US Banks Reject Effort by UK Bank Execs to Rein in Pay

From the Independent:

Chief executives from the world’s banks discussed the plans at a secret dinner held at Claridge’s, the London hotel, last October, at which several leading British bankers are said to have suggested that the sector should take greater responsibility for its part in the crash, and do more to reduce the vast bonuses paid to staff.

But the recommendations were met by stiff opposition from the US banks JP Morgan, Morgan Stanley and Goldman Sachs, according to one source. “Some of the US bankers were furious about attempts to reduce pay throughout the industry, arguing that any such move smacked of socialism and would be fiercely resisted,” the source said on Friday. “It’s not the way the Americans like to go about their business.”

Yves here. The evidence that US capital markets firms are firmly in the hands of hopeless sociopaths continues to mount.

The fact set is undeniable: the big firms in the industry engaged in a massive campaign of looting, of running enterprises in which the employees were consistently overpaid relative to the risks and true profits of the firms. The result was that they were overleveraged. The only reason the industry survived was due to massive public subsidies, from equity injections to special lending programs to super low rates to regulatory forebearance. By any right, the firms should have failed, and the bankruptcy course should have gone full bore after the pay earned in the bubble years as fraudulent conveyance.

The British bankers seem to understand:

1. The industry is responsible for the financial crisis and the toll it has inflicted on innocent bystanders

2. The industry should be very grateful indeed for all the emergency rescue, particularly since virtually nothing has been done to prevent the industry from resuming the same sort of profitable-looking reckless behavior that nearly drove the world economy off the cliff

3. Banks’ current profits are also due in significant measure to all that lovely cheap funding on offer from central banks, in effect an unexpected reward for having caused the crisis. Reader NYT pointed out:

GS [has] gone from a privately funded balance sheet to a government funded balance sheet since the October meltdown. They paid only $6.5B interest on only $500B of debt in 2009. That’s about 1.3%. Given that some of their debt is long term debt (e.g Buffet’s 10% loan etc) issued prior to 2009, they must have replaced almost all of the $500B in debt with loans from the Fed.

Looks like the financial crisis worked out very well for GS. They are paying $25B a year less in interest than they paid in 2008 and it looks like no one is even talking about why GS should not be given this huge and ongoing government subsidy.

4. The wisest course of action is to try to resume as much of status quo ante as possible while keeping a low profile so that the public and officialdom will not decide to interfere in this juicy little racket. That means avoiding in engaging in the most press and public annoying behavior, namely, paying lavish bonuses, is not a very good idea right now

5. But the US banks are convinced of their divine right to feed at the trough

The astonishing bit is that the US banking execs have the temerity to self-restraint on pay “socialism”. They are benefitting from what most would call socialism for the rich, but is more accurately termed Mussolini-style corpocracy or good old fashioned pilfering from the public purse.

A successful investor would often say, “Little pigs get fed. Big pigs get slaughtered.” A lot of people are waiting for these big pigs to get their just deserts.

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  1. Francois T

    “arguing that any such move smacked of socialism”


    One comment to these fuck heads: Remember 1917?

  2. attempter

    Obama said to these thugs about a years ago, “I’m the only thing standing between you and the pitchforks”, and that’s very true.

    I look at Obama, Geithner, Reid, Pelosi, and their Republican counterparts, and all I see are goons paid to protect those who robbed and raped me and everyone else who’s not part of their gang. (And who are continuing the robbery and slaughter.)

    I can’t even imagine any other way of looking at this rogue “government”.

  3. Stevie b.

    Yves – thank you. I have learnt so much from your posts on Golden Scumbags. I for one will never tire of reading as much as you care to print on this subject.

  4. ed

    truly astonishing….frustrating as hell though…..everybody should be sure to buy yves’s book “Econned” and encourage interested people to do the same…..we can only hope that knowledge is power…..

  5. john bougearel

    The money shot was this regarding curbing abusive and exploitative pay practices smacking of socialism was the unconscionable: “It’s not the way American’s like to go about their business.” Of course, it is not the way the abusive financial system exceeding their societal role likes to go about its business.

    If it wasn’t for socialist policies that subsidized these banks in 2008-09, they’d have no pay at all. God forbid they have to make money the old-fashioned way and actually “earn it” rather than their extorting and racketeering practices through the US Treasury, Gov’t, and Federal Reserve.

    Yves remarks about big pigs getting slaughtered reminds me of Taleb’s story about the benevolent turkey farmer. The turkeys all believe in the farmer’s benevolence until a week before thanksgiving, when in a highly improbable moment he wrings the necks of every last one of them.

    It seems to me that in this allegory, the fat cat bankers are the turkey’s. The highly improbable event would be that the benevolent farmer, i.e. US govt would actually wring the necks of these turkeys.

    Why, in the unlikely event these turkeys necks were wrung by some invisible hand or force, we’d have to declare a national banking holiday, just like FDR did on March 6 1933 77 years ago and sing a variation of the tune “Ding Dong the Wicked Witch is Dead.”

  6. koshem bos

    The banks are like the kids on unlimited allowance to whom you can talk until you’re blue in the face. In such cases, the real guilty party is the parents. No more allowance, no more toys and some community work might help.

  7. Siggy

    Clearly, the banksters will not go quietly into that good night. It’s easy to comprehend their reluctance, after all someone’s trying to mess with their rice-bowl.

    I saw a clip yesterday of Charlie Munger talking about bucket shops of yore. As much as this financial crisis is about money it is also about moral sentiments.

    I often wonder if the quants have considered the application of moral sentiments as a factor and what coefficient they might deem appropriate for their flawed averages models.

    Credit markets freeze when confidence is distilled to the presence or absence of tangible net worth. GS adeptly lost the month of December in order to adjust its Balance Sheet. Fancy stepping that and too clever by half. No matter what they might say, they were indeed on the door step of the local bankruptcy court, wherever that might have been. If GS were still a partnership, I wonder how much of the current bonus money would have been paid in cash as opposed to equity in the partnership.

    If you look at the balance sheets of the US IB’s you’ll see that they are thinly capitalized and really need some additional equity. Now, it is also true that you can run on thin equity if you have the guarantee of the US taxpayer to support your leveraged positions. Nonetheless, I believe that it is fair to say that most of the bonuses paid in the current year should have not been paid and the profits reflected in those bonuses should have gone to retained earnings and an enhanced equity position.

    What would transpire if IB’s were required to pay all ‘bonuses’ in shares as opposed to cash? In the current structure, such a move might begin to reintroduce the concept personal liability upon the banksters. Surely, one must agree that in the face of personal liability there is a greater propensity toward ethical conduct.

    I still want to know, when the hell is the Justice Department going to prosecute what fairly appears to have been massive fraud within the financial services industry?

    1. Francois T

      I still want to know, when the hell is the Justice Department going to prosecute…

      It can only happen:

      a) when the public outcry is so deafening that, for the politicians, it’ll be time to choose: they’re all thrown out of office, or they prosecute the banksters. It goes without saying that, with the media we have in the USA, it’ll never happen.

      b) when we have public campaign reform that free the pols from Korporate money. Since I love life, I’m not going to hold my breath.

      c) Large scale riots forces the Administration and Congress to sacrifice a scapegoat to the mob. Which one would be more convenient? Banksters, of course!

      In the meantime, the raping and pillaging known as the “work of God” shall continue unabated. Also unabated, percolating under the surface is the growing frustration and rage of the American people, watching their beloved country being fucked up by their political and financial elites. Whomever is naive enough to believe this couldn’t lead to dire consequences harbor a cataclysmic ignorance of history.

      One last thing: When the banksters appeared in front of the FCIC, no one had the kahunas to ask the CEOs:”Remind us again, what exactly is the real contribution your activities brings to society?”

      Ain’t that a tell tale sign?

  8. Briangobosox

    So, collusion in restraint of trade, which seems to be what the British were suggesting, is ok, so long as the result is to reduce financial sector bonuses?

    Please Yves, help me get this straight. You are suggesting that U.S. CEO’s, at a “secret dinner,” should have agreed with other CEO’s in their industry to cap employee compensation.

    Please, why not spend your time trying to draw attention to scams like the TLGP, rather than calling for illegal actions to cap bonuses?

    1. carol

      Brian, help me get this straight: you’re trying to joke, right?

      If not, please remember that those banksters always repeat after each other that “we have to pay these salaries and bonuses, otherwise we will lose our top talent”.

      1) if these banksters then protest when UK colleagues propose a little bit constraint is at least hypocritical.

      2) given the extent of the crisis, these people are neither top, nor talent.

      3) Yesterday, Ed posted on this blog regarding the lack of loyalty of people in the financial ‘services’ companies. These people threaten to leave their employer for a higher paying one in Hong Kong, Switzerland etc.

      This could be stopped immediately, if like at other sectors, they apply anti-competitor clauses, i.e. you are not allowed to work at a competitor within 3 years after leaving your company voluntarily.

      4) Yves is in the good company of Volcker, who at a banksters meeting a few months ago pittied them for overpaying themselves and their ‘top talent’ and told them they should reduce their pay (as well as quit innovating).

      The problem of ridiculously high salaries and wrong incentives from bonus formulas could be stopped by banksters immediately. In fact, it should already have been stopped.
      If they won’t do it, then the only solution is a 100% marginal tax rate (remember: it is taxpayers’ money they get anyway!).

    2. Francois T

      Did you read the article? UK bankers were suggesting to their American colleagues that there comes a time were it is permitted to ask yourself “when is enough, enough?”.

      Apparently, it is NEVER enough for the US bankers. So, they’re begging for society to smack them so hard that after all said and done, they’ll be unrecognizable.

      BTW, why don’t you tell us why do we so need the big banks that they’d be untouchables by anyone?

  9. bob goodwin

    Another point of view is that government takes 3 years to fully respond to a crisis with policy corrections. The sociopaths want to maximize their fee extraction in the interim.

  10. Frank Ohsen

    @1:43 pm

    “So, collusion in restraint of trade, which seems to be what the British were suggesting, is ok, so long as the result is to reduce financial sector bonuses?”

    If certain financial sector bonuses were paid due to the largesse of the tax payer allowing them to do so then yes it IS ok to reduce them and/or to get that entire payment back.

    If I overpay the IRS all other things considered I tend to get a full refund for the amount overpaid. The same logic applies when the taxpayer ‘overpaid’ these IB’s. If the IRS didn’t refund my overpayment would not then that be considered a form of outright theft? Likewise the same for financiers and their minions that were defacto bailed out by the taxpayer. Bottomline: That bonus money was not their money to give away. It was the taxpayer’s.


  11. sam hampster

    Like Downsouth continues to say, we have much to learn from countries south of the border. I lived 14 years split between Mexico and Ecuador. I rode countless city buses filled with the wretched of the Earth, making my way each day to school.

    Now, I’m on a different kind of bus: the blog, Nakedcapitalism. There is no stench of unwashed bodies. The faces of the riders are cleaner, their accessories more sophisticated, but I can’t fool myself. I remember the feeling of not being able to right what was wrong. I’m back on that bus.

  12. Blurtman

    Why cannot we try bankers as domestic terrorists and jail and execute the guilty? You can do serious jail time if you destroy construction equipment to prevent environmental destruction. Why cannot you face jail time or execution if you destroy millions of lives to fill your own pocket?

  13. LosingGround

    “Details of the secret talks follow another week of bonus anger after the news that RBS is paying out £1.3bn in bonuses to 16,000 staff – including £1m each to 100 bankers – even though it lost £3.6bn last year.”

    I guess this is why the story is being leaked almost half a year after the dinner allegedly occurred–the British banks are trying to justify their own bonuses. Perhaps this leak to the Independent is a sign that the bankers are beginning to turn on each other, but beyond that, I’m not sure I see the point to this story.

    Yves’ comment that, “the US capital markets firms are firmly in the hands of hopeless sociopaths continues to mount” is accurate as far as it goes, but I don’t think this absolves the British or Swiss or French or German banks from their own sociopathic tendencies.

  14. craazyman

    God’s Work

    If any of you have 5 minutes to kill. You can see what a master of language does with God’s Work. I can see the banksters, thick and black in the sky, watching for the underbellies raw and succulent and exposed, then swooping in a dive of death, silent immaculate talon-sharp death. I am thinking, Loyd Blankfein, of you and your “talent” doing God’s work, as I watch this. ha ha ha haha ahahahahahah.

    Start at 4 minutes. Genius. Genius. Genius. the whole thing is worth watching.

    1. sam hampster

      Good show. Tennessee Williams has a way of showing that the truth is unbearable and incongruent with sanity.

  15. William Cogburn

    We, the people, have succumbed to the selective application of the “socialism” label, aligning like so many good followers of McCarthy during the Cold War. While we may fear escalating Federal interference into our daily lives we must demand from our leaders consistent policy. If controlling how bailout funds are spent is anti-capitalistic, then certainly re-appropriating wealth from the common man, to banks and brokerage houses to save the ultra wealth from bankruptcy, under the guise of preventing subsequent failing of the economy, and the fear of admitting we don’t understand derivatives (and who does), is beyond socialistic; fascist maybe! Out right stealing more accurately. But then again giving Joe, 8k of Johns money to buy a house and calling it stimulus differs little. Each case however weakens the middle class and brings us closer to the two class world the Kennedys, Clintons, Nancy Ps’, Pres. Obama, and the rest of the Left push on us at every opportunity.

  16. jerrydenim

    I’m glad to see I wasn’t the only one to appreciate the richness of irony contained in the “socialism” quote.

    I’m ashamed to day I’m still so incredulous when it comes to the arrogance, hypocrisy, mendacity and avarice of these financial types, but damn they still shock and gall me with their infuriating remarks and general display just how out of touch with reality they are.

    They have no shame, they feel no remorse only entitlement. How much longer can necks this fat and truculent avoid the guillotine?

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