Morning:
2°c
The very senior banker wanted to explain to me how bonuses work. “Take three scenarios in an investment bank”, he said. First, there is the guy exchanging long-dated, 30-year fixed-rate interest payments for floating rates. He may earn his employer £30 million and the bank may be happy to pay him 10 per cent.
Then there's the bloke, said the banker, “who is advising Kraft on its Cadbury bid. If Kraft wins, he too may have netted £30 million for the bank [uncannily the figure which the Kraft lead advisers each stand to receive]. He may also be in for 10 per cent”.
And there's the chap who is dealing in home mortgages for the bank in California: “When he values a property he could reckon it is worth $200,000 or there again, he may put it down for $225,000 — thus jacking up the size of the mortgage book and potentially, his annual bonus.”
In the first two scenarios, said my senior banker, “there is little scope for anything untoward. In the third, the extent of the bank's risk is being driven by the prospect of the bonus and that is where the problem lies”.
He was trying to tell me that banks are very complex institutions, covering lots of different activities and that, likewise, the factors which determine the size an individual's bonus may not be the same.
I hear what you say, I said to him, but isn't something rather fundamental being lost here? “What's that?” he asked. Namely that these three employees are only doing their jobs — yet they expect to receive bonuses. It's that, I said, that sticks in the craw of most non-bankers.
In the outside world, I went on, people do not receive a payout for merely doing their job. His face was a picture to behold — one of astonishing blankness. He really did not get what I was talking about. “But in the City…” he spluttered.
Precisely. In the City. There you go. In the City it is taken as read that those pulling in a profit for their firms should get bonuses. But why?
When I told my companion I couldn't recall ever having received a bonus as a journalist he looked baffled. He was clearly struggling to understand how anyone could be in such a situation.
This was where banking had lost the plot. Politicians could huff and puff and tax as much as they liked but nothing would change until the entire system changed.
At this, the senior banker smiled. “Do you know, when I first joined the City, Barclays, NatWest and RBS did not pay bonuses? They only started paying them in 1985-6.”
That was Big Bang and the relaxing of the old restrictions, so banks were allowed to own brokers and Wall Street giants flooded in. Until then, he maintained, the bonus culture was nowhere near as rampant as it is today.
The broking firms and some of the US banks were owned by partnerships and it was regarded as natural for the partners to receive a profit share at the end of the year. That system was adopted by the UK banks and the rest, sadly, really is history.
What I did not understand, I said, was why the present owners of the banks remain content to see these bonuses paid. Take, for instance, Goldman Sachs, I said. It's still run as a partnership and the partners usually share a large bonus pot.
Yet I've never seen quantified what extra profits are generated by Goldman clinging to that structure — has, for example, Warren Buffett, its most famous shareholder, ever demanded to know what Goldman gains in monetary terms (as opposed to collegiality) by remaining a partnership and paying the partners vast bonuses?
We both agreed that Buffett almost certainly had not.
But that also was not the point: it was no use singling out Goldman. No bank will break ranks and stop paying bonuses unilaterally — to do so would be to create a competitive disadvantage in terms of hiring and keeping staff.
And so on we go, fuming and moaning but in the end still doing nothing about it.
If The Plumber is so good why is Fluid Leader suffering from a lack of liquidity?
Two Fridays ago, after the market closed, up popped the notice: Fluid Leader Group was being withdrawn from the PLUS-market.
Fluid, which sold a patented pipeline repair device enabling oil companies to seal leaks without closing down pipelines, had floated on PLUS with a valuation of £90 million in 2007. Now it was gone and with it, investors' money — today, the company is worth next to nothing.
Fluid Leader's demise jarred, to say the least. It was brought to the market by Paul Davidson, aka The Plumber. I interviewed Davidson in June 2008. He told me how he planned to secure a full market listing for the group and build Fluid Leader into an industrial giant. “I must have made hundreds of millions in the past,” he said. “This one will make me a billionaire. It's going to be huge.”
In the past as well Davidson had been fined £750,000 for market abuse by the Financial Services Authority and fought a lengthy battle to clear his name. He was a pipe-fitter by trade — hence his nickname — who became an inventor and, when he floated Cyprotex, another of his companies, took out a £6 million spread bet on the opening price of its shares. The FSA duly threw the book at him, although he cleared his name eventually.
When I saw him, he said he was going to open a wine bar in Cheshire near his home. “We're going to call it FSA's Retreat and the dish of the day will be Slip Up and Chips.”
But within five months of our meeting, Davidson was booted out of Fluid Leader because it was felt he “did not sit comfortably in a public company role.” He remained a major shareholder and a succession of managers followed. The company went on a downward path and now comes this latest news.
It was hard, meeting Davidson, between the stream of knockabout anecdotes, to separate fact from fiction. I thought you were bankrupt? I asked. “If you're a piano player, you can still play the piano,” he replied.
Later, I said, what are you worth? “Nothing. It's all gone.” He was shaking with laughter when he said this and went on to tell me how he'd made £42 million “so far this year”.
How so? Davidson leant over. “Me, I can earn a fortune anywhere. You see that glass of water,” he said, pointing to a glass. “I'll sell it to you for £10. You think I'm mental — but if I set fire to you, then you'll want to pay me £10 for the water.”
Alas, for Fluid Leader's investors, Davidson did not display the same touch. Surely, the authorities should investigate — Fluid Leader cannot be allowed to come and go so easily.
Reader views (2)
Chris Blackhurst you are completely missing the point.. completely!!
Firstly many Hedge funds are founded by ex-bank traders who have figured out that they can make way, way, way more money for themselves with zero publicity from Joe Public or the Press!! Ditto top M&A advisors, ever hear of firms like Greenhill? Wasserstein Perella? Your point about writing bad mortgages is quite simply appalling credit policy which can be cured by proper supervision and controls. Your analysis ignores the fact that if you break up the mega banks tthen you will still have enormously profitable pockets of business and major lending banks. The reason these banks added these trading and advisory activities is because they were making zero money on wafer thin lending margins as loans were were issued as bonds [disintermediation]. The ire of Joe Public is understandable but all futile. The banks pay these bonus's or risk losing the talent to private operations where they can make even more money and not give a damn what you or the public think. Management at investment banks pay these bonus's or else risk losing the human capital that make the profits that ultimately carry other low profit operations.
- James Macleod Ritchie, Oyster Bay Cove, 20/01/2010 15:15
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At least with this one you have hit the nail on the head, but the point you still are missing is that banks are using wholesale money to punt with.
If they want to offers dirivitive weapons of mass destruction then they must hold positions commensurate with a leverage that is an acceptable multiple.
That may means lower capacity to lend but only from teh present banks and it should not stop new participants setting up to compete and take on the shortfall.
Whilst I am a firm believer in less is more where profit is concerned with the right criteria and regulatoty environment limiting excess where banks are concerned more would mean no benefit to the end consumer and almost overnight reduce the remuneration packages in that sector, not raise them.
- Robert Marshall, LONDON, 18/01/2010 16:24
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