Why bank bonuses are so huge

Chris Blackhurst in yesterday's Evening Standard:

Bank bonuses are only so high because their profits are high — the two are joined at the hip.

Banks earn their corn from acting for companies and institutional investors. Usually, they will charge five to eight per cent on a deal, and the client pays. No questions are asked, they're not challenged to justify that figure.

The reason is twofold. The client is dazzled in the headlights of the bank, which goes to great lengths to impress. No detail is left to chance to leave the company or investment fund feeling they are in the presence of greatness.

It starts in the glorious reception area (paid for by the customers, of course) and continues with the impeccably-dressed banker, the fine dining over lunch, the art on the walls, the deep carpets and antique furniture. It carries on with mention of other clients and deals the bank has completed.

The bank plays upon the client's insecurity and the desire to be part of the herd. It will describe how only it has the muscle and brains, how it can call upon an array of close advisers — themselves with splendid offices, smartly-dressed staff, similar patter — also charging the earth. Hands are shaken, the transaction is the bank's — and the fee.

There is a second aspect as to why the client takes the bill on the chin: it's not their money. A public company chairman agrees to stump up £100 million on a takeover. It may seem a lot, but it's not his £100 million. Likewise, a pension fund trustee may assent to a £50 million charge for a clever bit of financial engineering that improves the strength of the balance sheet. Not difficult, it's not his £50 million.

Whose money is so blithely paid over? In many instances, given the size of the pension industry, it's yours and mine. In the case of the Government paying banks to handle the sales of its bonds, it is also ours.

There's no incentive built into the system for clients to save us money — they're not rewarded for reducing the fees they pay to banks. At the same time, given the clubbable nature of the City, they do not want to be seen as awkward, as troublemakers — particularly if one day, they aspire to gain the better-paid job ... in a bank.

Diamond may be shameless, but he is only in post for a short while. Right now, he is merely a high-profile, highly-paid beneficiary of a machine that is faulty. It needs fixing or else there will be plenty of other Bob Diamonds and we will still be fuming in the years to come.