February 24, 2010 2:00 am

Bankers still don't get it on bonuses

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Gapper Blog (Tony Tassell): Four down, more to come? The decision by Eric Daniels, Lloyds chief executive, to waive his bonus must have been inevitable after his peers Stephen Hester at RBS and John Varley and Bob Diamond at Barclays gave way and surrendered their pay-outs. The top bankers have taken a hit for the team.

These sacrifices should not be considered too cynically even if the alternative was public infamy. A multi-million pound hit to the bank account must hurt even the richest banker. But the trouble is that the pay restraint should have reached farther down the ranks.

It would have been difficult for a bank to act individually on the issue without suffering defections, although the worth of some of this "talent" can be disputed. For Barclays and Nomura, particularly, it would have been damaging as they integrate the operations of the old Lehman Brothers.

But it does not say a lot for the banking industry that it was collectively willing to push through large bonuses that owe a great deal to profits reaped from conditions put in place by central banks and governments to remedy the disaster caused by the financial sector.

In risking a regulatory backlash, the industry largely bet the business to pay bonuses. That does not sound like changed behaviour. If they could not do more to restrain bonuses in the current environment, it does not augur well for their collective discipline on risk in boom times.

That is what is still troubling about the comments made last week by Diamond that highlighted the disconnect between the thinking of bankers and much of the rest of the world. Diamond is one of the more capable industry executives, leading the rise of Barclays Capital into a top global investment bank seemingly through sheer force of will. He now wants people in the UK to focus more on that rise rather than bonuses.

Rounding on reporters asking questions on pay at a press conference following the release of the bank's 2009 results, Diamond said: "If you've already decided that this is all about compensation, then you should write the story before you even come . . . But just for the heck of it, let's throw some facts out. The facts are that these are remarkable results for a UK bank.

"I would think as UK reporters . . . you would be immensely proud that Barclays Capital . . . is now the number one investment bank in fixed income not just in Europe and in the UK, but also in the US."

As a hope, that is not particularly realistic. It hardly needs saying but a key lesson from the financial crisis is that the short-term interests of investment banks are not always aligned with the broader interests of society. Bigger banks often mean bigger systemic risks, even if Barclays has a reputation for tight operational control. And at the macro risk level, it is hard to discern that it is that much better than its rivals.

It only narrowly avoided the fate of some of its stricken peers in the crisis. If it had succeeded in its bid to buy parts of ABN Amro rather than RBS, its chances of surviving the crisis without partial nationalisation would have been much more challenged.

True, it would have paid in shares like Vodafone did for Mannesman at the height of the dotcom boom, thus hedging the cost. But it would also have taken on a lot of liabilities at a time when banks were being forced to raise much more capital to cover them.

Similarly, it dodged a bullet when it was prevented from buying Lehman before it collapsed. It subsequently was able to cherry pick the best of the operations of Lehman for what was probably even a lower knock-down price.

So while it may be a fine thing for Barclays shareholders that it appears to be integrating those operations so well, the broader benefit for the UK is less clear. A bigger Barclays entails bigger problems if things go pear-shaped in the future. Given the regularity of financial crises over the past 15 years, this is a concern. The onus is on the bank and its peers to show they are operating in a different way, that they can be boring in terms of their risk profile.

Full text: www.ft.com/gapperblog

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