EDITOR'S TAKE: Bankers are taking capitalists for a ride

2 September 2009

2 minute read

EDITOR'S TAKE: Bankers are taking capitalists for a ride

Marxists should be over the moon. Over the past twenty four months, bankers have demonstrated their ability to squeeze providers of capital until they divest themselves noisily of bodily fluids.

Lehman was a hotbed of worker empowerment. In the decade leading up to its demise, it paid its employees $55bn. Cumulatively, shareholders earned zero over the same period. They also lost all their capital.

However, now that governments are providing capital to the banking sector, pillaging is suddenly less acceptable. In an op-ed in last month's Financial Times, Hector Sants pointed out the FSA's new guidelines are designed to ensure that banks don't "subordinate the interests of capital providers to those of employees."

And in its draft compensation code, the FSA urged banks' shareholders to 'reconsider the current practice, common in many firms, of accruing bonus pools ahead of any risk-adjusted returns to the providers of equity capital.'

For the moment, this doesn't seem to be happening. Bonus pools continue to be measured as a percentage of revenues rather than risk-adjusted profits. Goldman has set the bar, with payouts equivalent to around 49% of monies coming in. Morgan Stanley is struggling to keep pace, with staff seizing 71% of revenues in the second quarter.

Top traders are most practicised at squeezing capital providers into submission. When Tod Edgar left JPMorgan for Barclays last month, it was rumoured to be for a package entitling him to 50% of his profits. Andrew Hall is said to be on 30% at Phibro.

However, capitalists need not fear. The machinery of state will not tolerate their ill-treatment at the hands of greedy, grasping employees for long. At this month's G20 meeting, Gordon Brown and Nicholas Sarkozy want to protect them by introducing legislation restricting bonuses as a percentage of revenues or profits.

Bankers have helped bring this about; Marx would be proud.

AUTHORSarah Butcher

Global Editor

Ka
Kay
3 September 2009
Djm, what you're talking about is old news to him.
He only knew the full extent of human experience around September of last year when he was this close to losing his job and health insurance (kind of like many of the people in his client companies, post restructuring) and moaned to me on the phone, choked up, 'I don't understand what's going on. I don't know what else I would do other than this. This is all I've ever done in my life.' Luckily the taxpayers jumped in to help, so he could eventually enjoy the stingrays and the polar bear bites.
That's what I call the full extent of what the human experience has to offer.
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dj
djm
3 September 2009
Kay,
I can't help but agree. There is little exciting about a September trip to the Carribean. It usually revolves around sun, beaches, and cocktails, while trying to keep the little ones entertained. Unless he's going to engage in some underwater hand-to-tail stingray combat or stake the bulk of his fund's capital on the Jamaican dog races, there isn't a lot to get excited about. I share your distaste.
I reserve similar disdain for his winter plans. Ski, rosti, brandy, cigar, repeat. Hardly the rush experienced while heading down an Olympic bobslead track with rockets strapped to the back in order to clear the jump left over by the rusted infrastructure. Or for the purists, polar bear baiting tests that age old struggle between a man's fears and his wits (and the bear).
I believe we speak as one when we weep for your friend's mundane boundaries, never knowing the full extent of what the human experience has to offer. If you speak with him again, please convey my sentiments.
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Ka
Kay
3 September 2009
As the adage goes, there are two types of government: those that have agreed to provide banking sector guarantees and those that have but don't know it. As the past year has shown, excessive compensation in the financial services sector creates moral hazard and poses the kinds of risks on the real economy that simply aren't comparable to other industries. Given that governments carry the burden of potential bailouts, it would make sense that the causes of excessive risk-taking and misaligned risks would be regulated.
Anecdotally, I spoke to some people at Lehman Brothers a year ago, and I know how despondent they were then. The fates of these choked-up bankers improved very quickly, however. Someone just shared with me some days ago that he's taking his family to the Caribbean for Labor Day and St Moritz for Christmas. Frankly, I found his excitement to be distasteful.
What's most disconcerting is the lack of reflection and change. Investment banks would need the equivalent of a morbidity and mortality conference, but it hasn't happened and probably won't.
Given the change isn't coming from within, I'm only glad to know regulators are drafting stricter codes and guideli
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Sa
Sarah, Editor, eFinancialCaree
2 September 2009
@Djm - we did have an article on this a few months ago, but I can't find it immediately. I seem to remember that people pointed out at the time that the comparisons weren't valid as other industries have higher raw material costs. WPP pays 58% of its revenues in compensation costs.
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dj
djm
2 September 2009
It would be interesting to see a comparison across different sectors to see what %ge of revenues are taken up by labour costs. I think it was already pointed out that some consultancies are above the 50% mark. The average for the 3 main football leagues is around 60%. I wonder what the ratio is in law, entertainment, education, healthcare, and media. Do financial firms spend a disproportionate %ge of their revenues on labour costs relative to other sectors of the economy? Sarah, do you have any data on this?
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