It’s been nice having a break, and feeling like the banking system isn’t the only thing I care aobut in this world. Nevertheless, the eye wasn’t completely off the ball as several grumblings and mumblings have been taking place during the last two weeks.
The obvious and biggest story being the need to sort out bankers’ bonuses.
For a start, Barack Obama thought about a cap of $500,000 earlier this year. Various newspaper headlines screamed: “Obama imposes $500,000 ceiling on bailed-out bank bosses”, and this was seen as a good thing … but only by the naive new incumbent of the White House that is who, like most of the populous, wanted to do the obvious thing and clip the wings of the evil banking system.
It just isn’t that simple.
Sure, bankers making ‘obscene’, ‘outrageous’ and ‘vulgar’ amounts of cash out of a failed system is a source of retribution to be sought, but not by making your country unattractive to the very people who fuel your economy.
That’s why Obama was rapidly shot down by those who understand these markets. Their argument went something like:
“OK, OK. So you’re a bit pissed with the banking system, as are all of us. But you gotta see it our way. The banking system is the fuel of the economy. If the system fails, the economy fails, you fail. You know that. That’s why you bailed us all out.
“Now then. What makes the banking system work? Having the brightest talent who totally understand and get these complexities of trading.
“Now you know how complex trading has gotten. That’s why we had these issues in Credit Default Swap Derivatives. In fact, the more derived a product is, the more complex it gets, the more risky it gets but, if you have guys who understand those risks and can trade in them effectively, then you make massive amounts of profit.
“That’s how the ‘vampire squid’ Goldman Sachs works, and that’s how all of us want to work. And it did us good for the past decade or so, didn’t it?
“So, you cap bonuses and you effectively are saying: the best and the brightest traders, go trade elsewhere. And they will.
“Just look at the dead meat on Wall Street and London.
“Royal Bank of Scotland for example. Lost a load of traders to BarCap and others overnight.
“Or UBS? Same thing.
“A bit of weakness in the system and stellar rewards await elsewhere for the best and brightest as can clearly be seen.
“So go on Mr. Obama. Put a cap on our ability to attract, retain and incentives the best and the brightest traders and you’ll soon see all your banks that are working fail. We will all fail because all the guys will be in some other country with some other bank.
“Oh yea, and you throw in a few things like: ‘working with the G20 in a co-ordinated fashion and we avoid this’. Sure. You think China and Russia would really see the opportunity to steal your main strength in the financial system – the knowledge – as something they would ignore or see as being just fair dues?
“We don’t think so.
“Your choice, Barack, but you stifle our competitiveness in salaries and bonuses and you sign our death warrant.”
In other words, the core of the financial system involves having top trading talent who understand their markets intimately in order to be able to deliver profits.
I liken it to footballers.
Do you really think that Christiano Ronaldo is worth or not worth £80 million?
Does it matter what you think because Real Madrid think he’s worth that and, if they have the money, they get the man.
This is how banks work and it may be economies they are kicking around rather than footballs, but the talented few who have proven track records deliver the greatest profits.
That is why America and Britain have fought Germany and France so hard over this matter, as America and Britain have the financial markets as the core of their economies and economic strength or, more recently, weakness. But to cede these markets now, as they move into recovery, would be to place a nuclear bomb in the heart of Geithner and Darling's Treasury operations.
It just will not happen.
Governments therefore have learnt that they have to protect their banks, that are too big to fail, and their bankers, who are too bright to lose.
Finally, on this last point, do the brightest really deliver the greatest profits … or is it their firm and environment?
In a fascinating study by Harvard Business School’s Professor Boris Groysberg of over 1,000 stock analysts who worked for 28 American investment banks between 1988 and 1996, he found that when a company hires a star away from another firm: 46% did poorly in the year they switched jobs and their performance remained lower even after five years; there is a decline in the performance of the group the star analyst joins; the market value of the company hiring the star falls; and the star doesn’t stay with the new employer for very long.
Grosyberg concludes that hiring stars does not do much for a firms’ or the star’s performance, and that everyone would be better off by growing talent inside the firm.
Hmmmm …. it's good to be back.