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30 April 2014

"Sympathy for the Devil"?....Well, Perhaps a Little Bit



When he wrote that lyric for the Beggar’s Banquet back in 1968, I doubt very much that Mick Jagger had Deutsche Bank in mind. And, for the avoidance of doubt, in no way am I imputing diabolic qualities to them; it’s just that the popular- or perhaps populist - view of investment banks currently is that they are verging on that. But actually, I do have some sympathy, specifically with Deutsche, on one particular issue. I highlighted in January of this year (‘Fixing the Fix’, January 29th) that I could envisage the bank running into difficulties as it tried to sell its seat at the London Gold Fix as part of its exit from the bulk of its commodity trading activities. That does indeed seem to be the case, as various reports have borne out in recent weeks. 

Sympathy?

Why sympathy? Well, the Fix appears to have been caught up in the rush to find evil-doing amongst financial institutions. It does seem rather odd to me; I can’t speak for the machinations which may or may not take place behind the scenes in the gold market - although I suspect there may be some genuine issues - but it is difficult to see how the Fix itself could be more transparent. It’s open, so anybody who wants to, broadly, can listen to it; orders can be changed during the process, so it would be difficult to postulate collusion. Now the FCA seemingly want to listen in themselves, to see what they can find. Of course, the FCA, and Ba-Fin, the CFTC or indeed any other regulator, obviously have the right to investigate any part of the financial system they choose, but in this instance, what they are doing appears to be having a material effect on Deutsche’s ability to sell the seat; in the grand scheme of things, perhaps it’s not much, but the value of the asset is called into question by the apparent desire of regulators to see wrong-doing. So yes, this time, I do have a bit of sympathy.

Egregious behaviour

But not with everybody. We’ve seen a few examples of egregious behaviour from some of our other major banks in recent days. Stephen Hester, whom I do not know but who is by all accounts a thoroughly decent man, must be scratching his head in amazement, at the very least. During his time picking up the pieces of RBS, he waived his bonus, since the bank was hardly healthy. Now, the current regime is doing exactly what was predicted when the bonus cap idea of the EU’s was first mooted, and paying “allowances” which have the precise effect of compensating for limited bonuses. Of course, they do something else as well; they rebalance the relationship between fixed and variable costs, effectively building in further instability. 

And what about Barclays? The share price may have recovered a bit from the bottom of the trough it hit in 2008, but it’s hardly a pretty picture for shareholders. Nevertheless, the reported bonus pool proposed by the executive is greater than the intended dividend. I may be old-fashioned, but the shareholders bear the greatest risk in the enterprise; shouldn’t the rewards somehow reflect that? At least some shareholders do seem prepared to rock the cosy boat and make some form of protest, by voting against the plans - not enough, though.

Necessary...or staff would leave?

I have an idea about one of the things that may be going on here. We are told that these sort of payments have to be made, otherwise all the good staff would leave. Well, I think we need to look a bit more at that proposition. Big banks see big deals because they are big banks - in other words, the corporate relationship is of major significance. Yes, individuals within that also have a part to play, but, as most people have seen in their own businesses, they are not irreplaceable. This country has a population of give or take sixty million, and some of the world’s top-rated higher education establishments; those two facts together suggest that finding the talent to operate banks should not be too difficult - after all, although the quants are sometimes jokingly referred to as ‘rocket scientists’, the truth is that they’re not and it isn’t. Amongst the available pool of talent there are plenty who will not automatically take the ‘Dubai-Shanghai-Byebye’ route if their pay is ever genuinely related to performance; in other words, if they are asked to take a hit along with the shareholders (who are of course their ultimate employers) when the road gets a bit rocky. So I don’t really buy that whole ‘they’ll leave if we don’t keep boosting their pay’ argument. It’s a bit of a self-serving logic.

Perhaps a more realistic view...

When, all those years ago, I applied to my (extremely prestigious) university, my school headmaster made an interesting point. He contended that the entrance exam I (and all the others) were taking was probably the most defining exam we would ever sit. When we asked why, and suggested that perhaps our finals four years later might actually be more significant, he pointed out that real hurdle was the initial acceptance. Once the Dons had accepted us, they had a vested  interest in our success. Since they regarded themselves - and the university which employed them - as the best, it follows that an excessive failure rate amongst the undergraduates they had selected would reflect badly on them. They therefore needed their pupils to succeed in order to continue justifying their own portrayal of themselves as at the top of the academic tree. (Just as an aside, that shouldn’t be construed as suggesting the final exams were easy; but it is true that the drop-out rate at out two most illustrious universities is traditionally pretty much the lowest of all.) 

If we apply that thought to the banking salary and bonus question, then perhaps it becomes clear that the people at the top need those below them to stay to validate their own position; if too many of your subordinates move on, then perhaps that is a reflection of the fact that you shouldn’t be the person doing the selecting. And the easiest way to avoid that is to keep on throwing shareholders’ money at them. Most of the people we are talking about are not stupid; if the threats always work - for the reason I suggest - they'll keep being made. 

Sympathy for the Shareholders

So yes, I have some sympathy, where it’s due, but actually a lot more with the poor old shareholders who seem to be there just to provide others with an endless gravy train.       

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