The question of how best to separate bankers from their bonuses – for charitable benefit – intrigued us here on Alphaville, so we’ve turned to an expert for advice.
Monday night saw £2.4m raised for Save the Children at the annual IFR Awards in London. The money was generated in a 10 minute bout of competitive pledging by investment banks, bidding to top a “tombstone” as global bookrunner. Traditionally, the IFR Bank of the Year is expected to pony up — and Goldman Sachs duly obliged with a cheque for £600,000.
But Professor Paul Klemperer, Edgeworth Professor of Economics at Oxford’s Nuffield College, reckons Save the Children and the event’s organisers, Thomson’s IFR magazine, could raise a good deal more. And the professor is worth listening to since he’s the guy who devised the auction whereby the British government extracted a cool £22.5bn from the mobile phone sector in return for 3G telecoms licenses back in 2000.
For the IFR dinner, Klemperer advocates what he calls a “modified Anglo-Dutch approach.” In essence, all the banks attending would be invited to table competing bids for a period — say 10 minutes — but the resultant top three pledgers would then be invited to submit final, sealed bids.
“The advantage of having a sealed bid is that it ups the uncertainty,” Klemperer says. “Goldman, for example, wouldn’t know what Merrill is up to, and vice versa.”
In Klemperer’s view the IFR bidding system as it stands risks abuse. “The current structure is disastrous,” he says, adding that it is open to collusion and/or bid-fixing.
Indeed, Goldman people said on the Monday evening they had been warned in advance by Citigroup that they would be “made to pay” – so they outmanoeuvred their rivals by bidding high at the outset (£300,000), thereby deterring competition.
Klemperer believes there is a danger of market failure here – or at least the market mechanism not working quite as efficiently as it could. Well-designed auctions can prevent such failure, he says, pointing to examples in his latest book on auction theory.
Assuming 2007 is another fee-packed year for the financial community, IFR might invest in a copy.