You would think with all the government moves to restrict or tax big bonuses in the banking arena, and the massive public outcry by consumers crying foul over huge fees and bailout money seemingly funding the bonuses, that bankers might take pause before agreeing to big financial rewards this year. Unfortunately, for banks and customers alike, this seems unlikely.
In news that seems to defy all sense of decency JP Morgan is expected to reward their executive team with more than $29Bn in bonuses, after a resurgence in Investment Banking during Q4 of last year. JP Morgan’s payout will represent an increase of 28 per cent over last years figures. To top it off Jamie Dimon, the chairman and CEO of JP, has been very vocal about his opposition to the 50 per cent windfall tax on bonuses, even threatening Chancellor Alistair Darling that if JP Morgan wasn’t exempted they might drop the plans for their £1.5Bn European Headquarters in London. (See Record bonus pot at JP Morgan – Daily Telegraph, 9 Jan 2010)
Bank of America, on the other hand, perhaps believes that it is taking the high road by rolling back bonuses for their top executives. But I think they’ve missed the point…
“When you look at the overall pool or the individual payouts, they will not be [at] record [levels]…They will be up from last year, but last year was significantly depressed.” – BofA spokesperson Bob Stickler
The banks, however, are not really on their own in the blame game. The first issue here is that the bailouts provided late in 2008, and some again in early 2009 taught the banks that they were essentially immune to the negative effects of their own strategy in relation to sub-prime and the securitization of bad debt. Secondly, when they did receive massive bailout assistance, many of the banks didn’t require the money, but took it to reduce liquidity pressure and simply because they had access to cheap government money. A JP Morgan executive confided in me that even when JP Morgan first tried to pay back the TARP (Troubled Asset Relief Program) funds in early 2009 that they had availed themselves of, the Government wasn’t interested and told them to hold onto the funds. This Wall Street Journal backed up this insider view when it reported that “In June, several firms eager to escape government scrutiny were allowed to return their bailout cash to the government” (WSJ Sep 1st, 09 – BofA Seeks to Repay a Portion of Bailout – emphasis ours).
The message to the banks was that they could do no wrong – they simply must have started to believe this.
In all of this the banks have forgotten that their sole responsibility as an organization is first to their shareholders and secondly customers. I’m sure shareholders at the moment would prefer to see the banks being a little conservative on the bonus front and either hanging on to cash or even distributing more dividends. But the biggest losers here are the customers. At a time when bank fees are at record levels, and banks are ready to jump on delinquent mortgage, credit card or loan issues lightening fast – their unwillingness to show even a modicum of constraint in respect to bonuses shows their overconfidence and lack of responsibility.
Banks could find themselves in significant trouble with shareholders over this issue. As Bankers in the UK reacted with fury (see Financial Times) at the 50 per cent windfall gain tax imposed by Alistair Darling’s team, they are yet preparing at least £40Bn in bonuses during the first quarter with the tax to be borne by the bank directly – thus reducing net profit and dividends. In a clever strategic move, the Chancellor has called on shareholders to take direct action in ensuring that bank executives are held responsible for their fiduciary duty to shareholders over the bonus tax (The Guardian UK – Treasury tells shareholders to block bank bonuses Jan 9, 2010).
This week news outlets carried the story of an Illinois shareholder of Goldman Sachs who is taking the investment banking giant to court over the bonus scandals (Pittsburgh Tribune – Goldman Sachs in the Firing Line)
Customers aren’t impressed either. As customers we once again want to believe that banks are capable of acting in our best interests, and that as customers we are no longer simply a number that is just part of a bonus/profit making machine. With banks reigning in expenses and cutting costs, it looks like some units of the majors will actually do pretty well in 2009. Thus, shouldn’t they feel justified in taking a bonus? Well, given the groundswell of sentiment against the big banks, it would make sense for these executives to give some relief to their hard off customers first, before thinking of themselves and their own pay packets.
It looks like we’ll have to wait a while longer for banks to have this epiphany…