Despite the financial downturn and the continuing public furore, JPMorgan last week announced it was paying its investment bankers some £6 billion in pay and bonuses for 2009. Citigroup, Morgan Stanley & Goldman Sachs will issue their results and bonus plans this week, the latter investment bank expected to announce a pay and bonus pool of around £8.5 billion. The results of British banks will be announced in February, the total associated bonus pool estimated at some £7 billion. Even state-owned Royal Bank of Scotland (RBS) is anticipated to pay its investment banking staff bonuses totalling £1 billion.
Excluding the state, the major shareholders in British banks are institutions such as large insurance groups or fund managers (e.g. on behalf of major pension funds), with those holding the biggest stakes including Legal & General, Axa, Fidelity, Standard Life, Scottish Widows, M&G (of Prudential), Aviva and Schroders. Together they hold around 15% of Barclays, 11% of HSBC, and 7% of Lloyds. These institutions are not necessarily content with the level of bonuses being paid out by the banks because they are also aware that these banks are still rebuilding their capital bases. However, they find themselves at the same time trapped by the demands of a market in which the banks have to pay big bonuses or lose staff to their competitors. Institutions are, therefore, looking to the politicians to find a long term solution to what could be considered a structural issue possibly requiring an overhaul of the banking industry, including the key aspect of competition.
The problem for the politicians, however, is that they cannot risk driving the wealth-creating financial sector offshore, its importance to the UK economy having increased as the proportion contributed by manufacturing has progressively decreased before and during the last 13 years of Labour government. Indeed the banks will pay an estimated £20 billion in tax this year. The Prime Minister has, therefore, called for an end to verbal attacks on the banks and blaming them for all the ills of the economy; the bonus tax demanded by his Liberal Democrat partners in government has also not been taken any further at present. Behind the scenes, the on-going negotiations (code-named Project Merlin) between the government and the banks continue to focus on increased lending to small businesses & restrictions on bonuses, in return.
In fact, bank bonus payments on average are expected to be 20% to 30% down on the year before, although this is said to be mainly due to the trading profits of the big investment banks having collapsed last year. The bankers are also seemingly feeling secure enough to suggest that the period of remorse and apology (e.g. of waiving of bonuses and giving to charity) now needs to end, as evidenced by the performance of Bob Diamond, the new Chief Executive of Barclays, before the Commons Treasury Committee. In addition, new regulations in the UK now mean that over 50% of a bonus must be paid in shares and deferred for 3-5 years, half of the other 50% in cash also deferred but linked to performance targets and the remaining cash then falling into the 50% tax band for top earners, with many bankers now given large increases in basic salary to compensate. This reflects the real world within which, however, the public perception also remains strong that bankers still earn significantly more than other professions, despite the taxpayer having contributed hundreds of billions of pounds to rescue the financial system and large numbers of public sector workers continue to lose their jobs, in what also seems a very unfair world.
Of course, if a major bank or open trading nation such as the UK chose to go against the global market, each would be likely to suffer financially and this then points to the need for a global agreement on financial market regulation. In the absence of this, some in the media point out that the banks make large profits mainly due to seriously overcharging corporate clients, companies which are in turn owned by the same big shareholders. Not all of these profits are returned as dividends to these shareholders, a large part being siphoned off to pay bonuses. There are also apparently, suspiciously similar charges for financial services such as underwriting of share issues, while the number of major players in the market has been reduced by banking failures during the financial crisis. Perhaps the Independent Commission on Banking which is looking into how to improve competition in the financial services industry will ultimately feel the need for a full-scale Competition Commission inquiry, as real competition would be expected to squeeze profits and the associated pay & bonuses. It would also be expected to reduce the level of bonuses paid out to (as admitted by at least one senior banker) quite mediocre talent, who surround the stars that really bring in enormous amounts of business and may well indeed deserve their extraordinary remuneration.
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