The London Paper – 30 Jan 2009
Last week ‘Bonusgate’ rocked Wall Street. It was revealed that Merrill Lynch had chosen to pay bonuses in December – a month earlier than normal. The scandal was that the £3-4bn it paid out may have been brought forward so that the massive $15.3bn fourth quarter loss Merrills was about to reveal would not have been publically revealed by then making the huge outlay a tad more palatable to shareholders and, more importantly, to the Bank of America that was in the process of acquiring the company. Merrill’s chief executive John Thain has since resigned (apparently to cheers on the Bank of America trading floor). Of course, to the general public the scandal was that a company that made a $27bn loss in 2008 was dishing out bonuses at all.
The truly horrific reality is that despite bankers facing the worst crisis in living memory various dubious characters are still raking in vast amounts. There are three reasons why this seemingly absurd travesty occurs. Firstly, despite the bonus system apparently existing to incentivize employees many have contractually ‘guaranteed’ bonuses. They have these either because they’d threatened to leave or because they’re a recently employed high flyer who requited guarantees to persuade them to join the bank. I received twelve bonuses during my City career and half were guaranteed – usually by threatening to move bank. The second reason is that if a bank has lost billions due to screwing up big time when it came to mortgage-backed securities characters working in equities or bonds or forex feel that those problems have got diddly squat to do with them and that they want their wonga. Finally, major revenue generators e.g. ‘the rainmakers’ will scarper to a rival if they’re not handsomely rewarded.
The major investment banks are like Premiership football teams. Bosses live in continual fear that they will preside over the disintegration of their ‘team’ because the success of any bank relies on retaining key personnel so that when the good times return they can mint it. Just as with a football team an underperforming player is still paid a ridiculous sum of cash because he may get back on form and score when things are back on track. That’s the major reason bonuses are still dolled out even when the proverbial hits the fan.
Of course, Citboys may soon discover that their age-old bargaining position ceases to cut the mustard if there’s been a genuine structural change in banking as there seems may be occurring. If that’s the case smart Cityboys who should be doing something useful with their lives other than pointlessly pushing around bits of paper may look elsewhere to fulfil their desires. So society may actually benefit as sharp people cease wasting their lives in the City and instead use their drive and intelligence to do something that helps their fellow humans rather than merely cause resentment and perpetuate a system that will invariably increase the gap between rich and the poor. Perhaps one reason to welcome the City clear-out.