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EDITOR’S TAKE: Big bonuses will be bad news

Things are looking up. Not only did banks have a strong first quarter in which generous amounts were accrued for bonuses, but there are indications that lots money has been accrued since.

According to the Credit Suisse research note we referenced earlier today, management at Goldman Sachs say the firm is on track for a second quarter as good as, if not even better than, the first –

‘Customer flows continue to be robust, bid-ask spreads remain healthy, a scarcity of risk capital in the overall system continues. The difference in the second quarter is a robust equity market (for both asset values and the underwriting calendar) and improved fixed income pricing.’

Where Goldman goes, others are likely to follow. Thanks to the elimination of Lehman Brothers and Bear Stearns, business is now shared between fewer players. Lucrative rights issues by the likes of HSBC have generated generous fees, and underwriting and M&A are picking up. Goldman says that even proposed changes to the OTC derivatives market, widely expected to dent banks’ profitability, will have the beneficial effects of increasing liquidity and reducing counterparty risk.

The upshot of all this, is that some banks are looking healthy again. The share prices of Goldman, Morgan Stanley and JP Morgan are slowly creeping back to pre-Lehman levels. The same goes for Credit Suisse and for Deutsche Bank. Goldman even thinks it can generate a 15% return on equity in 2009.

All of this is good news for banks, and for bankers, who are likely to be well compensated this year – particularly if TARP money is repaid.

But bumper compensation will do nothing to endear bankers to the rest of society. If the credit crisis is over, the crisis in the broader economy still has a long way to run; unemployment outside the City is rising fast.

This creates a dilemma for successful banks. They can pay individuals for what they’ve achieved, and risk a populist backlash and punitive regulation. Or they can pay modestly, and risk an exodus to less high profile competitors. It will be far simpler if this year ends with more of a whimper than it has begun.

Comments (8)

  1. (insert relevant 4 letter word) the rest of society. No-one liked bankers during the good times either

    Pythagoras Head Reply
  2. Don’t be ridiculous Sarah. Why would a bank care less what the loser “general population” think? How many serious vigilante attacks on banks/bankers have occurred during the worst times – banks still purported to be paying some high bonuses amidst taxpayer bailouts? One window smashed at an RBS retail branch, wow. We had a meeting yesterday where it was basically said our bonuses will be more than double what we got in Winter. The good times are back ladies and gentlemen.

  3. I am afraid that if big bonuses happens again, the world will head to 2nd wave of disaster led by these master of universe or failed professional gamblers.

  4. It can only be a positive if we get back to the old ways, all this anti bonus guff in the past year has been unhealthy and led to far too many people having an opinion on who should get paid what for the work they do. If you make millions for your bank, you deserve your share.

    Let’s rejoice the return of the big bonus, greed, conspicuous consumption and the “fat cat” banker. The wider economy will follow soon, the real lesson they need to learn is earning 20k, and having debts of 40k is not a long term financial plan for their lives. Want a 40k life, train to get a 40k job. Also if you live in Derbyshire or some similar deprived area don’t expect life to be like it is for those in London, want to advance yourself, go where the action is.

    Looking forward to getting back involved with Magnums, Maseratis, Models and fat Cubans in 2010, or even Q3/Q4 this year! and hopefully there will be no politicians with any credibility left to even contemplate getting involved in regulating pay. Leave it to everyone’s “tim nice but dim” friend, the FSA!

    Good weekend all!

  5. @ RAY

    people forget that one cannot clap with one hand.

    Had it not been for tom dick and harry on street who borrowed more than he could afford in the first place, then we would not be in this position.

    Banks may have been wrong in making bad investments but then there was ample demand for it.

    Those people who speculated and have lost deserved what they got. Whatever happened to spending and borrowing within your means.

    Above all, all these MPs who were calling bankers greedy have themselves been exposed as hypocrites.

    Let the bonus bandwagon roll ;)

  6. @ray.

    already prepared for the 2nd wave, bought a surfboard yesterday, will be riding that one when it comes!!!

    relax pal, we masters always find a way to rebuild the universe when it collapes, and make a shed load in the process!!

  7. Sir Fred,

    Really inspirational. You’ve left me a huge smile upon leaving the office this Friday. Looking really forward to the return of the good old days and well-deserved massive bonuses :-)

  8. Given the comments, looks like its time for me to start shorting some bank stocks again.

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