Word reaches us that the Credit Suisse axe will swing on Wednesday, with 50 heads to roll in the rates division as it bears the greatest brunt of cuts to fixed income, credit and commodities trading.
The Swiss bank has followed the lead of UBS in deciding that core fixed income trading is just too expensive, now that the whole flight to safety trade is over and lucrative over the counter business is dwindling. Read more
As the FT reports on Monday, banks in Europe are rushing to redraft executive pay deals in order to comply with recently passed legislation capping bonuses at the amount of fixed pay, or twice that amount where approved by investors.
We submit for discussion an illustration plus narrative on the subject the bonus cap, penned by Kevin Roose. (H/T Barry Ritholtz) Read more
Probably best to just get on and crowd-source the analysis and commentary on this one:
Some time ago Brussels decided that capping bankers’ bonuses is going to help prevent another financial crisis. A very fashionable move. In fact, the passage of the Basel reforms was contingent on a cap being introduced, so after months of negotiations, a deal was finally stuck this week.
From the FT (our emphasis):
Bankers’ bonuses are to be capped at twice their salary and banks will be subject to a strict transparency regime, under a provisional EU deal that includes minimal concessions to cushion the most severe pay crackdown since the 2008 financial crisis.
UBS reported a fourth quarter loss of CHF1.2bn — actually CHF1.9bn, when considering Libor fines and other regulatory and legal costs, plus restructuring costs. The loss came in a little lower than the median estimate of analysts surveyed by Bloomberg.
The full monstrous PDF is here, but meanwhile, we note the FT’s Daniel Schäfer scooped an interesting change to the bank’s bonus policy for its 6,500 highest earners: Read more
On Monday the centre-right Liberal and centre-left Labour parties in the Netherlands managed to pull together a coalition agreement after 47 days of talks. It contained a limit to the tax deduction on mortgage interest, which some economists say distorted the Dutch housing market. There are also changes to benefits and taxes, but the thing that caught one FT Alphaville reader’s eye was this line of the agreement:
De hoogte van de maximale variabele beloning binnen de financiële sector wordt wettelijk vastgelegd op 20 procent van de vaste beloning.
We’re translating this as: “the amount of variable pay for workers in the financial sector will by law be capped at 20 per cent of fixed pay.” Read more
Monday morning’s FT covered this announcement:
Lloyds Banking Group has launched a scheme that scraps all incentives linked to product sales in the latest attempt to clean up bad practices that have been blamed for causing mis-selling scandals.
There are already guidelines in Europe for setting compensation in the financial sector so as not to encourage risk-taking that threatens the stability of the system as a whole. Now it’s time to discuss how pay packets can be structured in a way that doesn’t reward ripping clients’ faces off.
Frankly, we think the easiest way to sort this out is to follow a cue from the online gaming community, but more on that later. Read more
Should we really be so shocked when people respond to incentives?
It’s a rhetorical question former TARP Special Inspector General Neil Barofsky posed on Thursday via Twitter. What triggered it was those Olympic badminton players who deliberately tried to lose their match. Read more
So, a particularly vocal disappointed banker has left the fold. And not just any banker: a Goldmanite banker. He’s been part of the
empire firm long enough to get a top job in the US government see it change for the worse. Apparently.
Anyway, here’s a graph that expresses some of our feelings about it: Read more
In the first post about our meeting with Yves Smith, purveyor of the blog Naked Capitalism, we discussed the blogosphere and what prompted her to join it. Here we ask Ms Smith about her involvement with the Occupy movement and her opinions about banking and the contentious topic of bonuses.
AV: Naked Capitalism has a badge on it: “We support Occupy”. What drew you to the Occupy movement? Read more
Barclays has warned it may have to scrap its ambitious target of a 13 per cent return in equity in 2013, while profits at the bank fell eight per cent in the last three months of 2011, Reuters reports. Income at Barclays Capital fell 19 per cent on the quarter, and almost half on the year, to $2.84bn. Adjusted return on equity fell to 6.6 per cent from 6.8 per cent a year earlier, throwing doubt over chief executive Bob Diamond’s ambitions for the bank, the WSJ adds. While Barclays Capital has capped employees’ cash bonuses to one of the smallest among investment banks, total pay across the bank fell by just 15 per cent, and salaries rose 2 per cent even though headcount fell by more than 6,000, the FT says.
Bloomberg reports that Morgan Stanley, Citigroup, and Credit Suisse cut the average pay of their investment bankers by 30 per cent year-on-year, after reporting lower revenues. There has also been a trend for firms to pay less of bonus awards in the form of cash, as well as having longer deferral periods over which stocks or additional cash is paid out. Financial stocks were among the worst performers in the S&P 500 index over the last year. Meanwhile, the WSJ reports that bankers in Hong Kong employed by European firms are particularly vulnerable to job cuts as their firms seek to scale back regional operations. Analysts are concerned about the knock-on impact of such job losses as bankers sell their properties and move out.
Can’t beat a Sun headline to round off a national bonus neurosis:
Around exam time at university, the conversation always seemed to fluctuate between points of revision, questions that might be asked, and what the meaning of life actually is. “Exams aren’t a test of your real ability,” you’d tell a friend who was almost certainly doomed.
For those who graduate and go to work in investment banks, the yearly cycle of reflection about the meaning of it all moves from beginning of the summer to the beginning of the year — about the time that bonuses are paid out. Read more
…potential thus exists for the formation of a”vicious cycle” where increases in disparity weaken concern for wage equality or redistribution. This weakened concern affords greater future compensation differentials, a shrinking of the welfare state, and so on that further increase inequality and again shift preferences.
With all the furore around high pay packets and “capitalism in crisis“, it seemed appropriate to look up what some of the latest academic research has to say. The above is taken from a NBER working paper entitled “Income Inequality and Social Preferences for Redistribution and Compensation Differentials” and it’s by associate professor William R Kerr of Harvard Business School. Read more
A British academic, Ian Tonks of Bath university, suffered a vicious TED attack this week regarding this post — a summary of Tonks’ research into links between bankers’ bonuses and the financial crisis.
Tonks finds that there is (to him) a surprisingly weak link between executive pay and performance across all industries, not just banks. In other words, bankers high pay doesn’t actually appear to be linked to performance. However, he thinks politicians should go ahead and reform executive remuneration in any case because bonuses should be fully transparent and the various corporate governance initiatives in the UK have so far failed to stem the dramatic increase in executive rewards. Read more
Goldman Sachs, JPMorgan Chase and other leading international banks may be forced to reveal the pay of their top London-based executives for the first time, as the UK government seeks to tackle what it calls “unacceptable” levels of bonuses in the City, says the FT. Draft proposals published on Tuesday by the UK Treasury would require large UK banks and some banks based in the US, Japan and Switzerland to disclose the pay of the eight highest-paid executives below board level across their UK operations. The Treasury thinks the proposal would capture a total of 15 institutions. Bankers and star traders without managerial responsibility, several of whom earn in excess of £10m per year, would be exempt from the new rules. The move is likely to lead to a storm of protest from large international banks with major operations in the UK, says The Telegraph.
Recruitment firm Astbury Marsden says that the average bonus for bankers in London is likely to be 24 per cent of their base pay, down from 35 per cent last year. This is linked to the impact that the sovereign crisis has had on bank revenues, Bloomberg reports. Banks are also downsizing as they struggle to reign in costs, a higher proportion of which are now fixed as many firms had gone as far as to double base pay as restrictions were placed on incentive pay. According to Astbury Marsden, managing directors expect 70 per cent of their base pay as a bonus this year. The numbers are based on a survey of 1,380 City professionals.
UBS executives are considering cutting the group’s bonus pool in an effort to recoup some of the $2.3bn it lost in the alleged trading scandal centred on Kweku Adoboli, reports the FT. The Swiss bank last month opted not to eat into bonus accruals when it reported its third-quarter earnings. The approach, which meant that 90 per cent of the investment bank’s SFr1.35bn of third-quarter revenues was set aside for pay and bonuses, was widely criticised. Analysts said that it appeared the bank was seeking to push the cost of the trading scandal on to shareholders rather than its own employees. But Sergio Ermotti, the bank’s chief executive, has now told the Financial Times that there was “no way” bonuses would be unaffected by the shock trading loss, allegedly racked up by a low-level trader in London. The decision could end up cutting the year-end pay and bonus pool within the investment bank – worth SFr4.6bn ($5bn) as at the end of September – by as much as 10 per cent, according to some estimates. Meanwhile, Bloomberg reports on recruitment firm Astbury Marsden’s finding that the base pay of senior bankers in London had jumped 21 per cent by the end of September when compared to the previous year. However, the firm expects bonus pay to relatively low, especially as most of the pay increases were awarded at the beginning of the year when banks were feeling more confident than they are now.
Wall Street Bonuses are set to fall by an average 20 to 30 per cent this year, making it the weakest bonus season since the credit crunch, underscoring the malaise in the industry, the New York Times’ Dealbook reported, citing a survey from Johnson Associates, a boutique compensation consulting firm. Employees in trading and investment banking divisions will see their pay cut proportionately more than asset managers and commercial bankers whose compensation package will equate to 2010 levels. The year-end bonus typically represents the bulk of financial employees pay and banks tend to allocate as much as 60 per cent of their annual revenue in compensation. In the first nine months of the year, Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America and Citigroup combined allocated almost $93bn to compensate employees, up from $91.25bn, NYT said, citing figures from the survey. However, the final compensation figure is not set until the fourth quarter when firms can take stock of their annual revenue.
In its present form, the Volcker rule has the potential to change compensation structures. Not only that, but the Volcker rule cares about what your intentions were when you executed a trade. Starting to worry? FT Alphaville takes a look at these aspects of the proposed rules then goes over some recommendations about what to focus on when writing those all important comment letters to regulators about how they are trying to kill your business.
To kick off, here’s the specific section on compensation (emphasis ours): Read more
Thought the recent pick-up in trading volumes would be good news for the big investment and universal banks?
Think again. Read more
Goldman Sachs managers have been reminding their London-based employees that temporarily higher salaries granted to them for 2010 would expire beginning in 2012, says the WSJ. The move dates back to a decision to shift bankers’ pay into salaries and away from incentive-based compensation, in the midst of a public backlash against big bonuses. Their pay will revert back to what similarly ranked employees are paid elsewhere in the company. It is mostly midlevel employees who are affected, including investment bankers, sales and trading, and asset-management personnel, the report says, citing a person familiar with the matter.
The UK’s Office of National Statistics published its latest bonus data on Tuesday, and as can be seen below there’s been very little change on the year when it comes to bonus payments in “financial and insurance activities”:
UK banks are facing increased pressure from regulators to use strong earnings to build up capital ahead of official requirements rather than paying out most of it to staff and investors, the FT reports. Although Basel III gives banks until 2019 to meet new “core tier one capital” requirements, the Financial Services Authority, which has power to veto bonus plans if it believes they are hindering capital-building, wants banks to outline a “flight plan” which takes into account bonuses, dividends and the potential for another economic downturn. The BoE’s Financial Policy Committee is expected to step up calls for “opportunistic capital building”, and officials have been blunter in private over the need for action.
Senior staff at Royal Bank of Scotland sparked the biggest one-day sale of the bank’s shares since its government bail-out, as they disposed of £140m of stock issued as part of their bonuses. Of the 650m shares awarded to employees on Monday for their performance in 2009, more than half were immediately sold into the market, the FT reports. While some analysts found the appetite for the shares heartening, some market experts said the interest from institutional investors was subdued.
Bank chiefs’ average pay in the US and Europe leapt 36 per cent last year to $9.7m, according to data compiled for the FT, despite variable performance across the sector. Jamie Dimon of JPMorgan Chase and Goldman Sachs’ Lloyd Blankfein were paid more than 15 times their 2009 earnings last y ear, at $21m and $14.1m respectively — although both received much less than in 2007. In the UK, the chief executives of Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland were awarded cash and stock bonuses valued at more than $26m last year. That contrasts with 2009, when all four declined bonuses in a nod to public and political furore. Full results of the analysis, carried out by Equilar, are available in an interactive presentation.
The EU’s top financial regulator has warned the Obama administration that it must speed up and toughen its new banking rules in order to prevent American banks from having unfair advantages over their European counterparts, the FT reports. In a letter sent last week to US Treasury secretary Tim Geithner, Michel Barnier, the European commissioner in charge of financial markets, argued that Brussels was ahead of the US in several areas – including capital requirements for banks and limits on bonuses for financial executives. Barnier urged the US to match European efforts. Howard Davies, first chairman of the UK’s FSA, asks if new regulation will be enough for banks to mend their tattered public image?
Future bonus and dividend payments by UK banks will depend on convincing regulators the handouts will not dent capital reserves or undermine sound risk management, the UK’s top financial regulator has warned. Ahead of unveiling details of a new body to supervise banks and insurers, Hector Sants, Financial Services Authority chief – who will head the new Prudential Regulatory Authority, told the FT that banks would have to publicise details of holdings that they currently share only with regulators.