Tonight:
8°c
A friend of mine who is something of an internet guru once pitched for a job to revamp a well-known company's website. Later, the managing director sought me out. "Your pal was superb." Then he frowned. "But we can't hire him."
Why not? "He's far too cheap, I can't possibly tell the board we're using him. They'll ask how much he's charging and when I tell them, they'll say: 'That's not enough, he must be no good.'"
Something very similar occurs day in, day out in the City - which is why the investment banks are making so much.
And not just the banks: law firms and accountants, too, in the eyes of the rest of society, earn fortunes.
The truth that is never properly explored about City bonuses and profits is that somebody is paying them. We've reached the point, surely, where laying into bankers for the amounts they reward themselves has run its course.
Yes, we can demand greater transparency. Yes, we can insist they keep more back to boost their reserves.
Yes, we can oblige them to defer their payouts and base them on performance and put their awards in shares rather than cash. Yes, we can impose a transaction tax.
The fact is that none of this will make a blind bit of difference. It won't address the fundamental issue which is their ability to make so much so easily.
As Robert Pickering, the former head of JP Morgan Cazenove, wrote to the Financial Times recently: "High investment banking bonuses are a function of high profitability. All the evidence this year is that, outside the areas directly affected by asset write-downs, the investment banking profit model is in robust health."
He continued: "The real marvel is that customers, both corporate and institutional, continue to be willing to pay so much for essentially commoditised services in a ferociously competitive marketplace served by multiple providers, thus generating these outsized profits."
That's where the problem lies. We may gnash our teeth this week at news of the earnings of JP Morgan and Goldman Sachs but if we really want to tackle City pay, the authorities should take a long, hard look at how the firms are able to produce such vast profits.
They get their money from acting for companies and institutional investors. Typically, they will charge five to eight per cent on a transaction. And the client will settle without blinking. Why?
Because the money they are handing over is not their own. So a company chairman may agree to pay £100 million for assistance on a takeover. Easy, it's not his £100 million.
Likewise, a pension fund trustee may assent to a £50 million charge for a clever bit of financial engineering arranged by a bank that improves the strength of the balance sheet. Not difficult, it's not his £50 million.
The bank will say that it must be used because only it has the market clout and knowledge to get the deal done. Not to use it, the implication goes, is to somehow miss out. Often this is nonsense.
We live in an electronic, internet age. There are ways of placing shares, for instance, that don't rely on the presence of a magisterial City name.
What is especially sad is that the money being paid is yours and mine.
It's our pension money that the investment managers so blithely cough up to the bankers.
In the case of the Government, it was taxpayers' money that was paid to Goldman Sachs for helping to clear up the wreckage of Northern Rock.
The banks will say there is fierce competition. There is - for business and for staff. But it's rarely reflected in the prices they charge.
This is where politicians and regulators who are fed up with giant profits and bonuses should make their enquiries.
Instead of questioning them about their remuneration, the Treasury Select Committee should demand that bankers honestly explain how, exactly, they arrive at their fees.
More than that, they should get the clients in and ask them if they ever question the bills they receive - and if not, why not?
Perhaps the Financial Services Authority and, ultimately, the Competition Commission may also want to launch their own studies.
There is competition but it is no greater than in other industries - contrary to what the banks would have us believe.
It's the same names that appear on the deals, more so now that one of the biggest players, Lehman, has perished.
It's no different from British supermarkets, where a handful of chains dominate - and there, the watchdogs have not been slow to intervene.
In America, officialdom may be reluctant to wade into the banks, not least because several of the senior officials themselves are ex-Wall Street bankers.
Encouraging their staff to move across to the public sector is, of course, one of the tactics banks deploy to shore up their futures.
Why, though, stop at banks? In law, five firms - Allen & Overy, Clifford Chance, Freshfields, Linklaters and Slaughter and May - are known as the "Magic Circle".
Clients believe they must have one of them in their corner. But if Magic Circle is not an invitation for a competition inquiry, I don't know what is. Likewise, the "Big Four" accountants - Deloitte, Ernst & Young, KPMG and Pricewaterhouse- Coopers - handle most large audits.
All these names are like stardust across the Square Mile and play a large part in defining its culture.
If the City is to change - and we are to stop getting so exercised about the amounts its inhabitants receive - then we need to begin with the basics: where do they derive their incomes? It's their clients who need to be looking in the mirror, not the firms.
As my website-designing friend found to his cost, if it's not your money being used, there's no such thing as too much.
Reader views (3)
Few points. 1) The people making money are the flow traders (people making markets) as they have widened the difference between buying and selling prices. Saying that competition has decreased as some banks have dissapeared. 2) Corporate finance desks who arrange for the sale of debt and shares did not lose any taxpayer money. The money that the Government pumped into banks was to cover bad lending and ridiculous investments in debt backed by leveraged debt, which they did not understand. The people who used to do this are now either unemployed or not getting bonuses. It's fine to have an opinion, but please understand of what you speak.
- Mark, London
I can not understand how these banks are making profits after such immense losses. It seems its only taxpayers who make losses.The guy who lost billions last year now gets a massive bonus now because he has made a short term sweet deal.The bankers are laughing at us all.
Still I suppose they are saving the french champagne producers, the italian super car makers and the essential lap top dancers.Maybe even Gordon ( the cook) will benefit
- Terry, Hennebont France
They have these huge salaries because the true cost of what they do is somehow written off. They don't pay off their loans for a start so this distorts the profit. And their actions devastate people's lives all over the world. If responsibility was built in they would have minus salaries. They must pay back the government before getting anything, where they have government support - and stop the stringent cuts in public services we are all facing because of their actions. No Chris - so long as this is the case we should not just forget and move on!!!!!!!!!
- Carol, London SW18
