The real scandal over bankers’ bonuses is how banks can afford to pay them

Why do top bankers get paid so much money? The obvious answer is that they are manipulative and delusional beneficiaries of the talent myth.

But a better answer is “because it is there”. Bankers get paid millions because banks make billions – the average big bank makes more in profit than a business in any other sector could ever dare to dream of. So the question we should really be asking is “Why do investment banks make so much money?”
 
The answer? Mostly it comes down to the fact that they charge very high prices for their services, and for a variety of reasons, they get away with it. Take the traditional businesses of investment banks – advising businesses and facilitating deals (putting buyers together with sellers and floating companies on the stock market). As Anthony Hilton points out in the Evening Standard, they will usually charge “five to eight percent on a deal and the client pays. No questions asked.”

If that sounds high it is because it is. There are two major reasons for this – neither good. The first, says Hilton, is down to the fact that so many clients are “dazzled in the headlights” of dapper bankers. The deep carpets, the fine dining, the art on the walls, the mentions of previous deals – it all “plays upon the client’s insecurity and the desire to be part of the herd”.

The second – and I think this is the real problem in investment banking – is that most CEOs signing up for deals aren’t doing so with their own money. £100m on a takeover might be a lot, but it isn’t his £100m, and if the takeover gets through, odds are he’ll make a killing regardless. Same goes for “£50m on a clever bit of engineering that improves the strength of the balance sheet”. He isn’t paying himself, but he’ll make a good bit out of taking the credit. The client isn’t necessarily price sensitive.

It is also worth noting that the investment banker hasn’t much in the way of expenses. He has no factories, not very many employees and all his travel costs and £200 dinners are paid for by his clients. You also have to remember that barriers to entry in many of these businesses are vast. Anyone can get into the coffee shop business. But you can’t wake up of a morning and think you fancy starting a small company managing FTSE 100 mergers and floats of Ocado-style businesses. No wonder the profits are so big.
 
The big banks’ fund management businesses and hedge funds make a killing for much the same reasons: they charge high commissions in the form of management fees and performance fees (which they get away with for reasons I will never fathom); a great deal of money goes through their hands; and their expenses are relatively low.

Then there is retail banking. Six big banks dominate our high streets. Between them, they control 85% of our mortgage market. As such, they have, as the analysts at Citibank like to put it, “significant pricing power”.

There is much talk about new entrants to the market, but they face pretty nasty barriers to entry. There is a problem with data: it seems the big banks have access to credit information they don’t fancy sharing with new entrants. But the main barrier for new entrants is getting their hands on the cash they need to become players: a few years ago they would have relied on the securitisation market for money. But that market doesn’t really exist any more.

That means that for now at least our retail banking industry, just like the global investment banking industry, will stay an oligopoly. Year after year they will get away with the kind of cartel pricing everyone else gets done for. And the Bob Diamonds of the world will continue to get very, very rich.

• For an idea of how investment banks earn their vast profits, see Tim Bennett’s video tutorial:
What investment banks actually do

  • Alex

    Merryn, I gave up working in the city after 15 years for quality of life reasons, I no longer wanted to get up at 5am everyday, then to get home at 8pm, having spent 12 hours having me nerves tested. I have friends who work in the more sedate world of corporate finance, where they often get to work through the night and weekends. These people generally have a minimum masters + an armful of professional qualifications and have come from global ( generally not UK ) top universities.

    If you think these people will work in one of the worlds most expensive cities, and pay 40%+ tax for £60-80k ( that’s less than a GP in a nice rural practice gets working 40 hours a week ) without a bonus to make the wage decent then you’re very wrong.

    The banks pay bonuses because if they didn’t the wages they pay wouldn’t be high enough to retain the staff they have under the conditions in which they have to work.

  • Alex

    Also worth considering, working like that most people will be wrecks by the age of around 45, you can work like that when you’re young, but the career is limited in a similar way to footballers and models, the higher wages also therefore reflect a shorter working life. Basically you’re being compensated for ruining your home life, forgoing normal sleep patters and risking a heart attack or stroke. The same can be said for executive at the top of the scale……would you like to work Bob Diamonds schedule? How would that impact you’re young family? Personally I’d prefer a bit of a life than Mr Diamonds salary, as they say you can’t take it with you.

  • bingo

    OK Alex, I’m going to ask what I have no doubt will be classed as a stupid question.

    Assuming these people are more ‘driven’ than actually clever and talented (I’ve met a fair few of them, they seem no more clever and talented than a hell of a lot of other people), why not pay twice the nunmber of people half the money? That way they all get to go home on time and still earn a reasonable living.

  • RitzRoz

    I’m not sure anyone deserves a £1m+ bonus and most will never be in position to try, no matter how talented or hard-working. As Merryn correctly observes the barriers to entry are too high for most to enter the rarified world of investment banking. I worked 60 hours in 2 jobs when I left uni with 2 law degrees for less than £8k a year so qualifications don’t necessarily translate into big bucks. Still I am luckier than the billions who work longer hours than Alex’s banker friends for less than £1 a day (1.4 billion live on less than $1.25 a day).

  • DC88

    @Bingo

    I was thinking just the same thing. That is basically how it works in engineering and academia.

  • IJ

    @ Alex: I spent some time working in investment banks too, in both research and sales (or glorified travel agency as a friend of mine accurately put it). While I understand where you’re coming from, I would agree with Merryn that the “industry” is basically a racket. From what I could tell, a lot of those long hours were pointless and just a means of justifying the fat bonuses. Take the job of a research analyst. I reckon about 90% (probably more) of analysts’ research is utterly useless, and the fruit of their “analysis” (the recommendation and target price) makes no difference to how much an investment bank makes. All they have to do, from clients’ and bosses’ perspective, is look like they’re busy by writing more useless reports than the other bank. The fact those on the sales & trading desk could make enough money to pay themselves AND these analysts such astronomical made me think the margins must be too high.

  • IJ

    I actually believe the margins and fees will come down one way or another (i suspect technology will do it), banking will cease to be as lucrative (though bankers will still make more than most), and the politicians’ work will be done for them by the market. If the internet doesn’t do it, the next crisis will.

  • Alex

    Fair comments about wages and back office staff IJ. IN terms of fees coming down surely where they can they already have FX for example is now dominated by low cost e-based trading. It’s the more complex bespoke transactions where fees have and probably will remain good. Also MW favourite market…. commodities due to the complexities, varitety of products and lack of liquidity. About the only people I know getting really good money at present are the oil desks.

    Maybe at some point the public might remember that the City contributes £50bn a year to the UKs annual tax take, before turning city workers into demons? I am still mystified as to why Beckam and Roonie earning £Xm a year paid for by the tickets bought by working class fans ( or for that matter Wogans £6 a year salary at the BBC ) drew virtually no criticism?

  • Peter Kellow

    Alex. Only one thing worse than an obscenely overpaid, fat cat, sponging, creep sucking the blood out of the real economy and people who do the real work that drives it.

    That would be a whingeing, obscenely overpaid, fat cat, sponging, creep sucking the blood out of the real economy and people who do the real work that drives it.

    “Maybe at some point the public might remember that the City contributes £50bn a year to the UKs annual tax take, before turning city workers into demons?”

    Yeah, sure. And maybe at some point the banksters might remember the the City fleeced the public purse for a lot more than £50bn.

    And one more thing. All those bonuses are only of any value if you live in London. Have you ever been to Frankfort? The banks won’t leave because people on massive salaries won’ t live in a s***hole

  • Alex

    Peter, your argument is agressive and ill informed, sadly it probably reflects the level of information provided to the public by a frankly appalling media in the UK. Jouranlists seeking to sex up a story for the tabloids and the TV equivalent generally don’t seem to be bothered about accuracy in there reporting these days. It’s a pity as they have almost entirely missed the really big story behind the credit crises.

  • Michael lewis

    I read this article until I saw the words ‘As Anthony Hilton …’ , Yeah, thats when I decided to stop.

    If you need to use his “unique” insight, give up now.

  • Peter Kellow

    Alex, you seem like a nice guy. I normally read your comments with interest. But the self-pitying victimhood of your first post was too much to bear.

    You may find my comment aggressive but yours was offensive to the millions of hard working, badly paid people doing absolutely essential jobs suffering stress, breakdown and ill health as a result. And nothing at the end of it.

    For the record I wouldn’t dream of reading mainstream financial journalism. My rule is stick to the net: MW, Ellen Brown, Ann Pettifor, Janet Tavokoli, WSWS, John Mauldin. Journalists have already been bought.

  • Alex

    Peter, the thing is the media have been having a field day demonising an entire industry, this has conveniently let off the regulators and politicians ( mainly US it has to be said ) who almost imploded the global economy with some very very stupid legislation, now repealed quietly. The crises didn’t just happen is was caused, by the lack of understanding of finance/business prevelant amongst our ‘leaders’ who have been more or less let off scott free in terms of blame sharing.

    The tax contribution of the City to the UK economy is massive, there is no denying that. It’s a fact, and amazingly one area the UK still holds a dominant position in globally is in having the worlds main financial market centre. It’s something to be proud of not something to attempt to deystroy or pillory.

    Are banking wages excessive compared to those of Lawyers, Accountants, NHS Consultants, Footballers, Actors? I’d argue not.

  • Pusser

    You will notice immediately my knowledge of this subject is zero and apparently on par with many politicians so I am in bad company. The only other difference is that I went to Oxford and not Eaton although that was at Her Majesty’s pleasure.

    My point or question really is this. If Bankers get paid such huge sums of money because they are earning their employers even huger (sorry) sums of money then where has all this money gone when they apparently ran into hard times.

    Do they also earn bonuses on the investment that the tax payer has fed into the money munching machines?

    And finally, if so much money is being earned; who is or are the poor sods that are clients of the banks who keep sending them these trillions of pounds so they can have bonuses – apart from the taxpayer of course.

  • IJ

    Alex – I agree that banks are too often the scapegoat, though I wouldn’t just stop at apportioning the blame to politicians and regulators, but basically the entire society that grew out of the Reagan / Thatcher doctrine. Even the “lefties” (e.g. New Labour) got taken in.

    As for your point about the city’s tax contribution, true but the article is asking why this is so big in the first place, and is there not something wrong with that.

    On the last point, there are clearly excesses elswhere too. Still, I’d argue that Lionel Messi brings a lot more joy to a lot more people than Bob Diamond. People in the other jobs you mention don’t get bailed out when things go wrong. And are there really NHS consultants that get paid an 8 figure bonus?

  • Peter Kellow

    Alex & IJ. I agree it is not only the banking industry that is to blame. The problem is that there is a compact between elected leaders and the banking plutocracy. It works like this.

    Politicians have an insecure job. They can be thrown out at the whim of the electorate. So they become fearful of democracy. So they look around for powerful friends that will look after them if the going gets tough. The banks are perfect for this role because the politicians have something on the banks.

    It is only thanks to the politicians that the banks (almost) uniquely create money. This they then lend back to the people who pay interest. Why doesn’t the government create the money? Because that would destroy the compact between politicians and bankers which allows the former to have a power base beyond the electorate they fear.

  • Peter Kellow

    Alex & IJ. I cannot take it on trust from you that the City contributes so much tax. Against that it is the City that destroyed the industrial base in the UK over three centuries. Now at 12% of the economy. That is a lot of tax revenue gone up in smoke.

    It did not happen in any other major economy except the USA – where the compact between politicians and banks is this same as here

  • Baxter T. Wall

    Not sure the big banks have an advantage with access to credit information: Tesco has a banking licence and a very rich data source from its clubcard system. I seem to recall that Experian grew out of a retail outfit (GUS, I think). And let’s face it, credit controls at the big banks are generally though to be based upon quite primitive data (electoral register, postcode region etc.). There are opportunities there.

    What I can’t figure out is why the barriers to entry are so high for investment banking. Is it purely a matter of networking etc.? Why should this be the case for setting up IPOs? Don’t such high barriers to entry imply that something is broken with the system?

  • Nick

    “I cannot take it on trust from you that the City contributes so much tax.”

    Well, why don’t you do some research and disprove them then. As it happens they are correct, the City does generate significant levels of tax.

    “It did not happen in any other major economy except the USA.”

    Wrong, I’m afraid. Every single mature economy has seen manufacturing decline as an overall percentage of the economy as service sector has expanded.

    The two countries that have slowed this transformation have been Germany and Japan. But both have substantially smaller manufacturing sectors than they did 40 years ago.

    The UK’s share of manufacturing in its economy is pretty much in line with France, Italy, Holland, Switzerland etc.

    And not sure why you raise the issue of 300 years as a comparison. 300 years ago every country’s economy was 95% agriculture. Fortunately today agriculture is under 2% for mature economies.

  • Nick

    A major issue not mentioned about how banks are so profitable is that of banks not competing on price.

    If a company wishes to raise $3bn in a bond placing the fact that Moneyweek Securities offers to charge $80m compared to Morgan Stanley charging $100m isn’t an issue. The company will always go for the better name.

    Similarly when Sir Paul McCartney chooses a divorce lawyer he pays up for the best. It isn’t worth the risk going for a cheaper alternative when the sums involved are so large and the professional fee is a relatively small share of the sums involved.

  • Critic Al Rick

    How can Banks afford to pay the bonuses they do?

    One word sums it up – ‘CARTEL'; illegal for lesser mortals, ‘CARTEL’

    How can solicitors and barristers charge the fees they do – the Law Society ‘CARTEL’!

    And while the ‘powers-that-be’ distort the playing field to make things a lot easier for their arrogant selves, they make life a lot harder for most of the rest of us.

    And now look at what’s happening. These short-sighted, selfish, conceited, greedy individuals have instigated the possible death throes of the proverbial goose!

    How very clever!!

    Despicable; may they rot in Hell!

  • IJ

    @ Peter Kellow – may i suggest you read my comments again. I’m not exactly defending the status quo.

    Nick – you make a very good point re paying for the best, or i would say what’s perceived to be the best. On the other hand, perhaps the damage to e.g. the Merrill Lynch brand has been big enough that Moneyweek Securities actually has an opportunity now to steal some market share and drive down pricing?

  • Eric

    To see the full picture, I think you need to step back. It is the political system that has failed us and allowed the bankers to become banksters. When a party gets into government the top echelon of that party love it – it’s the pinnacle of what they seek to achieve. They want to stay there. They see the way to stay there as doing lots of nice things for the people who put them there so at the next election they get voted in again. The last government took this to the extreme. And as most of them nowadays are “career-politicians” they are frightened to death of getting voted out, because they have little skills to earn a living any other way. Continued…

  • Eric

    Anyway, to do nice things for the voters they need money – so they borrow. To borrow more money, they need more income to meet the repayments – that comes in the form of taxation. When a sector like banking starts to turn in big profits and pay big taxes the government loves it and will inevitably (it’s human nature) become less stringent about regulating areas of banking that people really know is dodgy. Continued….Things start to get “air-brushed”. Terms like “sub-prime” evolve (OK started in the US, but became adopted here). I worked in the mortgage industry for many years. In the 1980’s any lending which was to less than squeaky clean applicants was simply called “crap-lending” – yes really! But now it is convenient to call it “sub-prime”. Continued…

  • Eric

    So yes, the banksters are incredibly money-driven and greedy, but the politicians allowed it to happen and it is their duty to change the regulations to stop it ever happening again. To start with split investment banking off. All that is happening is that our 0% interest current account deposits and savings accounts paying paltry rates are being used to fund dodgy investment banking deals which earn big profits and pay the banksters bonuses. When it comes down to it, we are the people paying to satisfy all of this greed.
    PS. Love the “banksters” word Peter – sorry for nicking it from you!

  • CHG

    Great comments..some good rationale but one word sums it up where this self feeding system all stems and started from: THATCHER…she created the dog eat dog, everyman for himself, greed is good economy and society…and thats why we are in the social and economic mire that we are in…and Im not being negative…banks rule our government (fact) and we’ve all let this happen and now we are paying the price..and each potical party is guilty and spineless for creating the tangled ball of wool we call our economy that nobody will be able to unravel!

  • Roger the Pianist

    I am envious I must admit of these fat-cats. I left grammar school with a selection of O-levels and applied for a job at Barclays Bank. I was turned down because I was not tall enough. What???? I still have the letter and at one stage did think of suing them for discrimination against short people! I am 5ft 6ins by the way.
    I then did a lot of studying and got a job as an TV/Video tech where I stayed for 32 years before being made redundant because I suffered a back problem at work. No golden hand shake either! While I was there we had a bonus each Christmas of £10 and eventually they stopped it because it became valueless. Our wage rises were ALWAYS just the rate of inflation.
    The bankers seem to think they have a bonus by right of passage whereas I always thought a bonus was paid for exceptional work. They created that very well. Us lesser mortals now have to work exceptionally hard, even in retirement just to make ends meet.

  • Tony

    Merryn is absolutely right on the money and it’s a perspective that is rarely aired. A business model that generates unfeasibly high margins or EBIT is either enjoying a competitive advantage (which usually ephemeral) or exists within a structural monopoly or closed group. Investment banking is the latter and adds very poor value for the money it charges. This is the issue, not bankers bonuses.

    The Credit firms that support Retail banking (esp Experian in the UK) make ridiculously high EBIT for what they do for the same reasons – high barriers to entry and a closed shop

    My question is: great blog but we seem to have no ideas how to address it ?

  • Peter

    Most opprobium was levelled at investment banking,correctly.However,the retail side is not innocent. As one who suffered a credit committee,who raced in when our covenant was breached in a (very ) minor way and as the people who had showered us with money melted away,the true face of banking was shown. They are all in it together and know that we need them more than they need us…..and if they fail they will be bailed out AND get big bonuses. Is there another way?

  • Merlin

    You are right. The high figures can be paid because there is a lot of dosh around to pay them.

    I’m rather sceptical about how clever these chaps are having enjoyed the services of a few.

    As to the recent history- just how has the audit profession escaped unscathed ? If there was every an injustice that is surely it.

    As to the city contributing lots of tax – well maybe. But if all those clever folk had gone into manufacturing and rebuilt Britains manufacturing base I suspect the economic and social benefit would have far exceeded the tax paid by bankers.(And the smart ones tax-plan their pay anyway).

    Finally if these blokes are so highly mobile and can flee abroad if taxed- is it smart to have such a risky cuckoo in your economic nest ?

  • Mrs D

    would not mind a bonus being paid for a job well done , we are in dispute with a big bank who will not even admit their mistakes and are taking months to sort them out. They owe us money and we are still waiting so why get paid for a job badly done

  • Ian Chapple

    There is no doubt the chief execs. bankers, lawyers etc have their respective areas sewn up so that the rest of us are forced to use their services and pay. They believe themselves to be worth the money. We can strike back by not buying overpriced products from fund managers etc. so that the profits made are reduced. If all shares were directly owned shareholder power might have some meaning. Break the cosy ring of highly paid non execs giving execs huge pay by voting against the rises at shareholder meetings. Vote against mergers where high fees change hands.

  • Martin

    Most folk just don’t understand how Banks which have lost billions of pounds and are in effect bankrupt can ring-fence billions of pounds for bonuses. In any normal ethical business, lack of profit or bankruptcy means no bonuses. Most folk also don’t understand why it is that if they print money on their Hewlett Packard printer, they will be arrested for fraud, but if the government prints money, that’s OK. It might wash if the money magically conjured from no-where was equally distributed to every citizen of that country, but it is actually funneled through cartel banking channels. Vast sums are borrowed from the government by the Banksters who then re-lend the money at much higher rates to normal ethical businesses, who pass on their interest charges as increased costs of services and goods to the citizenry.

  • Martin

    Please note I use the term Banksters rather than Bankers, as most Bankers are not the problem. It’s when the Bankers graduate to Banksters the problems begin with insane derivatives deals, insider trading, and playing both sides of the house against each other. Banksters make Al Capone look like a tea boy. The best comment I read was from Rolling Stone magazine which referred to Goldman Sachs as a giant Vampire squid wrapped around the face of mankind. Governments create inflation by printing money which picks the pockets of every hard working citizen. The Banksters skim money off the process. Reform of government spending habits is needed first, with reform of many banking practices a close second. The real problem is the foxes are in charge of the henhouse.

  • Geoff

    Hello

    I have read all of the posted comments with great interest. They all make a good read. However, the one thing that sticks in my throat more than anything is that the “fat cats” say “If you do not give us the bonuses and packages that we demand then we will go else where”.

    I would really like to know where in the world that they are going to get another job….sounds abit like three card brag to me.

    Maybe they can get relocated to New York, I am sure that there must be thousands of jobs available for them there ….or is this a myth?

    Geoff

  • Mrs D

    Dont have a problem with bonuses if it is for work well done, however, our bank has made so many mistakes ,taken money from us, not admitted their fault on any thing .We are fighting to stay in business have no support, only get to meet young arrogant bank staff who try to cover up mistakes, rather than apologise ,sort the problems out, and pay us back our money so that we can get on with running our business.
    Have over 30 years business experience and have never been treated so shoddily by the bank as have been treated in last 2 years

  • LERENARD

    The few bankers that I do know (my brother included) do not defend the status quo. Even Mervyn King is very concerned about the lack meaningful reform to date. One does have to seriously consider the issues of excessive profits and whether they are justified and seen to be working in the interests of consumers. The free enterprise system fails when competition is not free and fair. Hence more regulation is required, not less, but enlightened regulation and regulators are required to make it work. There is no doubt that very high potential rewards encourage risk taking, particularly when there is little or no downside for those involved. That simply cannot continue.

  • Big Dad

    The issue of bonuses is understandably driven by strong emotions such as anger and envy, but is excessivly fuelled by the media pandering to the population at large (thier market) and not telling the whole story. Why do the media not point out that bonuses attract both income tax at 50% and NI contributions. It might be interesting to highlight what percentage of Treasury income comes from Banker Bonuses? Also, am I right in thinking that when the Treasury “bailed out” the banks they actually bought shares not just gave away the money? What percentage of these shares have risen in value? Does the Treasury get paid a dividend like other shareholders? Disregarding the very valid arguments about paying capable people for their efforts I wonder if the Treasury would benefit more or less if the money being paid in bonuses was paid to shareholders than individuals who pay 50% tax?

  • Eric

    CHG – you are right that the “me first” greed culture that came out of the Thatcher years helped start the massive escalation in banking remuneration. However, you without predecessors Wilson and Callaghan, you wouldn’t have had Mrs Thatcher so it really is a continuum with Bliar and Brown doing nothing to stop it at all. Also though I do believe that the ridiculous remuneration packages actually started in the US and our bankers here saw that, were envious and wanted the same – so definitely the US was part of the cause of it all too. Let’s hope this lot do something..!!

  • Loafalot

    Instead of bailing the criminal banksters out (which the Central Banks continue to do with QE, low rates, asset bubbles, FASB accountancy fraud, etc etc) the politicians could have let them go to the wall as they deserved, whilst setting up (say) 10 new taxpayer backed banks called GovBankA – J. These would have provided hefty competition to any surviving investment banks, thereby limiting future bonuses, and could have been floated in due course to repay the taxpayer.

    Unfortunately the key figures in this crisis were mainly bought-and-paid for US politicians … and Gordon Brown. As soon as the world followed Gordon Brown’s ‘chuck money at ‘em’ philosophy I knew we were all doomed … and we are :o(

  • Eric

    Geoff

    You are absolutely right. Where would the banksters go? The answer is that a small proportion would find somewhere where they were equally well off, but my view is that the majority would fail to get anything like they have now. That’s why they dish out such rhetoric. They are actually frightened to death that the regulators will clamp down.
    If you draw the analogy of poker, they are (I believe) bluffing, so someone really needs to call their bluff and let’s see them jet off – or not – we’ll see.
    By the way I worked in banking and financial services for many years and there is a layer of management below the top people who are more than capable of taking over – almost certainly way better.

  • Alec

    I doubt whether all the bonuses and wages the bankers have been paid over the past ten years will amount to the billions and billions of pounds the tax payers will have to continue paying over the next twenty or thirty years for their casino-lifestyle. It begs the question, why have an investment banking sector in the first place? The country would be better off without them and their debts!

  • bob

    One of the best uncovered myths of the past year has been the “highly mobile pool of talent” which will “move abroad” if taxed punitatively. These myths were peddled ferociously around the time that Darling unveiled his bonus tax. The result……. the highly mobile pool of dynamic talent turned out to be a rather flabby and sedentary bunch of the usual city toffs that ended up paying 50% tax anyway and the country reaped a rather tidy tax sum. More, if I remember than was initially forecast.

    I broadly support the coalition in their stance of reducing the size of the state. However when politicians are surrounded by bankers, politically funded by bankers, advised by bankers & schooled with bankers, it makes them far more prone to buy the sort of bull$hit mentioned above and far less likely to introduce the strict regulation we so desperately require

  • Chris G

    It is curious that the banking industry is so profitable- in theory the market mechanism should be such that if there is so much profit to be had other companies/ individuals will move in, competition will increase, standards will be raised etc. and margins should be driven down to a level more on par with other industries…

    I think this point was key though:
    ‘You also have to remember that barriers to entry in many of these businesses are vast.’

    These companies and the individuals in them are in a financially very cushy position and they are likely to act to try to maintain it, even to the detriment of, say, the economy as a whole.

    I think this highlights a problem with the idea of a free market driven society- such a society would surely be dictated largely by profit and self-interest. Surely a strong democratic government is needed to act in the interests of society as a whole.

  • Johann

    Although not working in the city myself a number of my best friends do.
    Working hours. They freely admit that they spent hours on the phone talking to friends over the phone during the day before given an urgent task to be finished by the next morning by their boss on his/her way out.
    Intellectually demanding – they don’t think so.
    The remuneration – very generous, which makes this all a lot easier to endure. If you earn in 5 years what most people earn in a lifetime who cares.
    And it’s not the case that the guys would be demoted to poorly paid jobs at the age of 45 – when they are allegedly burnt out.
    Of course some of them lost their job in a downturn – transiently. They were all back in the same/better jobs within a year.
    It has been interesting to watch how they have their houses etc paid off in their early thirties and now have the freedom to continue the same or something they find more stimulating being freed of economic constraints.

  • Johann

    Although not working in the city myself a number of my best friends do.
    Working hours. They freely admit that they spent hours on the phone talking to friends over the phone during the day before given an urgent task to be finished by the next morning by their boss on his/her way out.
    Intellectually demanding – they don’t think so.
    The remuneration – very generous, which makes this all a lot easier to endure. If you earn in 5 years what most people earn in a lifetime who cares.
    And it’s not the case that the guys would be demoted to poorly paid jobs at the age of 45 – when they are allegedly burnt out.
    Of course some of them lost their job in a downturn – transiently. They were all back in the same/better jobs within a year.
    It has been interesting to watch how they have their houses etc paid off in their early thirties and now have the freedom to continue the same or something they find more stimulating being freed of economic constraints.

  • FreeEntrepriseChampionKindaInTrauma

    Why does no one seem to believe that the “market” in this area will ultimately “correct” itself.

    Are fellowsubscribers all so wedded to the concept of our democratically government and its various subsiduary bodies thinking they “know or can truly influence the marketplace without consequences arising in that self-same market place” pretty much most of the time?

    I find most government backed financial thinking little short of incredibly naive. No wonder Bob Diamond is earning so much. To me, it is like pea shooters against panzers (Govenrments vs Investment Banks). The Global Economy has changed the “Rules”

  • Ricardo

    Alex, oh dear oh dear. you seem to be a big supporter of the talent myth.

    I know a few bankers, in fact I’m good freinds with a couple. They earn a decent wack, and good for them, they work hard for it. And they hate it. But I wouldn’t say that they’re *particularly* bright, certainly no more so than the average 2:2 educated chump of a couple of decades ago.

    You see there’s this big myth perpetuated by the banks about “…rewarding the best to keep the best etc etc etc”. It’s purely propaganda. Let them walk into better jobs. And where would that be exactly ? NY ? Frankfurt ? Bern ? Sad for them but those places already have there own legions of unemployed bankers to choose from, and they’re very protective in the jobs market.

    Thruth is that the city could probably increase its head count and still maintain its current wage bill.

    You’re confusing luck with talent. It’s not somthing a banker should do.

  • bobbio

    This article is about a Conman who worked as deputy chief executive in an investment bank for a month.

    http://www.dailymail.co.uk/news/article-1352145/Conman-used-fake-CV-win-165-000-job-executive-City-bank.html

    I wonder if they would have noticed based on the quality of his work.

  • Chris G

    @FreeEntrepriseChampionKindaInTrauma

    When I said ‘Surely a strong democratic government is needed’, I think I meant more ‘a strong democratically run society is needed’ – I wasn’t advocating a strongly centralised government, but making the point that a democratic government is supposed to represent and act in the interests of wider society, wheras the ‘free market’ model seems like it would be dictated by profit and self-interest- so the government would be required to intervene on behalf of society as a whole when things are occurring in the market that are detrimental to society as a whole.

    The market may eventually correct on this issue– but arguably only because the state tries to provide the regulation, educational facilities and infrastructure for others to try to compete. Would big corporations provide the facilities for others to compete with them if the state did not?

  • Chris

    Actually, an even bigger scandal than the size of bonuses is the fact that there isn’t necessarily much tax paid on them. An accountant that I was sat next to on a plane last year told me that a loop hole She used to avoid clients (mostly bankers) paying tax on bonuses, is to declare the bonus as a loan. The loan of course is never repaid, and since it is not declared as income it is not liable for income tax. I’d be very interested to hear your thoughts on this Merryn. Assuming you actually find my comment at the end of this page.

  • Alex

    Chris. It’s just been banned. As of December this year any renumeration disguised as a loan has been deemed to be renumeration by HMRC.

    Btw….it was a structure beloved of actors and footballers as much as of bankers. Infact I’d be very suprised if many bankers actually used that structure as compliance would never allow it. More likely she was referring to IT/Accounts contractors in banking.

    It’s a structure designed for freelancers, rather than employees.

    Still lets not let facts get in the way of a good bit of hysteria over a single employment group.

    I heard some bankers even drink the blood of children and meet in crypts. Well that’s what a man in the pub told me.

  • Peter Kellow

    Nick, I have just returned to this. No I cannot take it on trust from you either that “the City contributes so much tax.”

    Positive Money says “The extra £404 billion extra that [will be] added to the national debt by the end of this year” That wipes out at least eight years worth of the money banks contribute to the exchequer and probably a lot more

    With regard to industry I should have spelt out BRITISH OWNED industry. The difference between Britain and the other “mature economies” is that they still own their industries. The point I was making is that profits from foreign companys’ British factories are largely repatriated depriving the exchequer of revenues

    The point about 300 years is that “modern” banking practices were imported from Holland with in 1688 with William and Mary (ever asked yourself why they were invited?) and since then efforts to establish industry in Britain have been thwarted by the City (the gains of the Industrial Revoution were lost or stolen)

  • Peter Kellow

    Alex

    Trying to make out that bankers do a normal necessary job for which they are justly rewarded is always going to be a tough sell.

    US President Andrew Jackson in the 1830’s who had his run in with the banks summed up the feelings of many then and today when he characterised the banking industry as a “multi-headed hydra, eating the flesh of the common man”

    Nothing you have said has altered the truth of that statement

  • Rob

    hi merryn,

    good piece but you missed the important area of regulation. the key to the oligopoly is not the people. its not the brand. its not even the huge amount of complicated IT, which increasingly can be outsourced to india anyway.

    its the mountain of hugely complex rules and regulations, different in every product and every country. you need licenced legal entities (companies or branches), and licenced people. setting this stuff up takes years, even in just one country. to do it globally would take decades.

    so they are protected by the mountain of rules that they complain about all the time. the sad thing is that all but a very few top managers realise or admit this, even to themselves. this is because admitting that super profits are due to government protection obviously detracts from one’s own apparent genius…

    (nb i spent 15 years in a bulge bracket investment bank, but have escaped to south america!)

  • Rob

    hi merryn,

    good piece but you missed the important area of regulation. the key to the oligopoly is not the people. its not the brand. its not even the huge amount of complicated IT, which increasingly can be outsourced to india anyway.

    its the mountain of hugely complex rules and regulations, different in every product and every country. you need licenced legal entities (companies or branches), and licenced people. setting this stuff up takes years, even in just one country. to do it globally would take decades.

    so they are protected by the mountain of rules that they complain about all the time. the sad thing is that all but a very few top managers realise or admit this, even to themselves. this is because admitting that super profits are due to government protection obviously detracts from one’s own apparent genius…

    (nb i spent 15 years in a bulge bracket investment bank, but have escaped to south america!)

  • Chris G

    If the markets appear to fail then free-marketeers will simply argue that it is because somewhere in the process there was too much regulation or ‘government interference’. So the argument becomes quite hypothetical.

    But consider a well educated and engaged population, that elects a representative and accountable government, should in theory then have a body of authority acting in the wider interests of the population/ society, i.e. a democratic government. Whether in practice a good democracy is achieved is another thing, for example is the population educated enough and sufficiently able to understand the arguments and engage in the democratic process, anyway…

    I would say government should ‘guide’ the markets, so not necessarily a case of more or less regulation, but the right kind?

    Although actually why are the barriers to entry in the financial industry higher than say, pharmaceuticals or engineering?

    Those questions are only rhetorical; probably quite big debates.

  • CHris G

    I think I am almost certainly talking to myself now, but I just wanted to add that I am not totally convinced by the barriers to entry argument.
    For example only two companies manufacture aircraft engines for large commercial airliners, these are GE and Rolls-Royce, and the cost for these companies to design a brand new engine from scratch I understand to be in the region of $1billion (usually the new engines are modified from older designs rather than starting form scratch). So these are high barriers to entry. Yet these two cannot make a ‘pact’ and charge airliners excessive sums for the engines, because there are regulations against not competing properly.

  • Chris G

    Also as to the market mechanism where competition should increase if the profits to be had are high… I suppose we are seeing a number of services being offered directly to private investors, such as RHPS and other investment advice service, PI’s will obviously be wary with their savings but if these prove to give good returns consistently and are an easy to use service then presumably individuals will move their money out of managed funds and into such services. This will then force managed funds to improve their performance or lower their fees if they wish to retain clients.

  • paulp

    Bankers bonuses and high profits are the result of unequal sharing of risk. Casino banking would be OK if the players put up their own money.

    The public can demand that we call their bluff and that we bring in a windfall tax on bankers pay while they are in receipt of our money.

  • Woodberry

    Some way back there was a discussion about how this situation can be changed – more regulation or less regulation to open up the market and slim down the bonus payments?

    What is needed is something simple like the Big Bang in the 1980s when the governemtn overnight abolished the Stock Exchange floor as the basis for security trading and shook up the City in the process. It had the merit of being a simple measure with no budgetary cost to the Exchequer but it broke up the cartel.

    My favourite for a simple measure to deal with the current situation would be the requirement for companies to publish salaties (including bonusses) above £100,000 so that investors can see how much of the return on theirinvestment is being siphoned off by their employees.

    No wonder the banks have resisted all the proposals for more open-ness about what they are doing with bank inocme.

  • The UK is a Corporatocracy

    Do bankers get paid so much because the government are allowing them to commit false accounting and fraud, resulting in bonuses based on fictitious profits? Where are the profits that generated all the bonuses pre-credit crunch?

    I suppose Tony Bliar won’t be too concerned now he is a “consultant” to JP Morgan, earning between £500,000 and £2,500,00o a year, depending which newspaper you believe.

    If you were a politician would you care about regulating banks, when the gravy train might stop at your station as soon as you leave office?

  • Martin

    I’ve enjoyed reading all of the above posts. One thought keeps recurring to me. It’s easy to get lost in the complexity of the Banking debate and miss the bigger picture. I think we are all in agreement that fair banking with sound money is desireable and even beneficial. Peter mentioned a multi-headed hydra eating the flesh of the common man. I previously alluded to the Rolling Stone Magazine comment of the Vampire Squid wrapped around the face of mankind. It’s true we now have a plethora of unfair banking practices , but the real problem is the destruction of the purchasing power of money. This is accomplished by overspending governments.

  • Martin

    To wilfully destroy the value of that money earned by the common man and woman is theft, no more, no less. If you want to be charitable, call it hidden taxation. If any government really cared avout the people, they would not entertain destroying the purchasing power of the millions on minimum wages. The recent large increases in commodity prices are a symptom of a depreciating currency, which is a government policy. Bankers merely aid and abet the government, and are a diversion from the major issue of sound monetary policy. Ask the rioters in Egypt how they like rising food prices!

  • Critic Al Rick

    @ 61. & 62.

    Your’e both so close to ‘seeing the light’ I have seen.

    Woodberry: you mention cartel.

    The UK is a Corporatocracy (that’s good, I like that! Wow!):
    you mention gravy train, politician and banks in the same sentance.

    All of that fits my theory:

    In matters of the economy the Fat Cat BANKster ‘CARTEL’ is running the country (there’s your CORPORATOCRACY); the POLITICIANs are incentivised puppets (there’s your GRAVY TRAIN)

    The Government (truly) regulating the Banks – it would take a Government with backbone and real selflessness to do that!!

    No wonder the big bonuses! Eh?

    Despicable !!

    Shades of Zeitgeist – unsustainable!!

    What will bring the end?

  • John Brown

    The end of the business cycle was coming. Recession was not inevitable, but people knew they could not make a lot of money out of shares for 3 or 4 years into the future: a big problem for a banker of 50+ hoping for early retirement.

    So they invented self-validated mortgages in the USA where, incentivising feckless over-borrowing by suspending repayments for 2 years.

    Bankers in Europe bought these
    high-risk mortgages, pretending that they were low-risk
    securities. The balance sheets of their banks appeared to
    grow accordingly, and they waltzed off with increased bonuses and final-income pensions: they no doubt invested
    their lump sum payments back into the stock market close to the bottom a little later on.

    Two years later, the mortgage holders default and we get wholesale financial collapse.

    I took my money out of the banks and put it with Tesco and the AA, who both have retail revenue streams, and appear clean

  • Chris G

    An interesting quote here, from the 1800’s:

    ‘In Proudhon’s view “democracy is nothing but a constitutional tyrant.” The people were declared sovereign by a “trick” of our forefathers. In reality they are a monkey king which has kept only the title of sovereign without the magnificence and grandeur. The people rule but do not govern, and delegate their sovereignty through the periodic exercise of universal suffrage, abdicating their power anew every three or five years. The dynasts have been driven from the throne but the royal prerogative has been preserved intact. In the hands of a people whose education has been willfully neglected the ballot is a cunning swindle benefiting only the united barons of industry, trade and property.’

    Written by Daniel Guerin, from writing of Pierre-Joseph Proudhon. (Page 17 of book ‘Anarchism’ written by Daniel Guerin).

  • Chris G

    Just to add Proudhon did believe democracy was the best form of political system but that it could be manipulated, he was the main founder of the anarchist political ideas, although I understand anarchist ideas can vary a lot.

    I think what he refers to is still true today to some extent, a practical way to try and correct this would be to have a nation well educated in politics and political philosophy IMO, i.e. make it a core subject in schools, and maybe finance as well now.

  • Jack

    Tunisia?

  • Critic Al Rick

    @ 67. & 68. Chris G

    Re. my post 65; there you go!

    Proudhon’s view: ‘the ballot is a cunning swindle benefiting only the united barons of industry, trade and property.’

    Corporatocracy comes to mind!

    The ballot, in my mind, is effectively a choice between sets of incentivised puppets; the true ‘rulers’ remain unchanged.

    How’s that for a Democracy?

    No wonder they say ‘Politics Stinks’!

  • Critic Al Rick

    P.S.

    How’s this?

    The Big Supermarket ‘Cartel’ is effectively ‘The Ministry of Food’?!!

  • Chris G

    Here is another point I heard recently.
    These large bonuses being paid by banks are justified under the banner of capitalism, i.e. the market rewarding exceptional talent, hard work, entrepreneurship etc.

    However while no doubt the vast majority of bankers are talented people, it could be argued many are not capitalists- capitalists are individuals who set up businesses etc, risking their time and money, and through talent, entrepreneurialism, hard work etc they try to make a success of it- and capitalists argue the free market is a good environment for this to thrive in and it will benefit society as whole to encourage this.

    However for many bankers, if stocks go up they make a lot of money, and if stocks go down- they still make a lot of money. Obviously the situation has been fixed and is not capitalist at all.
    At worst they lose their jobs, but by then they have made so much money they are insulated from the effects of the problems.

  • Critic Al Rick

    @ 72. Chris G

    That is a very interesting point!

    They aren’t capitalists; the’re economy totalitarians!

    So, the suggestion of ‘Cartel’ is not to be frowned upon. There is, of course, competition but this would be above agreed threshholds, honour amongst thieves!

    Well, if you’re selfish and you can’t make huge profits when you’re a Cartel and make the rules, it’s a very poor job. More corruption!

    How really clever are these people? I would suggest that other credentials would be of more import, such as deviousness, unscrupulousness, avariciousness, deceptiveness, etc.

    Despicable!!

  • Chris G

    @ 73. Rick

    Haha, so it is decided then!

    There seem to be no objections (although that could be because this board is now deserted).

  • Critic Al Rick

    @ Chris G

    Furthermore, Chris, I would have thought a lot more talent, hard work and entrepreneurship went into producing £X of profit in a Manufacturing Enterprise than in an Investment Banking Enterprise (with or without ‘fixing’).

    So, if my above thought is right, and if bonuses (justified under the banner of capitalism) are proportional to profit, then it hardly seems fair the Banker should have as large a bonus as the Manufacturer pro rata; does it?

    @ Anyone

    Regarding the above, what do you think?

  • Critic Al Rick

    @ Merryn

    How’s about this?

    I’ve just accidentaly found an article in ‘The Telegraph’ dated 8 Dec 2010 entitled:
    ‘Tesco Bank chief Benny Higgins accuses UK’s biggest lenders’

    Guess what of: ‘operating a ‘cartel’ on consumer credit data’

    Well, if they can run one ‘cartel’ they can run another:

    The Fat Cat Bankster ‘Cartel’!

    Nobody wanted to believe Nicolaus Copernicus when he suggested the Earth travelled around the Sun and not vice versa!

  • oliver

    Neither of the above. The Banking industry is a perfect example of practical socialism . In what other industry do you see so many of the workers so well rewarded with such a high percentage of the profits?

    It is beautiful really, power to the people.

  • Chris G

    @ 75. Rick
    I don’t think I could say Rick, it probably varies, in theory the market is supposed to reward proportionally but only if you believe it could tend towards being a perfect mechanism if left to its own devices, which I don’t personally (self-interest, personal profit, creating a monopoly etc).

    I suppose technologically advanced manufacturing (the only type the U.K can gain a competitive advantage in IMO) requires technical expertise, experience, practical skills, business skills, sales, foresight and planning, good organisation etc.. but made up of a combination of the people within the organisation and in differing degrees depending on the business.

  • Chris G

    Investment banking, in its purest form would you say this is the direction of capital toward the best business cases, so a ‘facilitator’ in developing business, although this only seems to occur when there is new investment like public offerings. Or the transfer of wealth between assets to try to hold the assets you think will appreciate most in value. Then there are also management, bureaucratic and administrative roles.

  • Chris G

    Both surely require a lot of expertise, although I would point out that the financial industry does not seem to directly create wealth, it can only facilitate other industries (like science and engineering) that can. And when you come back to the original discussion it seems like the amount of profit generated, and siphoned off, by the banks is disproportionate. Particularly it is an issue when you consider much of the profits were generated by inflating bubbles, and then when these bubbles collapsed (GFC), taxpayers had to step in to fill the void to protect people with savings in these banks, completing a process of a transfer of wealth from everyone else to the bankers. By necessity I think we see this process continuing with high inflation and high loan rates combined with low interest rates, allowing the banks to further repair their balance sheets (as well as many other indebted people).

  • Critic Al Rick

    @ Chris G

    Thanks for your responses.

    QUOTE:
    ‘the financial industry does not seem to directly create wealth’

    Now we are getting nearer the mark!

    The financial industry moves numbers about in various media, whereas a manufacturing industry moves tangible inputs about using tangible resource to output tangible goods.

    I know which industry involves the greater effort insofar as tangibles is concerned.

    QUOTE:
    ‘taxpayers have to step in to fill the void’

    So, what net contribution has the Banking Sector made for UKplc over, say the past decade?

    Are bonuses proportionate to this? Huh!

    QUOTE:
    ‘in theory the market is supposed to reward proportionally’

    Hypothesis: there is a Fat Cat Bankster ‘Cartel’

    Solution: SMASH THE ‘CARTEL’!

    What say you, Chris?

  • J.P. Diamond

    What is a banker ? Essentially he is someone who looks after
    other peoples money.
    Do people who perform this function really deserve to be paid
    bonuses which are measured as 5PM,10PM – PM being the annual
    wage of the British Prime Minister ? Wages should be directly correlated to degree of responsibility which accompanies a job
    (hard to quantify and an intangible entity I agree).
    But I suppose Lord Lardyfeline needs some
    liquid assets to buy his title.

  • Critic Al Rick

    @ 82. J.P. Diamond

    (No relative of Bob, I hope!)

    In my opinion, if our society was fair and was without corruption, nobody should be earning more than the P.M.

    The P.M. should, effectively, be CEO of UK plc and as such should command more than he gets.

    But, in my opinion, the P.M. is a puppet CEO, not acting in the best interests of the majority, but in the best interests of the puppeteers. I’m not particularly referring to Cameron, but all PMs (of whatever political guise) from ?

    If the status quo is allowed to go unckecked, we’ll end up with full-blown Corporate Communism.

    YOU MARK MY WORDS!

    ‘SMASH THE CARTELS’!

  • d.andre

    They don’t give due returns for having people’s money. Since the reduced interest rates to near zero, the percentage return for savings has become almost zero, but not so with borrowings.

    Returns for us during the passed 5 years have averaged 2%, even though at the time we had ‘expert advice’ from a financial adviser for our savings. Those savings we managed ourselves earned on average 4%!
    The bankers keep the money for themselves rather than give savers their dues and you wonder why people are so angry.

  • Critic Al Rick

    @ 84. d.andre

    They, effectively, gambled with our money and lost (Credit Crunch); the bail-out was, effectively, a grand theft (of our money).

    So. so greedy (and drunk with power) they continue to rob us in a desperate attempt to save their mortgage equity!

    They are, effectively, at the helm of the UK economy and are steering us in their desperate drunken stupour towards a huge Depression!

    And, by awarding themselves these astronomical bonuses, they appear to believe they are worthy of them!

    UK plc is, effectively, a rudderless ship.

    I refer you to blog on ‘The Telegraph'; not everybody is naive!

  • 4caster

    Having just read the article and some of the 85 comments (a record?) I would like to go back to basics.
    Whose money is it that the banksters think they have the right to misappropriate through bonuses?
    The banks belong to their shareholders, who own the banks, and employ their employees, from the Chairmen and CEs downwards. These spivs and gamblers should be taking their orders from the shareholders. They should not expect bonuses before the shareholders have been rewarded handsomely for the risks they take. Most of us are still down on our investment values of 2007, and some are still receiving no dividends, even on preference shares. The banksters should not have taken a penny in bonuses since 2007. They should consider themselves fortunate to have jobs.
    The problem is that shareholders have no mechanism to exercise the power and authority that should accompany their ownership of the banks. CORPORATE GOVERNANCE, or the lack of it, is the problem.

  • Peteinaber

    No other industry pays such gargantuan salaries. Everyone else is subject either to competition or regulation (in the OFFBANK sense rather than the FSA sense). It is clear there is no effective competition between banks or such salaries would not be possible.

    The natural assumption is that the banks are sucking all that money out of the economy that would otherwise be available to the rest of us. That certainly seems to be the case for those on the receiving end of negative real interest rates on investments, and on 7% loans, 13% overdraft and 30% credit cards.

    But the argument always used to be that speculation in commodity markets was instrumental in setting prices efficiently and therefore created wealth that would not otherwise exist. What is current thinking on this in relation to casino banking?

  • jessica joy allen

    Hi I am a 17 year old student and I think it is bonkers how these bankers keep getting their bonuses!!! And I am so impassioned that I have produced a song saying exactly that!! Jessicajoyallen Morality”

  • Arjun

    Alex tells us that one of these finance guys earn 60-80K for a day in which they get up at 5 am and get home at 8 pm and has his” nerves tested.” That seems a big deal so a fat bonus is necessary to attract people to such a punishing lifestyle. I work as a school teacher in a European country. I get up at 6.15 am and get home at 7 pm after driving an eighty km round trip to school and working with school students will have your “nerves tested” all right. For this I earn 19K a year and no bonuses. So is there some way in which we can get all this into proportion? No, because the money markets pay out heavily and people won’t pay classroom teachers an executive salary. It’s no good playing on the strings.

  • Norma

    “highly skilled bankers” !! They are hardly Einsteins, skilled surgeons or research scientists! If we are invaded by aliens, suffer a global disaster or world -wide health crisis I’m pretty sure we will not be looking to these “talented individuals” for an answer! Give the men/women who are trying to find a cure for cancer etc millions, the aid workers who risk their lives to help others etc These bankers just play with other peoples money with no risk to their own finances , give them – a Monopoly board game and let them “play” to their heart’s content.

  • Tom

    Ahh… Poor bankers. It sounds from some of the posts that it’s a really tough job screwing up the world’s economy. I’m afraid I have little sympathy, especially as it is our tax money contributing to these ridiculous bonuses. They are not healthy for the economy or indeed for the bankers. These guys need a sense of perspective.

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