Diamond: 'I am compelled to pay big bonuses'
First of all, an apology to those who follow me on Twitter: I had a bad case of Twittarrhoea while I watched the theatre of Treasury Select Committee versus Bob Diamond this morning.
My enthusiasm did not stem from any huge news divulged by Diamond - but it was gripping theatre.
Probably for most of the audience the best moment was when - on the second time of asking by the Labour MP John Mann - the UK's best-paid top banker said he was still stuck on why it was harder for a camel to pass through the eye of a needle than for a rich banker to enter the Kingdom of Heaven.
Which didn't reveal anything, other than the breadth of the gulf between those who run our biggest banks and legislators.
What should have perhaps disturbed Mr Diamond - who performed with good humour and some aplomb - is that not a single MP on a committee with a Tory majority chose to defend Barclays or give the benefit of the doubt to bonus-paying banks.
They listened when Mr Diamond explained why Barclays is - in his view - compelled to pay billions of pounds in bonuses. But none hinted any kind of approval.
Mr Diamond's case is pretty simple: he wants us all to take great pride that a British bank, Barclays, has created a world-class investment bank, Barclays Capital; and the price of that success is that Barclays has to pay billions of pounds in bonuses to retain and recruit talent for Barclays Capital.
We might not like it. He might not like it. But - and he said this several times - he cannot pay significantly less to his investment bankers and sustain the success of the bank.
For what it's worth, no MP endorsed this view, but nor did they seriously challenge it.
Perhaps the most telling exchanges were on the issue of bonus disclosure.
Mr Diamond said that Barclays did not wish to unilaterally disclose more detail about how much it pays individuals than its competitors.
Had Barclays bigger shareholders requested such information, so that they can form a judgement on whether Barclays is deploying their resources as efficiently as possible?
Mr Diamond said they had not.
Which meant, according to Andrew Tyrie, the Tory chairman of the committee, that shareholders are "half asleep".
If shareholders have been nodding off, perhaps they will have been roused from slumber by something Mr Diamond omitted to say.
He conceded, as he must, that Barclays was forced to eliminate and slash the dividends it pays to the owners following the 2008 crash.
Was there an apology from Mr Diamond for the diet of gruel foisted on investors, while Barclays investment bankers continue to pocket billions in bonuses? There was not.
And, perhaps more strikingly, Mr Diamond also rejected what the Basel Committee and Bank of England would argue, namely that the bank has some discretion in deciding how much to reward staff and how much to remunerate the shareholders.
The trade off between bonuses and dividends is illusory, according to Mr Diamond. The implication is that without big bonuses, there would be no dividends.
But here's the thing. Even with big bonuses, the return on equity likely to be earned by big banks such as Barclays over the coming few years will be stuck at between 4 and 6%, Mr Diamond said, compared with a long run average or around 12% - which will make it extremely hard for Barclays to cover its cost of capital.
In fact the return will be lower still if the Financial Services Authority has its way and forces Globally Significant Financial Institutions - such as Barclays - to raise substantially more equity relative to their loans and investments than the new Basel minimum (which is why Mr Diamond is desperately keen for the FSA to be defeated on this).
Which poses something of a problem for investors and - by extension - for big banks like Barclays.
If investors come to believe that the only reason for supplying that capital is to enable Mr Diamond's investment bankers to generate huge bonuses for themselves - with little left over for dividends - the rational thing for investors to do is to ask for their money back.
Although Mr Diamond may say that slashing bonuses would harm the bank and its owners, he has some work to do to prove that paying those bonuses benefits anyone much but the recipients.
PS I'm not sure Mr Diamond did himself any favours in refusing an invitation from the Tory MP David Ruffley to say he is grateful to British taxpayers for a subsidy which the Bank of England estimates at £100bn for all our big banks in 2009 (see my post How to curb bonuses).