Legislation on bonuses could destroy the City

John Waples, Business Editor: Agenda

The unpalatable truth about big City bonuses is that they are unstoppable. The model has become one of the principal pillars of the global financial system and mimics what has happened in the world of football. It puts a big premium on talent, particularly on its transfer value.

And in the world of banking — where a top trader at the peak of his career can generate £500m of profit for his employer and up to £50m for himself without tying up any capital — it comes at a huge price.

The British public finds the scale of bonus payouts unacceptable. It blames the excessive risk-taking by bankers for bringing down the financial system. It is no surprise then that Alistair Darling, the chancellor, has responded to that concern. He said this weekend he is prepared to legislate if necessary to curb excessive bonuses — but he will find it very hard to do.

However, banks around the world would be foolish to ignore the threat. What they must do is demonstrate self-restraint over mega bonuses and offer a level of transparency that hitherto has not been forthcoming. If they don’t they will face damaging legislation from governments pandering to public anger.

This would lead to knee-jerk policymaking. In all likelihood those implementing it would end up looking like fools and, at worst, it would kill the City — one of Britain’s few assets that can compete in a global economy.

If London is forced to outlaw bonuses the talent will migrate. Technology and screen-based trading means a trader’s skills are eminently portable.

Darling just has to look at the nameplates on the doors of London’s banks. Hundreds are offshoots of foreign institutions, most of them full of international bankers not domiciled in the UK. Their primary motive is making money and, at the moment, London is the best place to do that.

Everybody accepts that in the last cycle the rules were too lax. Bankers did collect huge bonuses, but a vast proportion did so in shares that could not be vested for a number of years. As a result, thousands of bankers at Merrill Lynch, Lehman Brothers and Citigroup lost millions when the value of their shares fell.

The only banks the government could impose change on are the ones where it has large stakes — and their competitors would be laughing all the way to the bank if it did. The other option is to impose a windfall tax, but that would only hit the wrong targets.

If bonuses are to be policed effectively, and for banks to adopt a policy of self-restraint, the government and the British public have to have more faith in the Financial Services Authority.

Given the track record of the FSA, that is a tall order. But if we are to believe that in this new, more sober world — where bonuses will only be paid to City bankers who deserve them — the regulator will have to be the judge.

Hector Sants, the FSA’s chief executive, made it clear last week that it is not his job to cap bonuses. It is to ensure that bonuses are not paid simply because a bank takes on too much risk. Those that underestimate Sants do so at their peril. He will insist banks hold the requisite amount of capital, and that is the only way that bonuses can be tackled.

The FSA must not kill success, it must kill abuse. Legislation would only drive banks offshore. I suspect Darling will huff and puff over bonuses until the next election and the Conservatives will also try to tackle the issue. Both parties know that to defend the bonus culture is a vote loser. The key question is not about bonuses, though, but a system that allows banks to ratchet up such huge profits. Every other industry has seen pricing pressure, but top-end banking seems to operate under its own rules.

A desert dream

It’s been the story of the week, but I’d be amazed if an Abu Dhabi-led consortium launches a £10 billion bid for British Land. To succeed it would have to pay so much of tomorrow’s value today it would hardly be worth it. The consortium would spend the next five years waiting for the direct market to play catch-up with the premium paid. And as a large part of its takeover would have to be financed by equity, that could be a painful wait.

If Abu Dhabi wants distressed property assets, it already has Dubai on its doorstep. And if it was interested over here, it would do better targeting the state-owned banks which are long on property and short on financial partners.

British Land will produce quarterly results this week showing that its net asset value per share has declined by a further 5%-10% to around 370p. Unless a thumping premium is paid, investors would send a bidder packing — and if a buyer were prepared to pay that much, why would it want to confine itself just to British Land?

There are others out there with assets they are desperate to sell, and they wouldn’t be half as demanding about an acceptable take-out price. That said, the fact that this story is doing the rounds will in the short term serve to change sentiment on a sector that has been totally out of favour.

First lender

Lord Mandelson’s brave new world of industrial interventionism had its brightest dawn yet last week, when the first secretary of state announced a £340m loan to Airbus to help it develop its A350 mid-sized jet. The UK has helped Airbus with loans for planes for decades, and so far it hasn’t turned out to be a bad investment.

Some of the launch aid might never be paid back — I think we will be waiting a while to see a return on our £500m contribution to the A380 superjumbo — but the money laid out on other programmes, such as the A320 and A330 planes, has generated a handsome return for the taxpayer.

Unfortunately for Airbus, its system of funding new planes is under threat. Early next month the World Trade Organisation is expected to rule in the long-running dispute between Europe and America over support to the civil aircraft industry. Many think the WTO will say refundable launch aid, like the £340m given to the A350, must stop.

Mandelson, a former EU trade commissioner, knows as much about this dispute as anyone. For him publicly to back the system last week must mean that Britain, and Europe, will not take the ruling lying down. It probably also means that they think that the long process of appeals and countersuits means changes to the status quo are a long way off.

In the car industry, Mandelson has shown a much less certain touch.

He promised the government would guarantee a ¤340m (£294m) loan from the European Investment Bank to Jaguar Land Rover as part of a £2.3 billion assistance package for the industry. It didn’t, and in the end Tata got so frustrated with the conditions put on the guarantee — and the endless talks — that it decided to look elsewhere.

There is an argument to be made for not helping Tata — but not for treating one of the UK’s largest inward investors (combine Corus, Jaguar Land Rover, Tata Consulting and a few others and you get to 47,000 employees) in such a cavalier fashion.

Tata has managed to find commercial sources of finance to tide the group over what it hopes will be the nadir in its sales. Traditionally, it has left its acquisitions to run themselves, but I suspect that from now on it will want to keep Jaguar on a much tighter leash. (John Waples, The Sunday Times) http://business.timesonline.co.uk/tol/business/columnists/article6797803.ece?token=null&offset=0&page=1

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2 Comments

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