UK bankers' pay increased by £12bn per year in the decade to 2008 excluding share allocations and options.
Over the decade from 1998, the top 10% of workers in the UK saw their share of total annual wages rise from 27% to 30%. The majority of this went to the top 1% and can be mainly accounted for by bonuses to financial sector workers. The majority of these gains went to the top 1% of workers, and finance workers accounted for almost three quarters of these gains.
The Centre for Economic Performance (CEP) at the London School of Economics says in an analysis that its figures underestimate the gains since it has no reliable data on bonuses paid in restricted stock and stock options. It says accounting for these would certainly make the gains at the top even more extreme.
UK financial regulator, Lord Adair Turner, said last August that the City had grown “beyond a socially reasonable size,” accounting for too much of national output and sucking in too many of Britain’s brightest graduates.
“I think some of it is socially useless activity,” he said, adding that the financial sector had “swollen beyond its socially useful size” and seemed to make excessively large profits.
Wall Streeter James Grant has written in The Wall Street Journal, that Wall Street is usually described as an industry, but it shares precious few characteristics with the metal-fasteners business or the auto-parts trade. The big brokerage firms are not in business so much to make a product or even to earn a competitive return for their stockholders. Rather, they open their doors to pay their employees -- specifically, to maximize employee compensation in the short run. How best to do that? Why, to bear more risk by taking on more leverage.
Grant cites Morgan Stanley, which had a ratio of assets to equity of 33 times at year-end 2007 from 26.5 times at the close of 2004. In 2007, Morgan Stanley paid out 59% of its revenues in employee compensation, up from 46% in 2004.
“They borrow to the eyes and pay themselves lordly bonuses. Naturally - - eventually - - they drive themselves, and the economy, into a crisis. And to the scene of this inevitable accident rush the government’s first responders - - the Fed, the Treasury or the government-sponsored enterprises — bearing the people’s money,” he said.
The US financial sector grew from 8% of S&P 500 market cap in 1990 to almost 25% at the height of the housing boom.
The Wall Street Journal today reports that Fabrice Tourre, the Goldman Sachs employee at the centre of the US government lawsuit alleging securities fraud, has gone on "paid leave with no end date," from the Fleet Street London headquarters of the investment bank .
"Fabulous Fab" as the then 28-year old Frenchman termed himself in an e-mail in 2007, when he was based in New York, packaging Trojan Horse junk subprime mortgage securities, for onward sale with the prestigious Goldman Sachs imprint, could be viewed as doing more than what Lord Turner termed "socially useless activity” - - he was effectively earning a massive salary for doing socially destructive work.
The CEP economists say that clawback agreements allow for bonus payments to be recovered from the employee if future performance falls below pre-specified standards. These are likely to be particularly useful in the financial sector because the existence and size of ‘alpha’ (that is, investment returns due to the worker’s true ability) is surely only observable in the long run.
The economists say that in a bonus system that is now operated by Swiss bank UBS, senior bankers were allocated a bonus pool of CHF900 million Swiss francs, which would pay out in equal parts in 2010, 2011 and 2012 provided explicit profit targets were met. Following a loss for the 2009 fiscal year, UBS clawed back 300 million from the pool.
The CEP says for clawback contracts to be practical, they must be based on explicit formulae of readily observable and verifiable measures of performance since more arbitrary clawback would be liable to challenge in the courts.
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