Page 2 of 2 Bring on the banking dullards
By Julian Delasantellis
As Professor Henry Higgins (Rex Harrison) exclaimed in My Fair Lady, "By
George, I think she's got it!", although not for the reason he thinks. What's
the use of doing business with a bank that pays top dollar for its "top talent"
if tomorrow the bank goes under and can't pay its counterparties what it owes
them due to the risks the top talent took?
The connection between pay and performance must be as old as the human species
itself. At the dawn of history, the best hunters and their families supped
well, the worst starved. Nowadays, the tautology between higher wages in
exchange for higher quality work is so accepted as to be generally thought of
as part of the background nature of creation. Very few outside of those born in
Cuba or North Korea would be surprised that for what the suburban dentist with
the office in the fancy professional development with the live ferns and
current magazines in his
waiting room charges for a cleaning, the guy with a few dings on his record
from the dental commission, in the shabby office on the wrong side of the
tracks, would give you a whole mouth of new teeth.
But for some strange reason, almost as if gravity had suddenly reversed to
become a repellant instead of an attracting force, just the reverse has been
happening this decade as regards pay in the financial sector. In the Book of
Matthew it says "the last shall be first", but this, with the worst being paid
the most, has certainly turned out to be no promised land.
Since the world financial crisis commenced in 2007, about $600 billion in
assets, loans where it became clear that they were never going to be paid back,
have been written down by US and other Western banks, with this number
increasing by about $60 billion a quarter. Most of these were related to
mortgages on US residential real estate, but now write-offs are increasing in
non-US residential real estate, commercial real estate, credit-card
securitizations, and in just about everything else Western banks were doing in
the decade up to 2006.
Overwhelmingly, these losses have been suffered not by small community or
mid-sized regional banks, but by the 100 or so largest "money center" banks in
the world - the ones that paid their bankers the highest levels of
compensation. Kenneth Feinberg, the US Federal Reserve, the Bank of England and
the European Commission are all trying to hold down the salaries and
compensation of executives of these institutions both to stabilize the system
and to slake the public's thirst for blood.
But what about the argument that holding down salaries will push away the most
talented artisans of the art of banking? Before the deluge, these guys were
putting some very impressive quarterly profit numbers on the board; isn't this
exactly what the industry so badly needs now to recapitalize?
It would be, if not for the fact that it was all a lie - all the profits, all
the adoration, all the glossy photos of bankers at the opera with nubile young
things on their arms, or racing Ferraris on the streets of Monte Carlo.
The only special skill or competency that these bankers possessed was something
that even the most doltish algebra dropout instinctively understands, the power
of leverage. The exact same principle governed the payouts of credit default
swaps as they did quinellas at the horse track - the more you bet, the more you
won.
Through long experience, the grizzled old men at the track have learned that
winning streaks always end, that you can't leverage up forever. But for these
pretenders to be the next Upper Class Twits of the Year, all betting in the
same direction, all writing credit default swaps based on underlying mortgages
they thought would never be defaulted on, they still had much to learn.
They thought they could run up prices on their investments forever, and are now
quite indignant and perplexed to learn that they can't, and, even worse, that
the public who violently objected to their becoming well-cosseted wards of the
state blame them for the social and human suffering that has been attendant on
their folly.
So the answer for the charge that pay caps will stifle bank performance is,
"You're exactly right." If the best and the brightest can crash the system the
way it has, if this is what is called proficiency and skill, maybe what is
required is a little bit less of this sort of "competence". In the old days, it
used to be said that "banker's hours" in the US were 9-12-3: in the office by
nine, out by noon, out on the first tee by three.
Give me one of those guys, even if he's the doltish son of the biggest dullard
at the country club (as most bankers used to be). The only competence we really
need from bankers these days is enough fluency in basic subtraction to know
that the bank can make money from a 6.5% mortgage they finance at 4%, and in
doing so, commence the resuscitation of both the world capitalist system and
the American middle class.
By my authority as an Asia Times Online writer, I think I am going to open up
this year's Upper Class Twit of the Year contest to trans-Atlantic competition.
America will have to field a team, and the competition's pretty tough; when
Monty Python held this event last time, in 1970, the contestants included
"Vivian Smith-Smythe-Smith (who) has an O-level in chemo-hygiene.
Simon-Zinc-Trumpet-Harris, married to a very attractive table lamp. Nigel
Incubator-Jones, (whose) best friend is a tree, and in his spare time he's a
stockbroker. Gervaise Brook-Hampster is in the Guards, and his father uses him
as a wastepaper basket."
My nominees are Robert Rubin, the Bill Clinton-era Treasury secretary who
savaged the attempts of Brooksley Born, then US Commodity Futures Trading
Commission chairwoman, to regulate highly leveraged derivatives in 1998; former
Federal Reserve chairman Alan "see no bubble, hear no bubble" Greenspan; and
Joseph Cassano, the former head of American International Group's global wealth
annihilation and vaporization service, its financial products division. They
should work well together. They're not doing much now, and for those who know
what they've done, the first response on hearing their names is usually "those
twits".
Note
1. Robert McCann, UBS AG's new head of wealth management in the Americas, said
this week he won't pay the most on Wall Street to attract employees to the
company. "I don't want people working with me that the only reason they're
there is because we are the high bid in the market," Bloomberg reported after
McCann was interviewed on Bloomberg Television. UBS at the end of last year
attracted US brokers by offering as much as 260% of the revenue brokers brought
in over the previous 12 months, the report said. McCann will be paid $850,000
with no guaranteed bonus at UBS, against basic pay of $350,000 and $4.69
million of additional compensation when he worked at Merrill Lynch in 2007, the
report said.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
(Copyright 2009 Asia Times Online (Holdings) Ltd. All rights reserved. Please
contact us about
sales, syndication and
republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
