Page last updated at 23:03 GMT, Thursday, 15 October 2009 00:03 UK

City Diaries: 15 October

Man looking at a falling graph

Politicians of all shades have been queuing up over the last few weeks to criticise bonus payments, but how much notice have people in the City actually been taking? This week our City Diarists discuss the crack down on bonuses, the future of London as an international financial centre and ask whether we really understand the nature of a jobless recovery.

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.

A salary slip
Employers will find it difficult to renege on pay agreements

If a private company wants to pay someone a large amount of money in return for that person earning the company an even larger amount of money or a massive loss, what business is it of the state or any other person if all parties are working within the law?

Bonuses have become part of many remuneration packages. If a PLC business wants to pay someone a very large amount of money the shareholders have the right to question and change that pay package up to a certain point. If someone has been given a contract of employment setting out an incentive scheme that is then reneged on (and assuming no 'get out' clause was included) it's possible the company will find itself in court.

In the public sector, the case of Sharon Shoesmith (Baby P) shows that even here you are getting into potential legal hot water if you start changing previously agreed rules over pay. If the government loses then it could potentially have to pay not only the original amount that was withheld but damages and legal costs too - all great news for the taxpayer.

So what makes regulating bankers' pay any different from the normal constraints of law? Nothing.

Believe me, I'm fed up with the Goldman Sachs announcement that the average bonus this quarter will be $172,581 per employee; just as I was disgusted that the government guaranteed bonuses for Northern Rock staff in return for being slightly less in the red to the taxpayer.

RBS and Lloyds are still paying bonuses and if the government wants to do something about this then it will have to pull out the only stick it can and get down to the next shareholder meeting.

I'm not getting a bonus this year despite being almost 100% over target

I'm not getting a bonus this year despite being almost 100% over target as my employer says that at the moment we should be keeping our shareholders happy and showing restraint in front of our customers - and we aren't even state owned.

This goes against my contract of employment but I like my job and my employer so I will keep this one back and remind the powers that be at the appropriate time in the future that my goodwill is something they need to maintain if they want me to keep earning them money.

Seething fury

Some of you will think it serves me right for being a banker in the first place, while others will think that I am looking for praise for this act of restraint. In reality the gnashing of teeth at Westminster over repaying cleaning expenses is as nothing to the seething fury of some of my colleagues over the change of the goalposts in pay.

We all earn far less than an MP or BBC presenter and many of us have spouses who have lost their jobs and therefore aren't flush with cash but c'est la vie.

The reason nothing has happened so far and is fairly unlikely to happen in the future, is that in order to change the way bonuses are paid the government and the banks would need to change the contracts of employment for most of their staff.

If either party tries to skip this step then they will be sitting in employment tribunals and the European Court for the next decade.


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

Singapore skyline
The City is under threat from the East

The location of the annual meeting of the IMF in Istanbul recently was symbolic in that it paid homage to emerging markets. It was also symbolic because history has always put Istanbul as the gateway between the cultures of East and West.

Why is that significant? Because there is about to be a seismic shift in the way capital flows are directed. In the past few years, Asian economies that worked hard and saved would place their surplus cash with the West to fund its huge deficit and mortgage boom. That is now changing and capital flows will in future be directed towards the East. HSBC, for example, have seen the writing on the wall and relocated their chief executive to Hong Kong.

Capital flows East

The days of cheap money which banks would throw at so called Ninja loans has gone. That's "No Income No Job Accounts" in case you were wondering. What worries me is that how we reconcile the need to keep interest rates low to compensate for the public sector deficit and at the same time fund the debt mountain. With capital flows heading East, the only way is to let the currency fall to compensate for low interest rates and even that may not be enough. The Centre for Economics and Business Research has been saying precisely that and see the Pound/Euro rate falling below £1 to 1 Euro for the first time and the US Dollar falling to $1.40.

This is why cutting the deficit is so important because, borrowing will become more and more expensive in terms of a falling currency as the East competes for those surplus capital flows.

The City contributes 9% of GDP which pays for schools and hospitals

This will also affect London which may have won the crown as world leading financial services centre but that position is very precarious. As Boris Johnson points out, the contribution to GDP of the City is around 9% of GDP which pays for schools and hospitals. But I believe the future of the City is under threat not from New York or Frankfurt but from Hong Kong, Singapore and Shanghai.

Technology means that there is no need to use London to raise global funds and if you provide an over regulated environment, as the FSA now seems determined to do, then there is no reason for you to stay put in London.

The FSA recently published its feedback to comments made on their Turner report on the global banking crisis. In that response it made the following comment:

"While the FSA is certainly required (and will continue) to have regard to 'the international character of financial services and markets and the desirability of maintaining the competitive position of the United Kingdom', this is only one of a number of considerations that the FSA is required to take into account. More importantly, the FSA's overriding concern is to achieve its statutory objectives, in particular maintaining market confidence and protecting consumers. An effective regulatory regime that delivers those objectives is the FSA's highest priority."

In other words, maintaining the City as the world leading financial centre is not their main priority.

Meanwhile, City traders are a pragmatic bunch and don't get too excited about all this hot air about bonuses. City AM, the free City financial paper, recently ran a supplement about buying property in Switzerland. Do I need to say more?


Stephen (not his real name) has worked in the City of London for over a decade.

Yachts in Monte Carlo harbour
Only the 'haves' and 'have-yachts' are benefiting from recovery

Banks are "recovering". With base rates at 0.5%, mortgage and corporate loan rates far higher and the most prolonged rally in share prices in living memory, how could they not be?

The corporates that have survived are "recovering". They employ such huge numbers that politicians naturally think of saving them first. They would rather prop up zombie corporations than risk alienating such large electoral blocs. In one or two bailouts, they can underwrite enormous number of votes.

But what about the rest of the world? Something like 90% of businesses are small businesses. In the last truly serious economic downturn - the 70s - Microsoft, Apple and Intel were all "small". Long ago, Marks and Spencer once had a barrow in a market and Sainsbury's once had a single store. So the global successes of tomorrow are somewhere in the small businesses landscape of today.

And note, none of these successes has blown up in the present crisis, nor needed a government bailout.


"Jobless recovery" is a disingenuous way of saying that there is no recovery for this sector - the one that employs the majority of people. These businesses are so small that individually they are invisible in the corridors of power, yet they are where innovation must inevitably come from. Small businesses are forced to innovate because they can't compete with established businesses unless they have an edge. They're also nimbler than corporations.

People I know who are trying to launch innovative businesses simply cannot get funding. And yet, the corporate sector has received the largest cheque ever written in history because that's where the easiest political impact is to be had.

It's a recovery for economists and investors, not the millions out of work

So "jobless recovery" succeeds in making bad news sound good. The term first cropped up after the bubble burst in 2000. Whilst corporate health and national economic figures improved, few jobs were created. And it's the same this time: heralded as a great achievement, it delivers nothing for most of those who have been hurt and does even less for the businesses that will create our as-yet unknown future.

People continue to lose their jobs and so an economic phenomenon that doesn't address this is not worthy of the title "recovery". It's a recovery for economists, corporate balance sheets and investors only. Not the millions out of work.

Those who bail out the failing corporations, mean to do well but are just putting off the problem till another day. Others who want reckless corporates to collapse, so that no business will ever again be"too big to fail", but I doubt any of them have the stomach for what it really entails.

No solutions

Neither the left nor the right has any real solutions to the crisis, other than emergency transfusions of cash borrowed from the future. The problem for politicians globally is that none of them know how to manage the decline of a corporate sector that got too bloated, the resulting mess of decades of ill-considered vote-buying and cover-ups. So the recovery that we see is a recovery for "the haves and the have-yachts".

Those who still have jobs are paying less for their mortgages, but more of their payments are going towards "balance-sheet repair" at the banks, as if the wealth they used to have was somehow unfairly taken away. Fixing our banks is really a euphemism for letting have their lost wealth back. The people are paying to re-enrich the banks and ensure the perpetuation of our political order.

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