the tax system to encourage the real economy and dampen house price bubbles?

Rather depressing

According to a BPIX Poll in the Mail on Sunday, when asked "What would make you more likely to vote Tory?", the responses were:

Tougher on crime 45%
Tougher on immigration 45%
Cut bankers' bonuses 44%
Offer tax cuts 31%
Cut public spending 22%

Let us assume that these are factors that would make it more likely for people to vote for any party, and that, being the Mail on Sunday, crime and immigration are always going to be top of the list, let's work backwards from the bottom...

It appears that the LibLabConsensus have won the argument on public spending by perpetrating the Big Fat Lie that all government spending benefits the public at large, as a matter of fact at least a quarter of it is wasted on quangos, chronic overspend and propping up the banking system.

But they know perfectly well that people associate 'public spending' with useful stuff like teachers or nurses (which may or may not be better provided privately, separate topic) even though the total salaries of those two groups are barely five per cent of total government spending. Ditto tax cuts, if people knew what their taxes were being spent on they wouldn't be quite so placid.

But it's the bankers' bonus bashing that worries me. Sure, it's probably true to say that a large part of what they were doing has no social value, but what the bankers have achieved is a trebling in house prices since the mid 1990s. Let's assume that total bankers' bonuses over the past ten years were about £7 billion per year (of which a large but unknown part had nothing to do with the house price bubble) and

a) Total household mortgage indebtedness increased by about £70 billion per year, that's only a ten per cent commission, or

b) If the average UK house price went up from £80,000 to £180,000, that's an average annual increase in the 'value' of all privately owned UK housing of £200 billion a year, making it only a three per cent commission.

And as ever, the general public does not know what it wants. The Home-Owner-Ist majority are happy with their £200 billion a year unearned paper capital gains (and don't want to relinquish a penny of it) but look down on the bankers who do the actual grubby work of lying and cheating to create the bubble.

If people were serious about reducing bankers' bonuses, what they should be calling for is an end to the whole too-big-to-fail mentality, but the flipside of ending bank bailouts is of course that mortgage lending will have to be reduced significantly (as Andrew Ellson explained on Saturday. He might be a Home-Owner-Ist but at least he's accurate on the facts).

So ... the real question is: is the Home-Owner-Ist majority prepared to accept falling house prices (which benefit future generations) as the inevitable cost of the only policy that will put an end to these bonuses?

Answers on a postcard postage stamp.

Questions, questions ...

From The Metro:

"Women earned an average of £2,875 in annual performance-related pay compared to £14,554 for men [in the financial sector]."

OK. Let's imagine women in the financial sector were paid an extra £5,840 gross and men paid £5,840 less to even things up.

Your starter for ten: How much of that extra £4,000-odd after tax would they just spend on uncomfortable shoes?

Bonus question: By how much would women married to men working in the financial sector have to reduce their spending on such fripperies?

The bankers' bonus culture - a complete red herring.

They're all wading in now, even the Tories, muttering darkly about the 'bonus culture' having got the banks into a mess.

*rant*

Which is complete tripe of course - these bonuses were a symptom of the credit bubble and not the cause. It must be quite clear to anybody that the whole New Labour economic miracle and G-d knows how many consecutive-quarters-of-economic -growth since 1997 (cheerfully adding on a dozen that happened under the previous government, of course) were based on the house price bubble (which makes home-owners feel wealthier and allows them to spend in excess of their incomes by constantly re-mortgaging), and that the property price bubble is merely the flip-side of the credit bubble (you can't have one without the other).

So Labour wanted there to be a bubble; and the gullible British public wanted there to be a bubble - have we already forgotten all the smug conversations about how much our houses had gone up in value?

Both bubbles are themselves huge con-tricks, of course, but somebody somewhere has to do the conning. On the property-bubble side we had endless property shows on the telly, endless newspaper articles ramping property and the constant drip-drip saying that you have to 'get on the ladder' and the way that home-owners look down on tenants (while cheerfully piling into buy-to-let...). On the other side we had the Chinese (and others) selling us cheap goods and lending the proceeds back to UK banks; we had the Bank of England keeping base rates artificially low; we had the FSA turning a wilfully blind eye to reckless lending; and of course we had the whizz-kids at the banks performing alchemy whereby self-certified and 125% loans were securitised and so on.

These whizz-kids were just doing the government's dirty work for them - the government and the gullible British public wanted them to do this in order to maintain the illusion that the paper profits we were all earning were somehow a real and just reward merely for owning a home.

Sure, these whizz-kids paid themselves handsomely at their shareholders' expense, but even the shareholders believed the hype, and, like victims of all good con-tricks, they wanted to believe the hype - now it's all gone tits up they claim that they were completely hoodwinked, or in the case of many Northern Rock shareholders, believe that the government brought the bank down and now want compensation.

I am not ashamed to say that I also made handsome pile of money from the property market in the ten years 1998 - 2008 (and am now renting again, I'll sit this one out, thanks); the opportunity was there, so why shouldn't I take it? Neither I nor the whizz-kids make the rules, so don't blame us for cashing in*. Blame yourselves for going along with the crazy Ponzi scheme that is the UK housing 'market'.

Just sayin', is all.

*/rant*

* The same applies to George Soros on White Wednesday, or indeed the millions who stay on the dole because The Rules tell them there is no point working unless they can earn something approaching the median wage. Don't blame George Soros, blame whomever it was who took us into the ERM; don't blame the scroungers (as easy a target as they may be), blame whomever it was who invented means testing.

Readers' letters of the day

From The FT:

Sir, It is indeed a paradox that the Church feels the need for professional investment advice (Letters, January 21), since this is the one area where even an atheist might well believe that decisions are best left in the hands of God.

Investment at random for a large fund offers full diversification, has very low costs and protects against the sort of expert knowledge and skill which led professionals to invest with Bernard Madoff.

M.R. Weale, London, UK

And, from The Metro:

I believe the bonuses being paid to Northern Rock staff are a good idea. They are necessary to recruit, retain and motivate the right calibre of staff to ensure that NR is profitable and can therefore repay the loans made by taxpayers.

PS I'm not a NR employee.

J Fisher, Hertfordshire, UK.

A Times article puts this in perspective - gross bonuses approx. £9 million, post-tax cost approx £5 million; "The payments were being made because the bank had more than met its target of repaying 25 per cent of the £26.9 billion lent to it last year by the Government, a Rock spokeswoman said. In fact, £15.4 billion had been repaid." Paying out £5 million in return for speeding up repayments to the tune of £9 billion seems like a good deal to me. I suppose it would be nice if there were some sort of cap so that the bonuses do not unduly reward the senior people who created the mess in the first place, but hey.

"Against high bonuses"

Tim W's musings have got a good debate going, which I sparked off with this:

"It’s simple.

The people who lose most from silly bonus payments are shareholders. As long as we have a daft tax system whereby you are at a disadvantage if you own shares directly and get tax breaks if you own them via a pension fund/unit trust, then people will do the latter (hence the decline in small shareholders and the rise in the % of quoted shares that are owned by ‘institutions’).

These institutions are in cahoots with Big Management at UK plc and together they rip off the little guys and nod each others’ salary packages through.

Ergo, the solution is to reduce tax breaks for pensions and at the same time reduce tax burden on direct share ownership (get rid of Stamp Duty, CGT and higher rate tax on dividends, for example) and there’ll be a lot more small shareholders kicking up a stink at AGMs and refusing to approve directors’ salary packages.

That’s that fixed. Next."

Former Tory seconding, Kay Tie opposing, as ever.