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Pay caps at US banks, bad bonuses at European banks. What’s left?

In the unlikely event that you missed this, we thought we’d bring it to your attention that Obama is about to unveil a a $500k (346k), pay cap for executives working at any banks receiving future cash from the US Tarp fund.

Precisely how much of an impact this will have depends upon the definition of executives. Yves Smith at Naked Capitalism says it will probably only apply to the five people listed on the proxy statement.

Less promisingly, further pay restrictions are to be announced for the next fifty staff below. But as the Wall Street Journal’s Deal Journal points out, even this might not have a huge impact – there are probably more than 10,000 employees of Wall Street banks who pocketed $1m over the past three years.

Nevertheless, if you still aspire to retire before thermal underwear becomes a consideration it’s a definite step in the wrong direction.

This also comes at a time when European banks have been trimming pay vigorously. To recap, UBS appears to be paying senior investment bankers nothing until 2010, Credit Suisse is doling out toxic assets, and Deutsche and Credit Suisse have let it be known that bonus pools are at least halved.

If US banks and Europeans are paying miserably, what’s left? Chinese banks maybe?

Comments (9)

Comments
  1. If a used car salesman sells 300k of cars in a year, he can take his 10% cut for a 30k bonus, let’s say.

    Similarly, for those of us selling/trading tangible products to clients, not messing around with prop for hard-to-value assets, there is no reason we can’t carry on taking a REASONABLE cut.

    For us, bonuses have always been very reasonable – a small percentage (about 10%) of the commission we make for the bank. When you take off salaries, expenses, travel, tech/building costs etc that equates to the 40-50% payout ratio.

    So, brokerages are the way forward. Its plausible that you don’t need to pay such high bonuses as you don’t need to keep people, but implausible if someone makes say 5m commissions that they don’t get a reasonable cut of it.

    There’s no reason my pay will substantially decrease – people getting laid off around me counteracting the decrease in clients and client revenues.

  2. broker –

    if your brokerage firm is engaged in other businesses which are making a heavy loss and you bring in 5m in commission….then your commission that your brought in will got to cover the losses. So you will get NO bonus or % of the commission. Now, you could argue that the firm could completely get rid of the people in the loss making areas and keep you – the broker. True, but when an upturn / boom comes in that business area which is suffering losses right now it will be mighty hard to build that franchise again. You will pay top dollar for mercenary talent etc etc. Goldman Sachs for example can’t just exit the M&A business if there is a severe recession in M&A for a year or two. They will still need to retain talent for the boom, and their salaries will be paid the commission YOU bring in. Which means you get a smaller cut / bonus.

    Similarly, if there is a severe downturn in your business line but M&A is doing well and you have proved to management that you are a very capable guy, then they will keep you for as long as they can. M&A will pay your salary and THEY will take a smaller cut / bonus.

  3. Banker,

    I thought I’d made it clear, but evidently not, that “brokerages are the way forward”. I work at a brokerage. All we do is services for clients where we take commission. We are “not messing around with prop for hard-to-value assets”, so there is no way we can make a loss unless expenses exceed commissions, which is never the case except bank holidays.

    A simple equity brokerage, we all make a direct cut of the commissions we generate. A simple model, and I much prefer it to working at a bank where people have been screwed thanks to morons on a different floor doing a different product they have nothing to do with losing money – and I’m happy to not get a higher bonus for times they profited to. Why should separate departments get more/less pay because of one another?

  4. Seems pretty non controversial

  5. I think is well done, with some nationalisation and strickt regulatory measures. but the problem was all the previous years of fun, and that wasn’t the bankers responsibility, it was Tony Blair and Bush. Bankers do whatever they have to to make money like every single one of us.

  6. “broker –

    if your brokerage firm is engaged in other businesses which are making a heavy loss and you bring in 5m in commission….then your commission that your brought in will got to cover the losses. So you will get NO bonus or % of the commission. Now, you could argue that the firm could completely get rid of the people in the loss making areas and keep you – the broker. True, but when an upturn / boom comes in that business area which is suffering losses right now it will be mighty hard to build that franchise again. You will pay top dollar for mercenary talent etc etc. Goldman Sachs for example can’t just exit the M&A business if there is a severe recession in M&A for a year or two. They will still need to retain talent for the boom, and their salaries will be paid the commission YOU bring in. Which means you get a smaller cut / bonus.

    Similarly, if there is a severe downturn in your business line but M&A is doing well and you have proved to management that you are a very capable guy, then they will keep you for as long as they can. M&A will pay your salary and THEY will take a smaller cut / bonus.”

    Could you please try to write that again but, this time, in English

  7. Dear dontknowcrap,

    This is AG, Portfolio Manager. I’d like to state based on your comment that your name (“dontknowcrap”) suits you.

    Kind regards,

    AG, Portfolio Manager

  8. broker –

    I understand where you are coming from and I agree with part of your statement – fair reward for profitable labour. But your other statement that “brokerages are the way forward”, I respectfully disagree. What you are proposing will mean the splintering of the institutional finance industry. It will go back to being a cottage industry – one firm specialising in broking, a separate firm specialising in asset management, a separate firm specialising in M&A….and so on. I’m not an expert in broking, but I would imagine that as a stand alone specialised firm you face greater competitive pressure from other broking firms, than if you were part of an integrated investment bank. A full service investment bank can help you win broking business using other additional means at its’ disposal.

  9. Banker,

    Respectfully I completely disagree again! Having worked as a broker in large investment banks, and working as a broker in an independent brokerage house now, I know the latter is better. Clients no longer trust research from big investment banks – as they know there could be an agenda such as the bank having a big prop position in the stock, the bank being corporate broker to the company so cannot upset them, there being an ECM angle ie if they please the company they can get a placing done… all this counteracts being able to transparently tell clients what you genuinely think, and the mkt share loss of banks vs independent brokerages counteracts the (to be honest, rather limited) opportunities of cross-selling. This is normally quite non-existent – FX, credit and equity depts in big banks often have no interaction when it comes to cross-selling, the same big client talks to each part separately, the only issue being one dept having to pay for another’s inadequacy which is ridiculous!!

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