16 October 2009

Bonus bonzai

Banks, and billions of bonuses, baby: the uncomprehending indignation manifested by the public, towards these unique financial system employees, is justified, and yet...

Another message from the ZENmud FireWatchTower

What the public has misjudged, is the nature of the game, which allows the 'system' to reward these 'traders'... massively. Most people, who watch a story on the TV news, or read related web or press articles, are indignant to read that Goldman Sachs or another enterprise has awarded its 'traders' with billions of bonus bucks. For them, these obscene amounts represent a system (and they are not wrong to think this) that has gone amok, which siphons out of the economy gross sums to reward its players: players who may have brought great profits to their clients.

A common thread woven throughout the stories relating to these bonus–babies, recounts the positions taken by CEOs of these financial institutions (which, we recall below, have been greatly aided directly or indirectly, by infusions of State Aid to survive the Catastrophe 2008), whose uniform responses offer their variant of 'panic': “... if we don't offer bonuses, the traders will leave and go (to the competition) where they can receive such compensation...”

Most readers are then left thinking that the banking system itself is putrefied, stagnating the rest of the economy (and they are not wrong to think this) by this siphoning off of 'our capital', to line the pockets of a selected few. What is not commonly known, is the true source of the imbalance, because of the nature of that industry: clients.

The ignored implicit denominator underlining these generic responses, transmitted through the fear–mongering media (FMM) regarding bonuses, is the liaison that exists between traders (or fortune managers) and clients: accumulated personal wealth.

And thus the numerator is this, making a simple equation: if a bank doesn't pay the traders for the profits generated through the fortunes they manage, the financial manager/trader would walk from that bank
with their clients. The bonus system, therefore, can be 'diagnosed' as a means of rewarding these traders for their social and professional connections, which reunite the personal fortunes of the ultra–rich into large investment consortia, who (towards their trusted bankers) are loyal beyond measure, during good times.

Clients of bankers in personal fortune management often demand a plethora of services, and whether some of these pass beyond the legal is not within the scope of this article. If someone calls, a banker could spend his or her time (or that of their staff) in chartering airplanes for cargo transfers, arranging important contacts with other clients with similar business interests, or finding a reputable yacht broker. While the purchase and sale of investment instruments (stocks, bonds, mutual funds, notes, whole companies, etc.) occupies a great amount of a banker's day, the cultivation of these relationships can also require (or offer) extensive 'vacation time' on the yachts or seashore mansions, and ski lodges of these super–rich clients.

Clients with personal fortunes are more loyal to their chosen banker, than to the bank which has engaged such professionals. Any trader that has made profits for his 'family' of clients, will have accumulated substantial financial leverage, for which the payment of the annual year–end bonus is one of the most pre–eminent liens to staying with that bank.

So, while reading about traders and bonuses, don't forget who holds the power.

A bank that diminishes traders' bonuses is going to be losing those clients, whose fortunes are shepherded through good financial times and bad, as the traders 'threaten' to vacate any bank paying under–market bonuses. Confirmation of this comes from a hard–hitting French newspaper, Le Canard Enchainé (translated as: the Enchained Duck), whose translated comment would read:

Bonuses are calculated as a function of performances, those of [the trader's] desk and bank... but especially as a function of the minimal price to which [their] boss thinks [he or she] would be able to keep [them].

Rich clients, one could say, do not trust the bank, per se... they trust he or she that comes to play on their yacht... and offers advice or follows orders, with the panache that the rich pride themselves for receiving.

If we want to add 'morals' to the 'equation', and if citizens are perturbed by the perceived injustices of 'bail–outs' and taxpayer indebtedness, then the thought du jour should be projected on to those rich clients, whose 'friends in the firms' are reaping millions in bonuses for having recommended (some) bogus investment vehicles (especially in markets such as
derivatives and credit default swaps).

It should be the rich clients who are upset with the
rewards given for bad investment advice.

And how a bank justifies rewards to their über–staff, who've reduced the confidence of (and in) the market regarding their offered counselling and advice, is totally unZEN...

This is pertinent to the global situation today, after the announcement by President de la République N. Sarkozy, and his Ministre de la Finance C. Lagarde, of their concept for regulation of French banks, to which they'd given the name 'bonus–malus', requiring the retention of fifty per cent of the bonuses paid out annually, to be retained for three years, and then judged against the performance of the bank in that period.

A rational concept, in sum...

Profits from better risk assessment will allow the retained bonus to be issued to the employee at the end of the three–year period, and losses from poor risk assessment allow the bank to retain those funds held (more or less) in escrow. We watch with bated breath, to see how Sarkozy's proposal is introduced at the upcoming G8 meeting to be held near Pittsburgh. As of the weekend, Germany's government announced 'support' for the concept, without detailing the width of any base of support within the entire country.

SIDEBAR: Wouldn't it have been nice to see President Obama place last month's G8 meeting at Bretton Woods, New Hampshire? The resort lodge and town in which the world witnessed the birth of the post–World War financial system, Bretton Woods could have been a symbol of the renewal for good of the capitalist financial system(s), as it once was seen to be many years ago.

Take the Goldman Sachs bonanza of bonus–bounty to its upper staff: this is the company who 'offered' its CEO, Henry Paulson, as Secretary of the Treasury, he who negotiated a 'NO–conflict–of–interest' (sarcasm mode OFF) bail–out to AIG and the others (all but its main competitor Lehman Brothers... hmmmm). His generosity with the future tax obligations of America's children, produced the last major Act of the Bush misAdministration: AIG received over one hundred Billion dollars, while the classic excuse was produced (as for Chrysler nearly twenty years ago) of its being Too Large To Fail. With this bailout, AIG was 'covered', and in a position to handle its outstanding obligations to clients. These included Goldman Sachs, who received something near eighteen Billio dollars.

Someone probably sent a sweet little memento to Mr Paulson in return for his persuasive response to a financial crisis (from both AIG and Goldman?)... Goldman Sachs didn't tarry, in rewarding its management with some
(??) Billion in bonuses, announced earlier in mid–summer.

conflict–of–interest has lost its impact in Financial America.

We, the Bankers from the United States,
in order to screw taxpayers, for
a more perfect Bonus

___çç*******/ ZENmud \*******çç___

© 2009

No comments: