Monday, September 28, 2009

Banker-Bashing or Plain Old Common Sense?

David Stringer of the Associated press reports that U.K. to scrap annual bonuses for bankers:

British Treasury chief Alistair Darling said Monday that automatic annual bonuses for banking executives will be outlawed in an attempt to curb excessive risk taking in the country's huge financial sector.

Mr. Darling told the governing Labour Party's annual conference that new legislation to scrap the payments will be put to Parliament within weeks.

Leaders of the G20 rich and developing countries agreed last week to limit executive bonuses, but didn't set specific caps. Mr. Darling said bankers in Britain will in future be offered bonuses for their performance over several years, rather than over 12 months.

“We won't allow greed and recklessness to ever again endanger the whole global economy and the lives of millions of people,” Mr. Darling said.

He told the rally that new laws would include a claw-back provision and help to “end the reckless culture that puts short term profits over long term success.”

“It will mean an immediate end to automatic bank bonuses year after year, it will mean an end to immediate payouts for top management,” Mr. Darling said.

The plans, to be included in a new Business and Financial Services Bill, will be proposed formally in the Queen's Speech in December, the annual announcement of the government's legislative program.

Mr. Darling told the rally that Britain's economy has not yet recovered from the financial crisis but predicted the U.K. is likely to come out of recession by the end of the year.

“Germany, France and Japan are showing signs of growth. There are many independent forecasters now believing too that the U.K. is coming out of recession,” he said. “I think it is too early to say so with total confidence.”

Prime Minister Gordon Brown's Labour Party trails badly in opinion polls ahead of a national election that must be called by next June.

Mr. Brown said Sunday that his party could recover if the economy rallies and the public give him credit for averting a worse financial crisis.

“When the history of this period is written, this country and this party will be proud. Proud that the people who led the way in stopping recession turning into global depression were our government and our Prime Minister Gordon Brown,” Mr. Darling told delegates.

In recent weeks Mr. Brown has acknowledged that the government will need to cut public spending to reduce mounting government debts – but insists his Labour Party would protect key services.

Mr. Darling said the main opposition Conservative Party – which is widely tipped to win Britain's next election – would put the country's economic recovery at risk by making fast and sweeping cuts to spending.

“If we followed the Tory route now, recovery would be put at risk, prospects for growth damaged, borrowing would in the long run be greater. We cannot and must not let that happen,” Mr. Darling said.

Bloomberg reports that according to some analysts, Darling’s Bonus Call Is ‘Banker-Bashing’ Politics:
Chancellor of the Exchequer Alistair Darling’s call for greater regulation of British bankers’ bonuses amounts to “banker-bashing” and “pandering” to appease popular sentiment, according to London-based analysts and head-hunters.

Darling announced an end to “automatic” bonuses and pledged legislation to punish banks’ risky pay policies through higher capital requirements in a speech to the governing Labour party’s annual party conference today. Two months ago, Prime Minister Gordon Brown announced plans to hold back half of all bonuses for up to five years.

“This is a government on the cusp of losing the next election, and if banker-bashing is going to be popular they’ll do it,” said Simon Maughan, a banking analyst at MF Global Securities in London. “This is a classic case of knee-jerk political reaction to a crisis.”

Britain’s government is looking for ways to limit banker pay and acknowledge public anger as it attacks the practices it blames for causing the worst recession since World War II. With an election due by June at the latest, Labour’s percentage support is the same as the Liberal Democrats, Britain’s third- biggest party, and 15 points behind the Conservative opposition, a ComRes Ltd. poll today shows.

Darling will meet directors of Britain’s four biggest banks this week, asking them to change the way they compensate staff, his office said. That follows a Group of 20 agreement in Pittsburgh Sept. 26 to ensure banks restrain pay. Banks were told to avoid “multi-year guaranteed bonuses” and that a “significant portion of variable compensation” must be deferred, paid in stock, tied to performance and subjected to possible clawbacks.

‘Reckless Culture’

“Let me assure the country and warn the banks that there will be no return to the business as usual,” Darling told Labour party delegates in Brighton, southeastern England. “We will introduce legislation to end the reckless culture that puts short-term profits over long-term success.”

Any legislation to limit bankers’ bonuses needs to be mirrored by G-20 governments, or banks’ top performers may move abroad, according to Shaun Springer, chief executive officer of Square Mile Services Ltd., a London-based remuneration-advisory firm that provides services to 15 of the largest financial institutions in the City of London.

“There needs to be joined-up thinking and not just pandering to satisfy delegates at the Labour party conference,” Springer said. “We need to be thinking about the City’s financial evolution over the next decade, not Labour’s political convolutions over the coming months.”

‘Revolving Door’

“If these proposals are introduced I see a revolving door with people jumping to get out,” Howard Wheeldon, senior strategist at BGC Partners LP in London, said of Darling’s plans. “Do these guys not understand that this is a hugely competitive market and whatever we do to tighten the remuneration will only be to the benefit of our competition? Do they want any national income?”

Royal Bank of Scotland Group Plc, Britain’s biggest government-owned bank, declined to comment on Darling’s speech. Barclays Plc, Lloyds Banking Group Plc and HSBC Holdings Plc were unable to offer immediate comment.

Should Britain get ready for a mass exodus of bankers who are pissed at these new measures to curb their bonuses? Oh please, where are they going to go? Wall Street? They're next in the line of fire.

Bankers have had it good for far too many years, but politicians are ruthless and when it comes to votes, they'll screw the bankers in a second, even if they're feeding them. Is this really banker-bashing and shameless pandering to the masses or is it about time that governments start curbing reckless greed driven by the myopic focus on short-term profits?

Sure, Mr. Darling won't be the "darling" of London's financial elite, but his measures are hardly punitive. In particular, what is wrong with tying bonuses to the long-term health of a bank and paying bonuses over years, so they can be clawed back if not warranted by long-term performance?

After the financial calamity of 2008, that's the least they can do in terms of regulating banks. The next step is to get the same type of regulations to govern the bonuses at Canadian public pension funds, making sure that bonuses are based on risk-adjusted returns and subject to clawbacks if long-term performance falls short of expectations.

***UPDATE: A Banker's Comment***

A banker shared these thoughts with me:

Actually, bankers are leaving, and top graduates are going elsewhere! We have seen a surprisingly large number of mid level managing directors leaving the profession to do something else. Nothing wrong with that, in fact it may be healthy, but bankers have options, they may choose a less stressful life in other sectors, and they are making those choices. One friend recently commented, its cheaper than a divorce! Several I know have gone to academia; there is an aging "Professor" problem in most OECD universities. People have options; sure they will not make gazillions. But
they will not have to work 100 hours a week.

Are bankers finally getting the meaning of enough?

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