Why big City bonuses are a thing of the past
By
Associate Editor
David Stevenson
Oct 10, 2008
Expect fewer Ferraris and more Kias on the roads in the near future
I'm no great fan of bank bailouts. Nor, for that matter, of Gordon Brown.
And as a taxpayer whose money has been committed to this week's British government 'lifeline' to the country's largest lenders, without being asked for my opinion, there aren't too many reasons to be cheerful.
But one bit of the deal isn’t so bad. Those insane bankers’ bonuses could at last be coming to an end.
UK banks spent £31bn on bonuses in the last four years
They're the stuff of legends. UK bankers have shared out more than £31bn of bonuses over the past four years.
And the City – and Canary Wharf - paid itself no less than £8.5bn in bonuses in 2007. That’s just 3% below 2006's all-time peak, according to a report just published by the Centre for Economics and Business Research (CEBR). And that was despite the credit crunch kicking off in earnest in July and August last year.
But that bonus picture is about to alter in a big way.
Even before yesterday, the top-line figure for 2008 was set to be massively lower. It could plummet as much as 60% to £3.6bn, says the CEBR. "We're witnessing a fundamental change in remuneration structures in the City", says Richard Snook, CEBR's senior economist, "the £1m-plus bonuses are going to be few and far between".
Of course that 'crunch' hits with a double whammy. Not only do City firms make much less money, they're having to fire people as well… or, like Lehman Brothers, they just go bust. Financial companies have cut more than 133,000 jobs worldwide since the start of the credit crisis, says Bloomberg. And job losses in the Square Mile may be a high as 40,000 this year, according to analysts at JP Morgan Chase.
Then there's the UK bank bailout fallout. It seems cash-strapped banks who sign up to the rescue deal won't be allowed to pay out big bonuses. Gordon Brown may not have covered himself in glory over the last few months but this was a target even he couldn't miss.
A change in the bonus culture is long overdue
"Brown War on the City", shouts the Evening Standard. "Our economy is built around people who work hard, show effort, take responsible decisions, and where there is excessive and irresponsible risk-taking, that has got to be punished," says our tough–talking PM to GMTV, "the days of big bonuses are over. One of the conditions of us helping the banks is that we will have to reach an agreement about their executive remuneration". Tory leader David Cameron has gone further by demanding a total ban on bonuses at the High Street banks that will take up Mr Brown's cash offer.
This change is far overdue. The City bonus 'culture' – what an idiotic expression – was always a real bone of contention even in the 'good' times. Bankers kept telling us how their great talents justified such massive amounts. But the system was always ludicrous, handing out gigantic rewards for taking huge risks with other people's money, and being able to walk away if everything went wrong.
CEBR sees the game changing for good: "even in three years time we see the City bonus pool running at about half the size of the peak", with no return to the recent payout levels "for the foreseeable future".
The 'trickle-down effect' will all but dry up
So a big dose of banker belt-tightening is on the way. Indeed, it seems it's already started. 50% of bonuses tend to go into property, so a lack of them isn't doing the housing market much good. House prices are down over 13% in the last twelve months, says yesterday's Halifax survey, the biggest drop in at least 25 years. And the latest figures show new registrations of Porsches down 27% and Aston Martins lower by 25% on last year. Yet Kia registrations have surged 18% this year!
What's more, we'll soon see much less of the so-called 'trickle down' effect. The City boys have happily splashed their cash around for years, boosting the economy near where they live by shelling out on everything from gardeners to guard dogs. In other words, less money percolating through from bankers' bumper payouts is going to hurt the pockets of plenty of local tradesmen. That's not so good.
But bankers may yet have the last laugh
I suggested a few months ago that the markets would sort out the bonus issue sooner or later. And now that half the banking system's gone bust, and with the way that share prices are slumping, there's not much left to pay bonuses with. But here's a word of warning. Come the next boom, whenever that may be, all today's hard talk may well have evaporated. Those bankers with their bonuses may, one day, still have the last laugh…
Published in Economics
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by
David Stevenson
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