The bonus questions
If you and I had the power to hire and fire investment bankers (that would be quite a thing, wouldn't it?), there are a few questions we would probably ask before lavishing bonuses on them.
Hang on a sec. We do, in a way, employ them, since taxpayers own not far off the whole of Royal Bank of Scotland. So here are a few pertinent questions for RBS - which will perhaps be asked on our behalf tomorrow by MPs on the Treasury Select Committee, when they interrogate RBS's chief executive Stephen Hester.
First, what proportion of investment banking profits can be seen as an exceptional windfall, stemming from the unprecedented financial and economic support provided by governments and central banks to lessen a recession that was caused in large part by the recklessness of banks?
This question can be broken down into two parts.
(1) How much has been earned by what investment bankers style as a "carry trade" with central banks? This is the business of buying assets that yield 5, 6, 7 or 8 percentage points over the official lending rate, and then refinancing those assets with the central bank at that official lending rate. Borrowing at close to zero from the central bank and lending almost risk-free at 6 or 7% is not the most stressful or challenging way to generate bumper profits. Investment bankers tell me this carry trade has been happening on a system-wide scale, in spite of central banks' precautions to prevent it.
(2) How much of the investment banks' profits is the result of a generalised rise in asset prices, caused by the easiest monetary conditions for a century, which has led to a recovery in the price of securities that in the previous year generated spectacular losses for the banks? This gain from marking investments to the market price should not be seen to be the consequence of management genius, since the main reason the banks didn't sell the securities in the previous year is that they were unsellable.
Bankers tell me that a vast proportion of all investment banks' profits stem from these factors. It is visible in the sharp increases in revenues from so-called trading and principal investments - a doubling in some cases - which in turn is the main driver of banks' overall profits growth.
There is an acknowledgement by some bankers that these gains are in effect an unrepeatable jackpot, the consequence of the authorities' bail-out of the economy, and not the result of their great prowess.
Or to put it another way, only the generation of losses in these benign market conditions would require a very special talent. Making profits? A suited monkey could do it.
So bank bosses accept that in an ideal world they wouldn't pay bonuses from these windfalls. But my own estimate is that bonuses paid in the coming weeks by the world's main investment banks - from the US, UK, Switzerland, the eurozone and Japan - will be greater than $80bn in total.
How so? Well, it is a classic example of competition leading to a mad outcome. No bank wants to be the only one in the world to pay less than what all the others pay, so they all pay too much. You might argue, of course, that there's a bit of vested interest in play here, in each banks' refusal to take a lead in cutting pay.
Oh, and by the way - as the FT points out this morning - compensation as a proportion of revenues will fall. However, that doesn't mean the banks are being hideously penny-pinching in respect of staff rewards.
At Goldman Sachs, for example, compensation and benefits for employees will be nearer to 40% of net revenues for 2009 than its typical payout ratio of 50%. But with revenues soaring, Goldman will still provide around $20bn in remuneration - including about $10bn in bonuses - or more than $630,000 of remuneration per employee.
Which brings us to question number two for the banks, and for Royal Bank of Scotland in particular. Since bonuses are discretionary, on what basis have they decided to pay record amounts to some executives, just months after more-or-less every bank in the world was minutes from meltdown?
At RBS, for example, I am told that executives in its Global Banking and Markets division who have previously never earned more than £1m at the bank have this year been told they'll be pocketing over £5m. And that a small number will be making over £20m.
As I mentioned well over a month ago, in total RBS's management feels it has to pay bonuses worth in aggregate over £1.5bn. I guess with an anxious Treasury breathing down its neck and in the full glare of publicity, RBS's board might scale this back a bit when it signs off the remuneration package in mid February.
But I would still expect it to pay very substantial bonuses. And it'll have the backing of UK Financial Investments, the arm of the Treasury which manages taxpayers' investments in banks, in doing so: UKFI accepts the argument that taxpayers would be worse off if RBS was perceived to be a lousy payer and lost its best investment bankers.
Which brings me to my final question. Are these investment banks as dependent on the skills of "special" individuals as they think that they are?
I am told that a good chunk of Royal Bank's revenues from investment banking - and this is very much to its credit - is in effect an annuity: it is foreign exchange and debt business provided by medium-size companies that are loyal to the firm, not to any particular individual.
But if that's the case, there would be less need to provide enormous rewards to the individuals who look after those clients, because the clients would probably stick with RBS, even if the individual bankers defected.
There are, of course, brilliant bankers who have exceptional abilities and can make the difference between a mediocre performance by their organisations and a good one.
But do we really think that collectively the investment bankers of the world should be paid bonuses for 2009 equivalent to considerably more than the annual economic output of Slovakia, Morocco or Vietnam?
PS: For the effect on bonuses of the chancellor's super-tax, see my post of last week, Bumper bonuses mean bumper tax.