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  • Writer's pictureInvestment Synergy Team

Big bonuses are back, and that’s bad ......

I should know, I was a banker - The chancellor has removed the cap limiting the end-of-year bonanza. Get ready for the return of reckless gambling.

Geraint Anderson - September 26 2022, The Times

The announcement last Friday by the chancellor of the exchequer, Kwasi Kwarteng, that bankers’ annual bonuses would no longer be limited to twice their basic salary was not unexpected but it still triggered in me a plethora of emotions, ranging from bemusement to shock and from dismay to fear.

Was this newly installed government purposefully turning the clock back to the time when I had been a stockbroker (1996-2008) — a period that was later dubbed by the former prime minister Gordon Brown as “the age of irresponsibility”? And if so, why the hell was it doing such a foolish thing?

“Civilians” (a term bankers use to describe all you low-salaried losers out there) will never understand just how vital the annual ceremony of receiving a bonus is to the average banker’s psychological wellbeing. Trundling off into that glass-walled corner office on the trading floor in late November and being told that your Christmas salary cheque will include six “PMs” extra (or six times the prime minister’s salary — it was about £800,000) was not just vital to your happiness because you could then afford a new Maserati and that villa in Tuscany. No, the size of your bonus was a perfect gauge of just how wonderful a human being you were because how much you received was a direct scorecard from God, also known as “the market”, and as everyone knows, the market never lies. If you received half the amount that Tarquin at Goldman bagged then there was irrefutable proof that said sneering buffoon was twice the man you would ever be.

The most common personality trait of every investment banker that I ever had the misfortune to meet during my 12-year stretch was not greed nor arrogance, though they were most definitely up there, but competitiveness, and while bankers can work themselves up into a lather about a game of racquetball nothing can create such unmitigated misery or unbridled joy as that terse letter that is pushed towards you on that cold November day. I’ve seen a 24-year-old telecoms analyst unable to stop beaming at everyone at the post-bonus drinks (something which is a big no-no) on receiving what I later found out to be a million-pound bonus, but I’ve also heard a trader crying in a toilet cubicle when he realised that paying for little Hugo’s school fees was going to be a challenge that year. Bonus day has all the drama of a condensed Shakespeare play and all the emotional impact of a World Cup final.

But after 2014, when the City of London agreed to fall in line with the European Union’s directive and only allow a bonus twice your basic salary (back then only about a measly £120,000!), the fun and games were over. Admittedly, I heard from some former colleagues that investment banks responded by increasing the basic salaries of their most valued employees, the massive revenue generators we called “rainmakers”, but where is the fun in only getting “double bubble”? What made us “special” were those huge, mouthwatering multiples that would offend any right-thinking person — especially as what we received seemed so random and unconnected to how we had actually performed.

If the bank had performed well, or your sector was in fashion, or you had brown-nosed the boss at just the right time, you could easily receive double what an equally competent colleague received. I have no doubt that I consistently got significantly more than an infinitely more talented team member simply because I projected an image of a deeply disloyal employee who would jump ship should I not receive “my due” (!). My endearing but foolish colleague gave the impression of being a spoddy lifer who would accept whatever paltry sum he received, while I spent the weeks preceding “B-day” pretending to receive countless calls from headhunters (in fact my aunty Marge).

The bonus system not only upped the ante when it came to toxic office politics, it actually rewarded Machiavellian toerags like me who spent more time manipulating perceptions than generating commission. A return to huge variable bonuses means that bankers can now look forward to all their colleagues stabbing them in the back as they compete for a bigger portion of a necessarily finite bonus pool.

But a return of toxic office politics is the least of our worries. If City bonuses can be huge then reckless, short-term gambling is the only sensible response. The bonus system is asymmetrical in that large bets that go right will increase your bonus, but those that tank do not result in money being removed from your bulging wallet. Combine that absurd dynamic with the ever-present fear that this lucrative casino’s days are numbered and the temptation is to put all your chips on red — especially since it’s not your money you’re betting with!

And most observers would agree that short-term reckless gambling is what brought capitalism to its knees in 2008-09.

Massive variable bonuses also encourage criminal practices such as insider trading and market manipulation, which were rife 20 years ago because the risk of being caught was so minimal and the rewards so vast. So, we can all look forward to a return to those “victimless crimes” which are actually not victimless at all, with the people losing out generally being the unwitting pension funds that were conned into selling shares to dodgy hedge funds just before their prices sky-rocketed after a takeover approach. That’s right, those lovely bankers are stealing directly from your granny!

Those bankers will also now once again be incentivised to use their big brains to conjure up near-term profits that later prove to be illusory, safe in the knowledge that they will receive huge bonuses that cannot be clawed back once the con trick has been revealed.

This rational response to a one-way unrestrained bonus system explains why bankers created preposterous financial products such as the sub-prime collateralised debt obligations that were the principal culprit behind the 2008-09 crisis, despite the fact that they only made sense if property prices kept rising and interest rates stayed low for decades. It may surprise you to discover that most bankers are marginally more interested in lining their own pockets than considering the negative impact their actions have on society.

Geraint Anderson is the author of Cityboy: Beer and Loathing in the Square Mile

Investment Synergy - Market manipulation, machiavellian designed financial products, irresponsible attitudes and actions by alleged rainmakers...... has anything ´really´ changed?

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