Came with Cap in Hand; Got Capped In the Ass Instead

This past week’s headlines reminds me of olden times… golden times… banker times… bonuses… entitlements… Psych! Not really. I’d shoot myself before going back to banking. The only thing attractive about banking is the money and promotion (which means more money). If that’s for you, you should consider a career in banking. Or should have in the olden times… golden times…

It’s almost as if the entire industry has been hit with all three traditional Chinese curses (that may or may not have been invented by the British) at the same time. The curses in increasing severity:

  1. May you live in interesting times
  2. May you come to the attention of the authorities
  3. May you find what you are looking for

***

If you don’t think that the financial system is fixing itself (or being fixed by governments), allow me to give you some good news. The following headlines (or Chinese curse if you’re a banker) should offer some comfort.

Wherein Mark Carney says bankers betrayed the public trust (Feb 25, 2013) or the first Chinese curse: Mark begins his speech with the following line, “Six years ago, the collapse of the global financial system triggered the worst global recession since the Great Depression.” The speech goes on to eviscerate bankers for losing Trust (with a capital T), expertly tying it back to the health of the overall financial system. Highly encourage you to read the first couple of paragraphs of that speech, if not the entire thing. Who’s Mark you say? He’s gonna be the second most powerful central banker in the world behind the US Fed Chairman (and senior-most amongst his peers if and when Bernanke retires I believe) and he’s the head of the Financial Stability Board, the global body charged with providing recommendations on how to fix the global financial system.

Interesting times indeed…

Wherein the EU decides to cap bankers’ bonuses (Feb 27, 2013) or the second Chinese curse: Starting next year, the EU is trying to limit bonuses to equal one year’s annual salary, across the board (whether senior or junior staff). First, even starting analysts could have typically earned their annual salary in bonus in their first year, with starting salaries being $60-70k (this might be higher since I left the industry) and everyone was used to earning multiples of their salary in bonus every year. Second, let’s ignore for a second the morality, constitutionality, economic justification… hell the plain rightness or wrongness of this policy, whether you’re a banker or a pleb. Let’s focus on the incentives, assuming the policy passes.

You’re a banker. You’re bonus was tied to generating business in the year, for which you bust your ass off 90-120 hrs a week. Next year, you’re bonus size has gone down, irrespective of business being generated. The only way to make the same money is if your salary goes up.

You’re a bank CEO (and let’s say your name is Dimon). You used to run a business where the top performers were rewarded handsomely with large bonuses, and everyone else got a little something something to keep them in place (even this was multiples of salary). The really weak fish were fired. If business sucked as a whole, the bonus pool would be smaller, but the top performers still getting the biggest slices. Now, everyone can only make their annual salary in bonus. This will be a steep cut for your employees, who are no doubt wondering how they’re going to make payments on the Maserati, keep their mistresses lavished in the manner to which they are accustomed, all the while keeping up with their coke habits and personal trainers. Do you raise everyone’s salary? That will keep your minions happy sure, but how are you gonna pay for this much much much higher fixed cost in a year when business sucks? The bonus pool won’t provide that same flexibility anymore. The entire business model has been upended.

Fuck the authorities indeed…

Wherein the Economist comes out against this banker bonus cap (Mar 4, 2013) or the third Chinese curse: So the Economist predictably comes out against the cap. But I don’t quite follow their logic at times.

By encouraging higher fixed pay, banks will have reduced flexibility to cut costs when they need to. When a crisis comes, the idea is to protect the taxpayer. If banks cannot slash their pay bill, the taxpayer is at greater risk.

But go back to the second Chinese curse. What is the incentive on you, CEO Dimon, to raise salaries? Is it less or more (which affects if the taxpayer is more or less at risk)? How stupid would a Bank CEO be if he raises salaries on the assumption of explicit taxpayer support of his now enlarged compensation scheme that will pay out handsomely even in the lean years (although I wouldn’t put this past Goldman, now that I think about it)? He’d be inviting more government interference in his business.

Anyone care to venture if the general public would have hated bankers, banks and bonuses so much, if only the banks didn’t pay out bonuses the first time they got bailed out back in 2008? Interesting thought experiment… I mean, when these payments were theoretically bonuses, why did they get paid out of taxpayer bailouts when the banks were on the verge of collapse? I mean… this is a perfectly valid question for a taxpayer to ask. Its as if the bonuses were fixed to begin with.

This mythical Dimon could take steps such that taxpayers aren’t on the hook in the lean years, like the following suggestion of the above thought experiment which ends the Economist’s article.

But if the banks followed a very simple rule—no bonuses, full stop, if there is a loss at group level…

Dimon can already imagine the rebellions among the minions – What we all get no bonus cuz some trader lost €10 billion euros in a swap on the other side of the world? Dimon don’t like looking at these options. Which does he pick? Fucked if he do or don’t…

Don’t want to be looking to find out indeed…

***

The incentives in the banking industry are changing. How will the industry respond? Well, they gotta make something else attractive about the industry other than money. Maybe let the minions not work so hard?

How you gonna do that, Dimon?

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