Two years of pain and mega bonuses are back

Amazing how quickly the financial services industry has bounced back from the brink to compete for vast profits and top staff.  The stock market looks to have passed its inversion point and confidence is back.

Dominic O’Connell

Today is the second anniversary of the start of the credit crunch. Adam Applegarth, the disgarced former chief executive of Northern Rock, memorably said August 9, 2007, was the day “when the world changed”.

We all know what happened in the ensuing months, from Northern Rock to Bradford & Bingley, and onwards and downwards to Lehman Brothers, HBOS, Royal Bank of Scotland (RBS) and Lloyds.

Next year we might look back on last week as the credit crunch’s unofficial end. All the big UK banks reported promising results — promising in the sense that all, even the worst afflicted, could see light at the end of the tunnel.

Lloyds chief executive Eric Daniels confidently predicted his bank had passed the nadir of losses from HBOS’s bad loans, while Stephen Hester, his opposite number at RBS, set out a credible five-year plan to restore its credit rating, profitability and morale.

All the bank chiefs warned that consumer debt would continue to pile up as unemployment rises, but their caution did little to sour the market’s ebullience at the figures. The share prices of all the institutions shot up during the week.

The interesting common feature among the banks was how their investment-banking arms — roundly abused in the past for having helped to trigger the credit crisis through irresponsible trading and lending — have become goldmines. Barclays, HSBC and RBS all reported stellar profits from their investment-banking operations. Lloyds, which does not do this kind of business, was the exception.

There has rarely been a better time to be in this line of work. Companies are desperate to raise funds from rights issues (big fees for the banks), bond issues (big fees for the banks) or from restructuring of their existing loans (big fees for the banks). In bond and foreign-exchange trading, margins are at historically high levels thanks to a combination of unsettled markets and the withdrawal of competitors, such as Lehman Brothers. We are back into a mini-boom, with banks competing furiously to recruit the best people.

Guaranteed multi-year bonuses, which have been attacked as the worst kind of banking excess, are back. As one bank chief executive told me this week, you have little choice but to compete for the talent.

It wasn’t meant to be like this. Regulators were meant to change the rules to make sure that such bonuses would never be paid again. We had the Walker report on executive pay, and Barack Obama’s strictures on remuneration in America. Funnily enough, they do not seem to have curbed banks’ behaviour one bit.

There is, of course, another side to the argument. As taxpayers, we are the biggest shareholders in Lloyds and RBS. We should want them to make as much money as possible so we get the most out of our shares. It’s probably too late for Alistair Darling, the chancellor, to direct Lloyds to set up an investment-banking division, but maybe he should tell Hester to go out and find the best people he can — and damn the rules on bonuses.

Confidence abounds

GOOD TIMES for investment bankers might help to explain our surging markets. It’s as good an explanation as any for the sharp rise in equity and commodity markets over the past fortnight, a rise we look at more closely on the opposite page.

In equities, there are some rational explanations as to why the FTSE 100, in particular, has had such a good run.

First, the volumes of shares being traded is down on last year, so it requires fewer big trades to swing the market up or down. Second, because the FTSE 100 index is now so weighted towards financial institutions and commodity stocks such as oil and miners, good news in those sectors has a disproportionate effect.

It’s the same in commodities. The rational explanations are all there. In sugar, droughts in India have sent demand for exports spiralling. In iron ore (where prices went through $100 a tonne on Friday, up a quarter in the past month) it’s because Chinese steel mills have used up the stockpiles built during the recent trough in the steel market. Zinc, lead, oil, orange juice — all the commodities have their own little stories as to why prices should now be rising.

There is another, intangible, reason for the rises, which is the return of confidence, a feeling among investors that the few green shoots that are out there are not far off flowering. The question remains, however, whether confidence is in danger of turning into that other, more dangerous, driver of the markets described so well by Alan Greenspan, the former US Federal Reserve chairman — irrational exuberance.

Motor manoeuvres

THE 5,000 workers at Vauxhall face an anxious few weeks. General Motors — the new, vigorous, slimmed-down GM that recently emerged from Chapter 11 bankruptcy protection in America — is about to choose the new owner of its European operations. These include Opel in Germany and Vauxhall here.

GM clearly favours RHJ, a Belgian industrial holding group with close ties to Ripplewood, an American private-equity firm. It’s not only GM’s decision, however. The German government has a strong say, given that it is being relied on to put up about €4 billion (£3.4 billion) of loans that the European operations need to keep trading.

It appears that the German government favours a bid from Magna, the Canadian car-parts maker, and a consortium of Russian interests led by Sberbank. The Magna offer holds out the prospect of more German jobs being preserved, an obvious priority for German politicians.

The British government will probably contribute some money to the rescue. As far as we are concerned, both bidders are making the right noises about keeping the UK plants — though their long-term future still looks shaky in the context of a contracting European car industry.

It is an interesting tussle. I suspect GM’s long-term game plan is to reassemble its global empire by buying back the European plants further down the track — hence its favouring of RJH ahead of Magna, which has grand plans to take GM technology and use it to expand in Russia.

The selection process looks likely to drag on — and might even prove too difficult an issue to tackle before the German elections next month. (Dominic O’Connell, The Sunday Times)


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