Compensation under control?

Despite our recent positive comment on Barclays Bank we have to put out a critical comment about the compensation practices at the leading (only?) British Investment Bank. It is risible that compensation increases by 2 pct during 2011 when total headcount drops by 6000 over the year. It means that 'cheap' bank and support staff was 'cut' while expensive staff in 'Wealth Management' and Investment Banking was added. This may be an explanation but it should not be an excuse for lax oversight.

Barclays does not 'fall short'

As some in the Media and Analyst community may want you to believe. I am the first to be sceptical when banks make grandiose announcements about the goals they try to achieve. But succeeding in investment banking is a game where those who last the course will win out in the end. Nervous prodding by analysts and media should not divert management's attention too much. The way the competitive landscape has unfolded over the past few years should allow Barclays to slowly but steadily up the rankings. Profitability is under pressure at all banks and no one can be sure what the new banking world will look like in a few years. On a more mundane scale, even the refurbished branches of the bank look great when compared to the competition here in the UK.

Are Bankers really overpaid?

Are all bankers overpaid? This seems to be the conclusion when reading the news on a daily basis. But reports that hundreds of headteachers in London’s schools are now receiving annual pay packages of more than £100’000 indicate that generalisations are inappropriate. Heads enjoy generous holidays, there is very high job security and there is no competitive pressure. They also have managed to escape teaching duties to a large extent. One wonders how they fill their days given that personnel turnover in most school is also relatively modest. The main problem with banker's pay is the fact that senior bankers - CEO's and the top level of management - benefit to a large extent from weak corporate governance that is endemic in all public companies. But this problem should not be used to target bankers in general.

How to avoid employment tribunals - better people management

It may well be too easy in the UK to launch an appeal to an employment tribunal but it usually takes two to tango and without passing judgement about an ongoing case I want to argue that cases such as this one underline the need for careful staff assessments before and after hiring a person. All-too-often personnel decisions are based on academic achievement or (especially in finance) the numbers in terms of P&L. The qualitative aspects of management are easily neglected in a pressured enviroment and personality clashes can quickly escalate out of control.

Is there any 'Leadership' in the City of London?

The 'Leadership' of the City of London (if there is something worth that name) is outmaneuvred at every stage. Not surprising as it is composed of superannuated 'worthies'. Decisive action a la De Gaulle would stop the interventionists on the Continent dead in their tracks. What would happen if anyone would want to dismantle the EU agricultural subidy gravy train over France's wishes?

No more listing schools on job applications - British Deputy Prime Minister

Given the abysmal approval rating that the British Deputy Prime Minister already receives this 'proposal' confirms that the lunatic fringe is alive and well in the ruling establishment. Logically the only way to hire people would be not to discriminate at all and just pay everybody a salary from the sheer inexhaustible money spigot the Bank of England provides. No questions asked about previous experience, pay, age, skill, 'race', political views, - that is unless you are a right-wing 'extremist'. We do not support the BNP in any way but it is noteworthy that some of their supporters have been deemed to be politically not correct enough to be allowed into certain jobs here in the UK, so this might well be the thin end of the wedge.

UK: Regulatory Black Hole?

The amounts hidden from balance sheet in the shadow banking system are truly frightening and can only be described as a house of cards. That hardly any regulatory capital has to be set aside for derivative positions and guarantees borders on the severely negligent. It is simply no excuse for regulators and their overseers in politics that this field of finance has grown exponentially during the past 10-15 years and has clearly overtaken the capacity of the authorities to deal properly with this relatively new phenomenon. If is accolade for London as a leading global financial centre to be seen as the epicentre of the global re-hypothecation game that played a significant role in the downfall of several major financial service firms during the past few years.

Do not play any tax games with compensation

News that another major bank has been entangled in a tax dispute with the British tax authorities as it has been caught with a tax avoidance scheme where (favoured) staff were paid in an offshore tax haven illustrates that even prominent firms have not yet learned the lesson that their corporate governance must be beyond any reproach. Even more so when the same firms often are the custodians for large amounts of money that are entrusted to them by institutional and private investors who expect that the highest ethical business standards are observed. Very often the rank-and-file staff lower down the pecking order is not benefiting from such generous 'tax advice' (often paid by the employer for the favoured 'high earners') and this creates a situation where the cleaning staff may well pay more taxes on their meagre incomes than the staff that receives multi-million bonuses.

Regulator's Report on RBS - Much Adoo about Nothing

When a (long delayed) FSA report into the collapse of Royal Bank of Scotland does not examine in detail the role played by the former CEO Fred Goodwin one can be certain that the usefulness of this 'report' must be close to zero.

Loan subsidies - abuse is difficult to police

The problem with loan subsidy schemes as proposed in the UK is: Who will receive these preferential terms? Will it be based on the old school tie, or who the bank manager plays golf with? The beauty of market economies is that the old element of feudalism is replaced by criteria of efficiency. All borrowers should be treated equally if they are good for a loan, and those not making the grade go empty handed. These subsidies create a tremendous amount of moral hazard - the same can be said for all subsidised loan schemes, be they managed by 'Development Banks', the EIB, EBRD etc.

City workers see colleagues as overpaid

This poll of 515 City of London workers confirms our observation that many financial organisations suffer from the effect of an upwards-only ratcheting of compensation levels. As everyone sits in the same boat - from the chief executives down - and setting pay levels means spending other people's money (shareholders in most cases) no one has a real interest to avoid paying more than is necessary to get the job done. The same effect is at work in the public sector where taxpayers are footing the bill for any pay largess. This merry situation (for those benefiting) carries on until the gravy train hits the bumpers: a downturn in business (or tax revenues) makes cuts in pay unavoidable. Responsible Managements are looking to keep compensation levels under control at all times not only because that is what any cautious business person should do in any case, it is also the right thing to do in order to avoid an irresponsible hire-and-fire culture (where those at the top usually are spared any pain and even pensioned off with golden handshakes and gold-plated pension schemes).

Lloyds Bank boss needs a break

While we have sympathy with Antonio Horta-Osorio's health problem and wish him a speedy recovery we cannot but take the opportunity to point out that this incident may point to a management failure. While Horta-Osorio is at the center of a 'perfect banking storm' and has to battle on all fronts to steer the bank through choppy waters caused by the never ending financial crisis and the ensuing onslaught by regulators it is the mark of a good leader, and in particular the man/woman at the top of an organisation, to surround himself with strong and capable lieutenants that he can rely on. Maybe Horta-Osorio fell into the same trap as so many (chief) executives and tried to do too much himself. But no person is irreplaceable and we all know that at any moment the CEO could be knocked out of action by the proverbial bus. So an organisation should not only have a well-balanced leadership team for efficiency's sake but also for the eventuality of any succession that may be necessary for one reason or another.

Fireproof the British Banking System

'The remorseless logic of the monetary union is starting to bite' (Financial Times). The curse of the bad Deed (Goethe, Faust) haunts us - first the undemocratic introduction of the Euro, now the undemocratic decision of letting Greece off to the tune of Euro 10,000 and more per man, woman and child in that county. Mismanagement on that scale can, will and should only lead to disaster. Big challenge for Britain: how to make its financial system 'fireproof' against any fallout from Euro land. Are regulators making sure that the banking system disentangles itself from any exposure to Euro land? (esp on the asset side of the balance sheet). Other countries that are not part of the Eurozone are well advised to take action as well before it is too late. The same can be said of all companies, institutions and individual investors and savers.

Advice to the City of London: stop the bureaucratic control freaks before it is too late

Reading Monsieur Barnier's latest utterings (pity he has no pregnant young wife, maybe that would put a stop to his unnecessary activities) makes one wonder what the reaction of the representatives of British interests - be it the cacophony of associations pretending to speak for the 'City' or the arms of Government (FSA, Bank of England, Treasury) will be. Pious talk will get them nowhere against the hunger of the typical continental bureaucrat (statist control freaks) for ever more power. As an Austrian who works in the City for 30+ years I am allowed to say that. Call their bluff or face certain defeat, the choice is there.

Cameron vs Taleb? - No Contest!

The discussion about banking reform (or should it be non-reform?) reaches a comical aspect when David Cameron, PR Manager turned Politician, assumes that his approach to reforming the British banking system should take precedence over the deliberations of the experts that are members of the Independent Banking Commission. Reports indicate that the Prime Minister will brush aside a critical aspect of the recommendations made by the IBC, namely the separation of proper banking activities from investment banking (some might say gambling). While a go-alone approach to reform by the UK alone might well put UK-domiciled banks at a disadvantage versus their international peers we would think that the correct course of action would have been to intensify pressure on other countries to follow suit - at least the other EU member states might have been amenable to instigate similar conservative policies. In an article that was just published the other day, Nassim Taleb and Mark Spitznagel send a sharp criticism in the direction of the banking industry (and supine institutions that invest in them) which implies that banks need more not less regulation - in clear contrast to our PR Manager's view that seems to have been dictated to him by unaccountable lobbies. One wonders if the members of the IBC in that case would do the honorable thing - resign and openly defy the Prime Minister on the issue.

UBS CEO raises doubts about London

Oswald Gruebel, CEO of UBS, wants the British government to state its intentions concerning regulation and taxation that will affect the banking sector in the years to come. Gruebel states that it is very difficult to work in a constantly-changing environment and that there may be a point where it becomes preferable to de-emphasise London as a business hub. In my opinion there is a danger that the City of London may suddenly reach a critical 'tipping point' though it is not obvious if the candidates to take over a large part of the business are really an alternative. Zurich would simply not have the capacity and Frankfurt and Paris are not exactly free from regulatory overgrowth. CS may have be a special case as it has a large hub in its Swiss headquarter and the duality of two large centres pose a management problem in terms of duplication and coordination that American or Asian banks coming to Europe do not have when concentrating European activities in London.

Barclays: Protium deal worries shareholders

A look at the longer-term performance of the shares of some of the leading 'universal' banks confirms that shareholders have largely been left out of the party when it comes to sharing the wealth generated by the explosive growth of financial markets during the past two decades. So it should not be a surprise that more than one eyebrow is raised about the cosy deal that was struck between Barclays Bank and a number of its employees when $12.3 billion of toxic assets were sold to the Protium off-balance sheet vehicle in September 2009. It is not obvious why this transaction was necessary as the amount is quite insignificant compared to the Bank's total balance sheet. As is often the case when banks dispose of unwanted assets one has to ask why outside parties should get the upside. Surely the price of any such deal reflects what should be a realistic market price. Why would a bank - once it has accepted market reality - not stick to an asset that has been marked down to a new - and more attractive - price level? The only explanation we can come up with is bureaucratic inertia or intellectual lazyness thus opening an opportunity for outsiders with an eye for value

UK banking regulators: lunatics at the controls?

When 'bank regulators are launching a new type of "stress test" that forces banks to consider unlikely but potentially disastrous scenarios like a flu pandemic or disruptions to the country's food-supply chain' (Wall Street Journal, 11 Feb 2011) one has to ask if regulatory creep has reached the lunatic stage. I wonder when banks are asked to plan for the possibililty of an asteroid impact.

Andrew Smithers on Banking Equity Ratios, Competition and Pay

We heartily recommend Andrew Smither's latest comments on the failure of banking regulation. Smithers argues that higher capital ratios would limit public subsidy to banks and pose no threat to lending volumes - if anything, banks would lend more than under the ill-considered Basel III capital ratios that come into effect in 2018.

Tax burden in UK becomes problematic

A simple calculation in the sports section of a British newspaper came to the conclusion that a football player who would move to England on a total compensation of Euro 3 million would take home only around half that amount after the deduction of all taxes. In Switzerland his take-home pay would be nearly 2.4 million. Obviously this also has clear implications for Britain's standing as a global financial centre. With discrepancies as large as this the decline in London's relative attractiveness - especially for foreign professionals - becomes evident.