x Abu Dhabi, UAEFriday 19 January 2018

Surfeit of largesse

After a year being the butt of jokes, they seem to be back doing what they do best - rewarding themselves.

Rogues gallery: banking chief executives testifying before the House financial services committee in Washington, DC.
Rogues gallery: banking chief executives testifying before the House financial services committee in Washington, DC.

Lloyd Blankfein is suddenly the most popular man on Wall Street. The Goldman Sachs chief executive found himself in the limelight this week after it emerged that staff at the world's most successful investment bank are in line to receive the largest bonuses in the firm's 140-year history. After a year in which bankers became the butt of jokes and were held in lower public esteem than journalists, or even lawyers, they seem to be back doing what they do best - rewarding themselves handsomely.

While Goldman is rumoured to be posting record profits this year, the news will come as a slap in the face for governments and taxpayers around the world, who rallied around to keep the bankers in their lucrative positions. Ever since the US subprime mortgage fiasco created the domino effect that felled legendary investment banks such as Bear Stearns - forced into a fire sale to JP Morgan Chase - and pushed Lehman Brothers into bankruptcy, compensation packages have been widely seen as the catalyst for the financial downturn. Short-term profit has been chased rather than long-term sustainable growth, mainly because bankers were busy chasing bonuses for themselves.

Last year, the top 100 Wall Street executives shared more than US$1.2 billion (Dh4.4bn). Many of those same executives were at the helm of companies given a bailout by the US government to help them deal with their toxic assets and bad debt, according to Crain's New York Business. These include the Citigroup chief executive Vikram Pandit, who paid himself $38.2 million while receiving $45bn in government aid that has yet to be repaid, and Jamie Dimon, the head of JPMorgan Chase, whose firm was handed a $25bn lifeline from Uncle Sam, and who rewarded himself with $35.7m.

The compensation boards seem to fall over themselves to hand over huge salaries - even the New York Stock Exchange board decided to award a $4m bonus to Duncan Niederauer, its chief executive, even though his firm took a $1.59bn write-down following its recent merger with Euronext. Although Mr Blankfein's salary was $42.9m last year, he and his army of financial lieutenants arguably deserve every penny they earn. They are the most successful firm to navigate smoothly through the choppy waters of the credit crisis, benefiting from a lack of other players vying for lucrative investment banking contracts and by smart foreign exchange and bond trading. A $10bn life jacket in government aid was recently deemed unnecessary and the money is expected to be repaid by the end of the year, earlier than anticipated. The financial crisis is turning into a bonanza for the bankers.

"These banks are intermediaries in the bond markets, where governments and companies are raising billions of pounds of new money. There is also a lack of competition that means they can charge huge sums for doing business," David Williams, an investment banking analyst at Fox Pitt Kelton, told The Guardian. While it is good news for the bankers, it may also be good for the Gulf's financial centres such as the DIFC and Bahrain. Goldman's profitable handling of the US government's $3.25bn worth of bonds has ensured that it will continue to be the marquee name in business, unfazed by the credit crisis that has squeezed the valuations of many of its peers. Almost 1,000 of its bankers pulled in $1m in bonuses last year and, barring another worldwide catastrophe, the party will undoubtedly continue for the firm's 28,000 staff worldwide. This will put it under less pressure to pull back from international expansion.

One result of Goldman's success - as well as other banks expected to report profits, including Barclays Capital, Morgan Stanley and Deutsche Bank - is the amount of high-profile talent waiting in the wings to be plucked from their own struggling firms. The threat of senior banking executives being plundered has forced the market rate to increase their base salaries by up to 80 per cent, according to the Financial Times. Managing directors, once struggling along on $250,000 before bonuses, can now expect $400,000 - and that's before the real compensation kicks in. Mr Blankfein's BlackBerry was probably vibrating all week with people desperate to work for his firm.

This will leave many regulators and taxpayers livid that the people who created the crisis are now benefiting from it. Rather than queuing at soup kitchens, the only bankers waiting in line are those fighting to get a seat at New York's and London's best restaurants. Changes may be afoot, however, for the executives' rocketing bonus regimes. Initially, US President Barack Obama's administration waded into the politically charged debate, promising to fix executive pay and additional compensation for corporations who elected to receive part of the US government's $700bn Troubled Asset Relief Program. "I think boards of directors did not do a good job," Timothy Geithner, the US Treasury secretary, said last week. "I think shareholders did not do a good job in terms of discipline and compensation practices."

But Mr Obama's critics have already scoffed at his attempts at industry-wide regulation, exposing significant loopholes that could render the president's regulatory efforts useless. In his white paper, Mr Obama aims to seek legislation that would use shareholder pressure and less influence from management levels to affect compensations at publicly traded companies. He also wants regulation to reform credit agencies, which many experts have claimed had an important role in ignoring the dozens of red flags that should have warned of impending doom.

Nobody thought that the financial system would find itself in the same situation that it was in a few years ago - trading complicated financial instruments and posting record profits. It would be tempting to applaud Goldman's triumph. Yet again, the geniuses on Wall Street have outsmarted Main Street. But unless the bankers have absorbed the lessons of the past 12 months or so - that risk is not something to be taken lightly and that leveraging is inherently dangerous - we may very soon find ourselves in exactly the same position in a few years' time. Governments will have to step in again to save reckless lending.

Wall Street needs to be told that its job is financing industry and services, and not just as a giant casino serving its own staff. Mr Obama and his advisers should insist that the bulk of the trading and prime brokerage in US Treasury bonds is conducted by banks that owe their existence to the US Federal Reserve. We should not forget that in September last year, less than nine months ago, both Goldman and Morgan Stanley, along with a host of other financial institutions, might have gone into Chapter 11 bankruptcy without the support of the US taxpayer.

This will not limit the bonuses on Wall Street. But raising the taxes on those bonuses might at least mean that Uncle Sam could be repaid for his generosity. dgeorgecosh@thenational.ae rwright@thenational.ae