The City may have been cheered by reports that some of the big investment banks are starting to pay out bonuses again, but it hasn’t gone down well in Whitehall. Chancellor Alistair Darling was quick to castigate the banks today in an interview with the Independent: bankers were ‘too complacent’ and need to be ‘brought back to Earth’ via extra regulation, he complained. But even apart from the fact that it’s a bit hard for MPs to take the moral high ground these days, we can’t see how he’s going to stop privately-owned firms incentivising their staff...
Darling told the Indie that the Government wouldn’t legislate to cap bonuses – presumably because they couldn’t if they wanted to. However, he did say that he’d give regulators the power to crack down on firms offering short-term bonus schemes that incentivised excessively risky behaviour (i.e. the kind of behaviour that got them into the mess). Regulators should be prepared to ‘put people on the rack’, he said. We don’t think he’s necessarily advocating the use of medieval torture instruments on recalcitrant bankers, but it might go down well in some quarters if he did.
It all stems from reports this week that Goldman Sachs and Morgan Stanley – two big investment banks that appear to be bouncing back rather quickly – are preparing to start shelling out big fat bonuses to their staff. Goldman (which has now paid back its loan from the US Government) is apparently on course to pay out an extraordinary $700,000 per employee, while Morgan Stanley is set to dole out about half as much – although both are making all the right noises about long-term incentives, clawback options and so on.
Helpfully for the Chancellor, there’s a cautionary tale to hand: it emerged this morning that a rogue oil trader managed to lose his firm, PVM Oil Futures, a cool $10m early on Tuesday morning. Bonus schemes effectively incentivise traders to take huge risks on a daily basis; so when it goes wrong, as it clearly did at PVM this week, the financial implications can be huge. The trader apparently got himself into trouble over some Brent crude futures contracts (i.e. he was betting on the future price of oil) – to such an extent that trading volumes were 32 times the normal level, and the price rose by almost $2 a barrel. The result was that his firm is $10m out of pocket, and he’s been suspended.
However, you might argue that Darling’s criticisms – that bankers were ‘too complacent’, were ‘only operating because of very substantial support from taxpayers’ and were failing to hold themselves open to proper scrutiny – might equally be applied to MPs, after the expenses row (albeit the sums involved with these bankers are orders of magnitude higher). And is it really the Government’s place to block private firms from paying their staff bonuses, if they’re performing well?
In today's bulletin:
Darling wades into bonus row - as trader loses £6m
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CFOs take centre stage
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