Reply from M. Philippe Lamberts - MEP (Green)

while I agree with you that we have to incentivize banks to go back to their basic mission of collecting savings and using those to fund the real economy, I totally disagree with your statements on pay.

1. There is absolutely no factual or scientific evidence of a correlation between eight-figure salaries and real value creation; in this business, banking executives have basically (up until very recently, see CitiGroup case) been left to determine their own pay, getting away with whatever they dared asking for. The hypothesis of self-interest (greed if you will) driving pay schemes is I believe much more credible than one that purportedly would relate them to value creation.

2. Your statement that a 1/1 relationship between fixed and max variable pay would lead to a hike in fixed salaries remains to be proven; maybe a way for banking executives to have shareholders approve what ended up as absurdly high salary packages was precisely to have the fixed part relatively modest, so as to make size of the real total package less obvious. Those executives might have a tougher sales act to perform in front of their boards and their shareholders should they want to convert a significant part of what used to be variable into fixed pay. I definitely would like to see how they manage before I decide whether or not I agree with your statement.

3. The pay rules that are being proposed are in fact very simple : 1/1 ratio between fixed and variable; 20-fold ratio between average and maximum pay; 40-fold ratio between minimum and maximum pay. I do not believe the adjective "onerous" to reflect that simplicity and I see these ratios as more than reasonable. Administering those limits would not impose an extra administrative burden on firms; as far as I know, they do manage their payroll (with the help of effective and efficient IT systems, I would venture). It would just need them to adapt and publish their existing pay rules, which are hopefully documented. Enforcing legislation would be left to existing supervising bodies; no new ones need be created. Your mentioning of "expensive bureaucracies" gives me the opportunity of questioning whether decently equipped and paid supervising authorities would, in terms of absolute cost, come anywhere near the total impact of financial sector irresponsibility to our societies, which runs into the trillions. That said, I do not see this as an excuse not to tackle the issue of the cost-effectiveness of government as a whole and I do agree that there is still room for improvement in that area.

4. I'd also like to discuss your statement as to "the conviction that unequal incomes are somewhat suspect". On that, I would refer you to Wilkinson & Pickett's "The Spirit Level", which demonstrates a statistical correlation between many key indicators of societal wellbeing (incl. life expectancy, crime, education...) and the level of revenue equality in society. Those who claim that more inequality is beneficial to society as a whole have yet to come up with anything coming close to similar evidence proving what is, I'm afraid to say, belief rather than fact. Everything indicates on the contrary that more equal societies perform better. So I my view, what is suspect is that drive towards absurd - and self-serving - pay packages in an industry that has run amok.

5. Finally, a word on "the Chimera that any problem can be fixed by rules set down by an 'enlightened' technocrat". Beyond that statement, assuming that you agree that problems - at least non trivial ones such as the climate/resource equation or the closely interlinked private and public debt issues - need to be fixed, I do not know exactly how you would suggest to do that. As a citizen, as a democrat and as a lawmaker, I agree that trusting one's future to "enlightened technocrats" is an option that would simply lead us to disaster. I might also say that having seen how unregulated (financial) markets drive the planet and its societies towards collapse, I would not trust our future to them either. What is then left is public, open, fact-based debates leading to decisions to be made by democratically-elected people.

Now, as an author of amendments on banking industry pay, I do not see myself as an "enlightened bureaucrat". I am a politically-aware citizen, who, after a 22-year career in business, got elected and I remain accountable for my work. As you may know, I will need to face my voters in 2014 and I definitely have skin in the game, much more than any banking executive has at the moment. You will therefore understand that have little desire or interest for being lectured by such people on my societal responsibilities. It is not clear to me in what capacity you are writing to me - as a citizen or as a service provider to an industry that has a lot to account for and who stands to lose revenue if pay packages would go down. I will therefore leave the argument at that.

Pay regulation not addressing the real problem

What really drives financial market regulation is not logical thinking but a mishmash of misguided ideology as well as a reversion to good old authoritarian attitudes. The former is derived from the conviction that unequal incomes are somewhat suspect, the latter is the Chimera that any problem can be fixed by rules set down by an 'enlightened' technocrat. This leads to absurd outcomes such as the current proposal to limit any discretionary bonus payment to a maximum level equal to the amount of annual base salary. Not much thought is given to the fact that this will lead to an upward move in basic pay which in turn will mean that the financial institution that pays these higher salaries will become less, not more, stable. Making compensation more sensitive to the time horizon of risks incurred in a bank is another can of worms that regulators seem to be intent on opening. While one has to admit that remuneration policies in many banks and other financial institutions have been found wanting during the past few years this situation is not being helped by the way that politicians and regulators fall over themselves in order to help out the same institutions with public support once they reap the fruits of their profligacy. Proper financial reform - especially the introduction of limited purpose banking - would ensure that the shareholders of the banks - and not the taxpayers - would pick up the bill for any poor management decisions. The need for onerous pay regulation - and an expensive bureaucracy to monitor compliance - would be avoided.

Europe's banks face gaping capital hole says EBA

When the EBA states that many banks would have insufficient core capital under the rules that will come into force we are not surprised. As we repeatedly said, no amount of capital will ever make banks 100 percent bulletproof. One just has to make more and more pessimistic assumptions and come to the conclusion that a bank is not 'safe' enough. The only way to get the taxpayer off the hook once and for all would be the introduction of limited purpose banking as suggested by Larry Kotlikoff.

Not all publicity is good publicity

How much longer can the image of Goldman Sachs get knocks such as these? It is time that someone minded the house again.

UBS boss hires old friend for senior role

When one reads that the recently appointed CEO of UBS hires a former colleague from his days at Merrill Lynch as Co-Head of Global Investment Banking one has to assume that the hiring old an (business) friend may give a certain amount of comfort and hope that relationships in the top management team will work smoothly. But there is always the danger that sentimental aspects cloud the judgement or that conflicts of interest impede rational decision making or sour the morale of the other team members. The big question is also why a global (?) player like UBS cannot grow its own senior managers. Once you had to be an officer in the Swiss Army to climb the management ladder at the old UBS (before it was taken over by local rival Swiss Bank Corporation) and that surely was not providing an adaequate talent pool (and led to the sorry demise of the 'old' UBS) but has the bank really drawn the right conclusion and found the right formula? The track record over the past 10 plus years speaks a clear verdict.

Stress tests - same (sad) old story

The publication of the results of the latest stress test performed on US banks does little to inspire longterm confidence in the ability of the financial system to be protected from another (near) meltdown. We repeat our contention that only a limited purpose banking system will give near certainty that taxpayers will never again have to be called upon to bail out insolvent banks.

Conflicts of Interest in Investment Banking

The discussion about separating banking and securities and investment banking has reached a dead end. But the inherent conflicts of interest in an investment banking world where intermediaries directly compete with their supposed customers (the word client is no longer appropriate) will always tempt service providers to treat their clients as 'muppets'. Maybe not even reverting to the rules imposed by Glass Steagall would be enough to improve the situation and the principal trading function and the customer advisory side should be separated like they were in the UK brokerage business before 'Big Bang'. This would mean that salespeople and corporate finance advisers would have more incentive to work with and for their clients. As long as this is not feasible the only protection for customers - be they individual investors or 'sophisticated' professionals working for fund managers or corporates - is to follow the old rule of  'Buyer Beware' and not to be too trusting when dealing with their sell-side counterparts. All too often they fall for sales patter, get taken in by glossy brochures and forget to check if there are better terms available in the market.

Political pressure to prevent CDS on Greece to pay out?

The example of a minor Austrian bank demonstrates the potential fallout that can be expected if CDS sellers are required to pay out in case Greece is 'officially' (by the insider-dominated ISDA committee) declared to be in default. Kommunalkreditbank - already rescued by the Austrian government - could be required to pay out in the high hundreds of millions of Euros if it is required to pay out on the CDS contracts it has sold. One has to assume that the Austrian government - and quite a few others - are not too keen to see the ISDA committee to declare that a credit event means that CDS contracts have to be paid out. Who will be brave enough to sue the Committee? Don't expect any help from the regulators - they are in the pockets of politicians who probably snigger about the fact that the CDS market has been little less than a game like the many online games - a financial markets farmville.
"Since when is a country's defaulting on its debt not a credit event?" asks Alan Abelson (Barron's)

CDS - a misconceived instrument is Null and Void

Says today's headline in a newspaper (City AM). To leave the decision about whether or not a CDS pays out in a 'credit event' to a group of market insiders at a private industry association such as ISDA makes a mockery of proper regulation in financial markets. Especially as the members of the relevant ISDA committee are the largest users and providers of credit default swaps who have made vast profits from this market during the past ten years. No surprise that the author states that "The decision has been criticised by some as making a mockery of credit default swaps on sovereign debt. These critics believe that their value has now been permanently undermined." We could not agree more and every user of this market has to face a negligence claim from his investors if he uses this product in the future. We always thought that the construction of the CDS contract was overly complicated and likely to lead to disagreement exactly at the point in time when they would be needed most, i.e. in a credit event. Would it not have been more sensible to design a product similar to an option? This could have been exercised at any time - credit event or not - simply based on the price performance of the underlying securities.

Charlie Munger on Derivatives in 2003

"But I confidently predict that there are big troubles to come. The system is almost insanely irresponsible. And what people think are fixes aren’t really fixes. It’s so complicated I can’t do it justice here – but you can’t believe the trillions of dollars involved. You can’t believe the complexity. You can’t believe how difficult it is to do the accounting. You can’t believe how big the incentives are to have wishful thinking about values, and wishful thinking about ability to clear."