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British Banks Should Delay Bonuses To Reduce Risk

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http://www.bloomberg.com/apps/news?pid=206...id=a5Q.okKmIvvI

July 16 (Bloomberg) -- British banks should delay bonus payments, increase the policing powers of risk committees and bolster the responsibilities of chairmen to avert a repeat of the financial crisis, a government-commissioned report said.

Board remuneration committees should scrutinize pay at all levels in a company, and be allowed to claw back bonuses, David Walker, a former executive director at the Bank of England and ex-chairman of Morgan Stanley International, recommended in his report into corporate governance to be published today. Chief risk officers should report directly to a board committee, and a non-executive director should be given the job of overseeing risk controls, Walker said.

Horse, bolt, stable door, lock

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It's very nulabour.

No plan. Just rush in without a thought for what might happen and what exit strategy should be in place.

think war. think bank. think nulabour *ank

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Blimey I nearly agree with Rachman!

What we really need is forensic investigation of criminal wrongdoing using existing laws

- if you mis-sold assets to investors

- if you're fraudulently misrepresenting the value of assets on your balance sheet using SIVs/ derivatives

- if you're found to have been manipulating markets

- if you're were bribing regulators/ politicians/ law enforcement

criminal investigation, prosecution, then jail. And that should extend to mortgage fraudsters who falsified their income and the mortgage professionals that colluded with them

Failing that, banker baseball by the mob. Which they will continue to deserve anyway if they don't return the taxpayer loot they've nicked through AIG that's magically turning into bonuses before our very eyes.

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Blimey I nearly agree with Rachman!

What we really need is forensic investigation of criminal wrongdoing using existing laws

- if you mis-sold assets to investors

- if you're fraudulently misrepresenting the value of assets on your balance sheet using SIVs/ derivatives

- if you're found to have been manipulating markets

- if you're were bribing regulators/ politicians/ law enforcement

criminal investigation, prosecution, then jail. And that should extend to mortgage fraudsters who falsified their income and the mortgage professionals that colluded with them

Failing that, banker baseball by the mob. Which they will continue to deserve anyway if they don't return the taxpayer loot they've nicked through AIG that's magically turning into bonuses before our very eyes.

trouble is, without the bankers, we couldnt afford to keep them in Jail.

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Bin bonuses altogether. Pay a decent salary. Problem solved.

The irony is that small basic salaries and large bonuses in were designed by employers to help them manage their wage bills in difficult times.

As we now all know, the intertia in the bonus culture has meant people still get paid large amounts of money even when things are really bad.

I have no problem with people getting paid a lot if they do very well for their shareholders. I get very upset at the current assymetry where people still get paid very well when their shareholders suffer.

Most share based compensation schemes have vesting periods of around 3 years with forfeiture if employees leave. These structures are more about "retention" than risk sharing with shareholders.

Changing the structure to a higher equity payout relative to cash with a 10 year vesting period with dividends but no forfeiture if people leave means is probably better.

In the "olden days" many of the riskier investment banks were run as partnerships. As the partners were risking their own money (both to the upside and the downside) they were very measured in their risk taking. To-day's regime where employees get all the benefit and few of the risks to the returns on owners' capital is nonsensical.

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Changing the structure to a higher equity payout relative to cash with a 10 year vesting period with dividends but no forfeiture if people leave means is probably better.

share bonuses are 'free' (except for the employer's NI). They are typically approved by the investor committees etc - the problem is, if you simply issue a load of bank paper every year, you could rapidly end up swamping the existing shares which get diluted and so the external investors are loathe to commit. That's difficult to deal with. I know they've done share deals in the past, but these are mainly relatively pissy little amounts - bring it in wholesale and you'll end up with whole banks owned by employees and ex-employees (effectively).

And shoud I, as a bank employee, be able to leverage off my locked up equity, or perhaps securitise my dividend stream for a lump sum now ? Why not ?

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share bonuses are 'free' (except for the employer's NI). They are typically approved by the investor committees etc - the problem is, if you simply issue a load of bank paper every year, you could rapidly end up swamping the existing shares which get diluted and so the external investors are loathe to commit. That's difficult to deal with. I know they've done share deals in the past, but these are mainly relatively pissy little amounts - bring it in wholesale and you'll end up with whole banks owned by employees and ex-employees (effectively).

And shoud I, as a bank employee, be able to leverage off my locked up equity, or perhaps securitise my dividend stream for a lump sum now ? Why not ?

I wasn't being accurate enough with my language.

The scheme does not need to be actual shares. It could be "phantom" shares.

Let's say that someone was awarded a bonus of £10k in December 2009. They could be paid £1k in cash and the rest in phantom shares. If the share price on the day of the award was 900p, they could be granted 1,000 phantom shares.

Let's pretend that the dividend yield was a constant 5% of the initial share price. In 2019, the employee would have 1,629 phantom shares.

The payout would be 1,629 (1000*1.05^10) shares times the price of the shares in 2019 paid in cash. This is the same number of shares that any outside investor would own had they bought the same number of shares in 2009 and reinvested their dividends in the firm.

Using phantom shares avoids the dilution problem that you mentioned.

If the shares perform well over time, the cost to the owners of the business of this plan rises but it can be paid for from good performance. If the shares perform poorly over time, the expected cost of the plan will drop which can subsidize losses that are causing the drop in the share price.

This type of plan is counter-cyclical to the firm's income which is a new goal that regulators seem to be considering.

As these are phantom shares rather than physical shares, the income stream will be difficult to securitise. I would go one step further and make it illegal for any employee of any company to short shares in their employer or any related business (including buying puts and selling calls) to ensure that people retain the financial risk that this type of structure is supposed to create.

The current climate would mean that compliance groups would be very conservative in assessing the insider trading impact of schemes to reduce exposure to employer share prices.

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The scheme does not need to be actual shares. It could be "phantom" shares.

A few US unlisted co's already offer similar schemes.

Bloomberg LP, for instance, rewards employees with EECs (Equity Equivalency Certificates), whose value is linked to the firm's worldwide revenues.

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A few US unlisted co's already offer similar schemes.

Bloomberg LP, for instance, rewards employees with EECs (Equity Equivalency Certificates), whose value is linked to the firm's worldwide revenues.

Quite a few listed firms do too.

The equity-like proportion of total compensation is just too low and the vesting period is too short at the moment. Making the equity portion larger and the vesting period much longer will force employees to act much more like a partnership and share the risks with the actual owners of the companies.

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The scheme does not need to be actual shares. It could be "phantom" shares.
Great, except you will need actual cash, not phantom cash to pay it, and you'll need to ringfence that cash through the term to meet future obligations - or it'll be like the final salary pensions disaster. In effect, all that will happen is that all that public money will be claimed to have been paid out in the phantom stock plan.

A phantom is a non-starter for something on this scale.

Typically, a phantom plan is one which is extended to less senior persons in companies to whom there is no desire to extend the equity participation - from either senior management or the shareholders - the 'middle management' so to speak. It's not particularly desirable or anything like as flexible, or potentially lucrative, as a straight equity plan - so they are not particularly popular - which is why they survive, because they are not that big in the first place...... so they remain affordable to fund.

Edited by Rachman

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....bonuses handed out by the wrong management could be a problem ..but the real problem is selling lending and related insurance products on a commission only basis whereby there are commission cuts and kick backs all along the line between lenders and intermediaries.... just another case of the Government chasing the wrong rabbit.... <_<

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