Sunday 20 January 2019

Banks, bonuses, long-finger logic and two-finger attitudes

Medb Ruane

The glittering image of enormous bonuses dangled before Goldman Sachs employees this week when the global investment banking and securities firm's US branch reported second-quarter profits of $3.44bn (€2.46bn), a 65pc increase.

If they keep it up, nearly 30,000 staff may share pay and bonuses of $22bn, with the bonus element totalling somewhere between $770,000 and $900,000 each. Meanwhile, the firm has repaid its $10bn US government bailout only nine months after getting the dosh.

How did they do it? Wall Street's white-haired kids saw opportunity in bad times and held their nerve. They dived right back into high-risk trading, exploiting the absence of former competitors Bear Sterns and Lehman Brothers, and invested in mortgages, commodities, along with underwriting stock and debt offers.

Isn't there a cap on bankers' pay and bonuses, someone wondered, recalling President Barack Obama's guideline that $500,000 be an appropriate upper limit. Yes and no, because the aspirational cap incentivised Goldman employees to repay the government as fast as possible, leaving them free to make money from making money, again. Let the rest eat cake.

The scale and speed of Goldman's profits is enough to silence critics -- almost. Mr Obama's press secretary said the White House was "reluctant" to comment.

Meanwhile back at the ranch, Ireland's Financial Services Om-budsman Joe Meade asked for new legislative powers so he could name and shame banks and financial advisers who prey on ordinary punters in a manner that is, he admitted eventually to RTE's Sean O'Rourke, "systemic" and "scandalous".

Meade told how how his office dealt with over one million "inappropriate investments" by elderly people (see www.financialombudsman.ie). Easy prey, the elderly, who wouldn't have expected sharp practices because they'd believed the image of trustworthy bankers.

His case studies detail a range of predatory behaviours inspired by a bonus culture linked to short-term profits, where standards drop the bigger bonus prospects become. One couple was persuaded to take out a six-year bond, according to Meade, but the risks weren't explained.

The especially predatory aspect was that the couple were aged 84 and 85 when they signed up, so they'd have been in their 90s when the bond matured.

The couple needed security and access to cash, in case of illness. This was only available for the price of the exit fee. One died, the other is now in a nursing home.

A bank official came to another elderly couple's home and advised them they'd be better off switching their life savings of €345,000 from deposit to a managed fund, so they did. How courteous of the bank to visit! They didn't know the fund was property-related and were horrified to be told some 18 months later that their savings had dwindled by almost €100,000.

Goldman's brilliant results are such a glowing example of a certain can-do culture that they spark clichés about green shoots and rising tides, as well as appearing to endorse the principle of government bailouts. And, you may recall, Goldman has Irish connections, not least through Peter Sutherland, their former chair, as well as through their Irish office currently managing part of Irish Nationwide's bond sales.

Do their results justify a no- limits 'bonus culture'? Or are calls for a new morality in banking so much hot air spouted by weaklings who are afraid of money and can't keep emotion out of business?

Until the sleeping giant called recession staggered into sight last year, leaving customers reeling, people weren't generally aware of what they stood to lose because of bankers' high rewards.

Those flattering letters banks and credit companies sent suggesting you were being singled out for a 100pc mortgage, gold card or extended overdraft facility, masked clever sales pitches driven by an unregulated, short-term bonus culture.

The sense of entitlement spread elsewhere (although there is no similar suggestion of the sharp practices uncovered by Mr Meade).

Senior HSE officials received over €1.4m, recommended by Prof Brendan Drumm, senior public servants over €3m, as well as salary increases under benchmarking. Some ministerial bonuses were more than an average industrial wage.

Here, the 'customer' wasn't and isn't the naive investor, or the elderly couple exploited by predatory bank staff. In a wide-open economy it's the State as a whole, along with the pay packets and dreams of children, women and men. What about the risks to which customers are exposed? Where's risk equalisation for them?

The fabulosity of Goldman Sachs's results could lull governments into thinking they can revert to the status quo and leave things more or less unregulated. UK Chancellor Alistair Darling is having a white paper drafted about financial regulation, including bonuses.

Long-finger thinking, yet still better than the two-fingered attitude of doing nothing, alias what's happening here.

Altruism is worthy but it's no competition for profit, alarmed with warning bells. Try plotting them on the basic economics graph of supply and demand. If the downwards slope is ethics and the upwards slope is bonuses, then the point where the bonus curve rolls up towards heaven is the moment the customer gets screwed.

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