THIS is turning out to be a decent year for the global investment banking industry, despite weaker trading results and even though some firms are doing better than others. True, Wall Street’s total profitability – as defined by the broker-dealer operations of New York Stock Exchange members – will collapse 69 per cent this year to $19bn, from the exceptional and unsustainable $61.4bn collected in 2009. But this would still make 2010 the fourth-most profitable year on record, New York State’s comptroller said yesterday.
Thomas DiNapoli also confirmed that a net 31,000 – one-sixth – of all Wall Street jobs have disappeared since the end of 2007. Bonuses totaled $20.3bn in 2009, up 17 per cent from 2008 (they collapsed 47 per cent in 2008). US investment banking bonuses could be up 0-5 per cent this year; but total compensation will slip for the big firms, dragged down by trading.
The situation will be different in London, however, where UK and European regulators are obsessed with reducing compensation and especially bonuses. That is the reason for HSBC’s decision to double the basic pay of many of its bankers yesterday, in return for much lower bonuses.
The Centre for Economics and Business Research estimates City bonuses this year will be £7bn if market forces are allowed to operate, down from £11.6bn in 2007. Yet there is now discussion that banks (how these are defined remains to be seen) should get together to cut total bonuses to no more than £4bn; it is unclear, however, how much of this is purely spin. Does the £4bn refer to cash – or also to equity? London players may have suffered more than Wall Street and bonuses may be set to fall of their own accord. There are also probably fewer investment bankers employed at the largest banks in London.
More likely, the real drivers are the rules forcing a much greater emphasis on basic pay, deferred compensation and reduced cash payouts. All of these will automatically cut cash compensation this year; there will be no need for legally dubious cartels or secret meetings in smoke-filled rooms. If so, the government and the industry could pretend to have successfully pandered to the City’s enemies while not actually doing anything other than implementing the new rules.
Even if compensation does fall, the envious and the left-wing commentariat should not rejoice too soon: the largest single gainer from bonuses is the taxman. If bonuses are £7bn, the taxman would get £4.1bn, with the 315,000 City workers keeping just £3.8bn. If bonuses fall to £4bn, the taxman will lose £1.8bn in revenue, since some banks are not yet paying corporation tax because of losses made in previous years. Lower compensation would force greater spending cuts and additional tax hikes on ordinary folk. It would chase away jobs to parts of the world where financiers are welcome, including New York, Singapore and Hong Kong. The anti-bonus rules will also make the industry less flexible: fixed costs will increase hugely, making banks much more vulnerable in the event of a downturn and guaranteeing far more job cuts.
Populism and the politics of envy always backfire; it’s a tragedy hardly anybody understands this.
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