The Bonus Culture

This is one very obvious reaction to economic contraction – the end of huge bonuses.

However, the fact that they were handed out in December 2008, after all the losses, collapses and government interventions did surprise me. In September of 2008 I was happily writing about how much more the economy would feel the absence of all the bonuses provide to our economy, not thinking for a minute that companies taking tax payer cash and making huge losses would continue to supply huge cash pay-offs to those responsible.

Truth is however that companies are only as good as the people they employ and the people making the decisions. So, as those making the decisions were party to huge bonuses themselves, it should have been more apparent to me that it would carry on.

It was generally accepted that huge pay-off’s were just reward for good work and profits made by companies, and that losses see them stop. It was even more a given that bankers would not put their employers and customers in danger of closure by taking unnecessary risks with their cash, as it benefitted no one to make a company bankrupt, neither employees and investors alike.

However the examples that come to mind paint a different picture. The purchase of ABN Amro by RBS shows that all those involved wanted the huge bonuses associated with this type of merger, more than they wanted to see due diligence done. It shows that they didn’t care about the how this would affect the companies long term survival or even if it was in the shareholders best interests. As shareholders themselves it is claimed that being personally invested should have guided them to better decisions, but the cash bonuses were of the here and now, and shares offered them no long term security like cash today had done.

The worst example was Bank of America’s purchase of Merrill Lynch which seems again to have had insufficient due diligence applied, but did see the executives and boards of both companies coming away with huge payments. The fact that Merrill Lynch was right on the heels of Bear Sterns and was going to cause BOA more harm that good did not get in the way of huge one-off payments for both. Given that Merrill Lynch’s board had ’screwed the pooch’ and would have no jobs soon enough, no pension pots (at least from Merrill Lynch) and no prospects of a safe haven in any other firms, they must have been laughing their asses off that BOA were stupid enough to take this deal. Now they have BOA backed pensions, BOA shares (not great but better than Meryll’s would have been) and came away with huge one-off payments.

Like the New York Attorney General, I don’t know the figures behind these payments yet, because in their shame at what they’ve let Merrill Lynch’s board do before they left,BOA  have since been trying to block the Attorney General from finding this information out, given that it will mean the forced resignation of those who knew the figures but voted this debacle to proceed anyway.

The latest story to hit the press, that Sir Fred Goodwin formerly at RBS voted through a rather unsavoury enormous pension pot for himself before he left RBS, is the latest in this long line of rich idiots lining their own pockets with share holders and tax payers cash before they leave devastation behind them. The arrogance of the figures is bad enough, the arrogance of those who voted this through staying on the RBS board seems a slap in the face to everyone they’ve robbed, but for me the real arrogance comes from knowing that if RBS goes into administration then this pension pot is gone in its entirety. Therefore it shows that Sir Fred had it in mind that this ruin of an empire he’d made was too big for Gordon Brown to let become bankrupt, that tax payers would have to save it, and when they did they would have to provide him his legally binding leaving present. Tantamount to taking a huge shit in the living room before leaving a house for the last time.

The start of March will probably reveal the same sort of abuse by former HBOS Chief Executive Sir James Crosby. It seems his terms of departure were far more gracious than could have been expected, since the figures he was hiding pretty much meant that HBOS were insolvent. His close connections to the Prime Minister Gordon Brown meant his character was beyond reproach, but just like sir Fred Goodwin he knew what he was doing was wrong, but did it anyway.

He sacked his Risk Manager, Anthony Smith, in 2005 because he didn’t like being told that his decisions posed unacceptable risks, and it seems, to better expedite his ability to avoid scrutiny, he took a position with the regulator investigating his companies risk position (the FSA) and, surprisingly, this conflict of interest resulted in a clear bill of health from HBOS.

Now he’s been fired as Gordon Brown’s personal adviser because after leaving a collapsing company he was still considered the ideal man to figure out what’s gone wrong by the government, when they should have been able to take one look at his track record and said what’s wrong with banking is idiots like Sir James Crosby being left unchecked to do as they like.

The Prime Minister Gordon Brown keeps saying that “No one could have predicted this collapse”, but Anthony Smith probably would have, and it seems that knowing the truth would only get you fired because idiots like Gordon Brown are far more interested in the views of thieves and crooks like Sir James Crosby. The fact that the most prominent attempt by a risk manager to put the brakes on this runaway train only resulted in his being fired, undoubtedly shut the mouths of anyone else who might have counselled against such risks. Too often the trail of destruction and greed leads to the top of big banks and the FSA, and both lead directly to Prime Minister Gordon Brown and his decisions. He kept poor company and allowed his opinions and decisions to be influenced by it.

I’d only like to finish by pointing out that I bet Zoe Cruz is letting out a huge sigh of relief. This is because although she was Forbes magazine’s highest earning woman in 2007, she was asked to resign by Morgan Stanley in November of 2007 because the SIV (Structured Investment vehicle) she was responsible for as Co-President and head of Morgan Stanley’s Investment Banking division had just had to be taken back onto the balance sheet as it was now reporting a loss. The SIV was worth $25 Billion at the time, and this was the first failure of an SIV I know of and, for me, marked the start in earnest of the economic collapse.

In the end she got a genuine ‘golden parachute’ with a huge pay-off and massive pension for presiding over her failures, yet unlike most in this business got out before this was being noticed by anyone in the media.