Page last updated at 23:01 GMT, Tuesday, 21 July 2009 00:01 UK

City Diaries: 22 July

Man looking at a falling graph

Banking bonuses are back in the news. This week our diarists discuss remuneration in the City, the government-commissioned Walker report on banking governance and the BBC drama Freefall.

These diaries are written by people who work in finance and have had a front row seat as their industry goes through the biggest changes in decades.

They give us regular insiders' updates on the mood in the City of London and the dramatic changes in the world of finance.


Laura (not her real name) works for a commercial bank in London.

Wall Street sign
Are we seriously saying that it is OK to suddenly pick on one profession? Eventually bankers may get protected status along the lines of gypsies

"I'm sorry Mr Branson we've decided that as we don't like entrepreneurs anymore you are going to have a super tax on anything you earn over £1 as your wages are morally wrong in the eyes of the law. I'm sorry Mrs Smith, that goes for you too as we don't like cleaners either."

The fact that there has not been more of an outcry about the utter rubbish being bandied about by the Treasury and various think tanks is more worrying than Goldman Sachs paying out lots of bonuses. Are we seriously saying that it is OK to suddenly pick on one entirely legal profession and discriminate against them in the tax system because of what they do? Eventually bankers may get EU protected status along the lines of gypsies and travellers - whole towns like Weybridge will get protected status for their cultural diversity.

On the matter of risk and reward, existing in a world where people only played a very long game would do none of us any good. Our standard of living would decrease as returns were measured over, say, a generation rather than five years or even six months.

In every aspect of life, we choose short and longer term goals. Some work out, some don't. Buying a lottery ticket is a short term risk with a potential for long term reward and many of the decisions you make in investment banking are similar. In business banking you look at a company and decide if you want to lend and over what term. Sometimes you will lose a deal for being too cautious in the face of competition but that is also risk. That company may then turn into the next Google in which case you think, "If only I'd gone in £5k cheaper," or they may end up with an insolvency practitioner - in which case you sit smugly saying you were right not to try too hard for it.

Banking isn't only about money, it's about risk. The best banks are not the ones who just make the most money - if they are also the ones who are then having the highest bad debts.

You cannot inextricably link risk and reward on an individual level in banking because £1 of risk is not the responsibility of any one person. In fact, the person who chooses to lend £1 is likely not to be the person who collects it if it goes wrong. This is not that stupid when you consider the extremely large number of people working for banks and the wide variety of jobs they do. Balancing risk and reward must therefore be the job of the institution as much as it is the individual staff member and attacking people's pay is not the way to do this.


"Anthony" (not his real name) works for an investment bank in the City.

The relatively good results from US Banks over last week - particularly Goldman Sachs and J P Morgan Chase - were good for the markets in both the UK and US. But it was the size of the potential bonuses that caught the eye.

Unless you control bank remuneration at a global level, the high earners will just go somewhere else if you clamp down on pay

The timing of these announcements could not have been worse as the banks seem oblivious to the political storm that huge bonuses cause.

Let's not dwell on the fact that these two banks were less affected than others by the credit crunch proving the soundness of their business model. Let's also not consider that only a tiny few were involved in subprime lending. These businesses have continued to be profitable right through the downturn. The public do not care about these arguments and rightly have no sympathy for the view that bankers deserve these rewards which run into millions.

The problem is that unless you control bank remuneration at a global level - which is almost impossible - then the high earners will just go somewhere else if you clamp down on pay.

Carlos Tevez
Anthony compares star bankers with top footballers

A good analogy is with footballers. The current antics of Manchester City and Real Madrid are bidding up salaries and transfer fees. Given City's previous record, I do not sense that Carlos Tevez has moved across Manchester for the sporting glory. It is for the money. It is much the same in the City.

The Walker report on banking governance made some healthy recommendations. It's right to put a greater emphasis on risk assessment. And directors should be independent and able to challenge executives. The formation of a risk committee which has real power in the organisation is essential. But the report is flawed in calling for tighter control of bonuses. This will cause star bankers to leave - especially when coupled with the new 50% tax rate. Ultimately this will be bad for the economy.

There is a much simpler way to control bonuses - become more risk adverse and reduce the expectation of vast profits.

I remember meetings before the credit crunch where credits running into hundreds of millions of dollars were approved in a matter of minutes. A scenario might play out like this. The deal-makers would circulate a hundred page document to the credit committee the night before so no-one had time to read it, and then expect them to rubber stamp the transaction in a short meeting. If there was any resistance, the committee would be reminded that the bank stood to lose a stream of revenue running into millions. The transaction had to be closed that night. If you made a stand, you would not last five minutes in a credit-related job.

That is the problem. Nobody would say no.

You can control bonuses without directly hitting pay structures. If risk and credit committees have real power to say no and high-risk deals are avoided, then the bankers will not generate the short term revenue or get the mega bonuses. Of course, this would make profits lower and so shareholders would have to accept lower returns. "Casino banking" has to stop because it does not help the long term welfare of the economy.

Problem solved.


"Mark" (not his real name) works for a stockbroker outside London.

There was a lot of hype regarding last week's BBC drama Freefall, which starred Sarah Harding of Girls Aloud fame. Harding was hardly in the drama, gracing us with her presence for a few minutes in a 90 minute documentary but it was enough to have people falling over themselves to advertise it in the television magazines. I was more interested in the content, as it was based on the experience of those working in financial services.

I will briefly summarise Freefall and spare you the torture of watching the show on the BBC iPlayer:

Sarah Harding and Dominic Cooper
We are all looking for a scapegoat to blame the crisis on. Freefall chose the high-pressure mortgage salesman

A mortgage broker sells an unsuitable product for bigger house to security guard with wife and family. After one year, the rate goes up, the security guard cannot pay. The mortgage broker still enjoys life but the security guard commits suicide. Thought provoking? Actually, no. It was sensationalism of the highest order. The broker, played by an actor from Mamma Mia, was all 'gimme, gimme, gimme' in terms of money while the poor security guy, with his wife and two kids, was left facing his own Waterloo.

The BBC's excellent One Show recently sent its consumer champion on to the high street to talk to people about terms and conditions. In pretty much all cases, people admitted to not reading the small print or even all of the terms and conditions. I'm afraid this was the kind of basic error made by the security guard in Freefall. Yes, he was under pressure from the broker to sign up to the mortgage, but a house is generally the biggest investment you will make in your life. You will probably spend some 25 years paying for it. So surely it's important to actually read the document?

Had he done so, he would have realised the mortgage was unaffordable. I have said it before: we are all looking for a scapegoat to blame the crisis on. Freefall chose the high-pressure mortgage salesman. Stupidity of the consumer never seems to be mentioned.

The comments from last week diaries were extremely interesting. We do read them so please continue to send through your messages, it is your opinion that counts not whether you agree with myself or the other diarists.

I wanted to respond to "Ross from Stoke". The comments can be read in full here .

Ross compares a newly qualified teacher with those of head of a bank. That's not fair. I know everyone likes to comment about bank chiefs, but a fairer comparison would be with those who work behind the counter, in the operation or in the call centres. They don't get huge bonuses and will earn less than the average teacher!

Do you work in financial services? Have you had similar experiences? What is the mood like where you work? Send us your comments using the form below.

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