When clawbacks turn nasty
This will be the first year that widespread clawbacks are incorporated into bonus terms. Morgan Stanley, UBS, Citigroup and RBS had them for the 2008 bonus round, but from now on they're going to be both more widespread and more punitive.
It's vaguely concerning, therefore, that an allegation of inappropriately applied clawbacks has surfaced already. Bloomberg reported last week that Nabeel Naqui, the former head of the credit products group for Europe and Asia at Toronto Dominion Bank is resisting the bank's efforts to reclaim 3.1m in bonuses after it fired him for gross misconduct.
TD Bank says Naqui "substantially overvalued" his trading positions, but Naqui claims the bank's pricing system itself contained 'systemic flaws.'
Clawbacks for misconduct are nothing new, but clawbacks for all kinds of other things are.
The Wall Street Journal reported last week that JPMorgan, Bank of America and Goldman Sachs have tightened their clawback provisions to cover bad risk analysis, disappointing profit projections, and excessive risk taking respectively.
Charles Ferguson, a solicitor who represents aggrieved traders predicts clawbacks will be "fertile ground" for litigation. When the crisis erupted in 2008, Ferguson defended numerous traders dismissed on the grounds of gross misconduct because they lost money when markets plummeted.
"It's not unheard of for banks to argue that black is white," he ponders.
The most clawback-friendly positions are probably in equity sales, where performance is fairly cut and dried and the risk on the trading book is relatively short lived.
However, even equity sales people will be caught by clawback provisions which apply to the profitability of the bank as a whole. Expect much nastiness to come.
