naked capitalism

In an interesting bit of reporting disparity, news of planned EU legislation on bank pay is a top story on the front page of the Financial Times, yet is buried in the Wall Street Journal and didn’t make the cut at the New York Times. Admittedly, that is no doubt in part due to that any EU pay restrictions will affect London based bankers. But it is the US FT edition that is presenting this story prominently, and with good reason. To have rules like that imposed over such a large number of important markets to US firms is going to pose quite a conundrum. No one with an operating brain cell (or who is any good) will take a posting in regions that subscribe to the EU pay model if he can have more liberal pay elsewhere. That in turn means the US firms might need to adopt similar measures.

The high concept of the legislation is that it will substantially defer the payment of bonuses. As the Financial Times explains:

Under legislation expected to pass the European parliament next week, between 40 and 60 per cent of bonuses would have to be deferred for three to five years and half the upfront bonus would have to be paid in shares or in other securities linked to the bank’s performance.

As a result, the cash portion would be limited to between 20 per cent and 30 per cent, far tighter the limits currently used by most members of the 27-nation bloc…

National regulators will have some discretion in applying the rules to their own countries but the overall percentages appear to be fixed. Regulators would be able to impose financial or non-financial penalties on groups with risky remuneration policies.

The legislation would also force banks to link bonuses more closely to salaries – with the aim of reducing the importance of such payments in the financial sector.

Any banks bailed out by taxpayers must rebuild their capital first and repay those funds before focusing on employee pay.

On Wednesday, lawmakers and EU officials welcomed the agreement and said it should help to reduce the “bonus culture” in the banking sector.

“This EU-wide law will . . . end incentives for excessive risk-taking,” said Arlene McCarthy, the MEP steering the legislation through the European parliament.

The Wall Street Journal provided additional detail:

The new rules would also ensure high pension payments are generated as contingent capital, with their final value linked to the strength of the bank. The measures aim to avoid the kind of bloated severance packages for disgraced departing executives that have caused an outcry in Europe.

Banks would also be required to hold a minimum amount of capital to ensure they are covering risk from their trading book and complex securitized investments, such as mortgage-backed securities, to avoid a repeat of risk-related losses like those seen during the financial meltdown. The capital requirements would take effect in 2012.

One has to assume that a big goal is to make sure most of the cash a performed earned is still at the firm in case his results are later found to be, ahem, exaggerated.

Needless to say, the industry sabre-rattling started almost immediately. Back to the Financial Times:

Senior bankers contacted were reluctant to comment but said they believed the instruments would be difficult to design and warned that tough pay rules could drive business to Asia and the US, which have shunned strict limits on bonuses.

Angela Knight, of the British Bankers’ Association, said politicians should realise most banks have already changed their pay practices and keep in mind that “this is an international and mobile business”,

Yves here. The EU has gotten similar threats on other financial services initiatives and has not been deterred. As we noted:

In March, the EU announced plans to restrict the operations of private equity funds. This is far from surprising, since US and UK firms have exhibited a nasty propensity to lever up firms, pull out a lot in the way of special dividends, and too often overdo the cash extraction and leave a bankrupt hulk in their wake. The irony is that while that is peculiarly seen as a legitimate way to do business here, most EU member states are not at all happy with it. The EU has been working on a proposal to restrict investors in the EU from putting funds in private equity and hedge fund firms outside the EU, and also limit the ability of foreign investors to buy European companies.

The amusing aspect of this initiative, as we noted in an earlier post, is the private equity industry immediately started threatening that the proposal would “seriously disturb” many of the world’s biggest PE funds. So? That would seem to be a feature, not a bug.

Yves here. The contretemps got even more entertaining:

The EU seems unintimidated by various threats the hedge fund and private equity fund industry have tried to make to forestall efforts to restrict the activities of those firms….

The idea that any government dare tell the moneybags what to do is a bit of a stunner to the industry, which has gotten used to having its way in the US and UK. But despite the loud noises from the industry, there has been no change in the stance of the Europeans.

Indeed, it gets even better. An EU parliamentarian who is the rapporteur on the proposed reforms, in effect said that what was at stake was 3000 hedge fund jobs…

From the Guardian (hat tip reader Swedish Lex):

Jean-Paul Gauzès, the European parliament rapporteur on a proposed directive on alternative investment, said: “If the directive wipes out two or three thousand speculators, I am not going to be sad.”

US based readers might assume that non-EU firms could slip the leash, but that may be easier threatened than done. The EU is requiring private equity firms and hedge funds to be licensed locally and adhere to local regulation Securities firms already require local licenses, so anyone operating within the country would presumably be captured in this net. It isn’t clear how the EU would deal with bankers flown in for particular deals, or whether firms will try clever dodges (locating trading desks, say, in Moscow). But the EU operates under a principles-based regime, which also gives it considerable latitude to attack practices designed to circumvent rules.

This will most decidedly continue to be amusing.