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Leverage 'mirage' Under Fire As Banks' Profits Soar

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http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7922754/Leverage-mirage-under-fire-as-banks-profits-soar.html

Full financial reform has been delayed seven and a half years (roughly the same amount of time it took Sir Fred Goodwin to build and then destroy Royal Bank of Scotland), salaries have doubled and, although bonuses may be lower, total pay is back on the march. To cap it all, strict new rules requiring bankers to take their bonuses largely in shares have put them on course for their biggest payday ever. Take RBS. Since the March bonus round, the state-backed lender's stock has risen 40pc – at least partially due to the delayed regulatory reforms. Life is certainly looking up.

If the general public is bemused by the bankers' apparent Teflon-coating, they are not the only ones. One senior executive at a leading British bank privately expresses similar surprise. Delaying financial reform is vital if the economic recovery is to be supported, he says, but the banks will have to do their bit by cutting bonuses. That way, the industry can demonstrate that "we are all in this together", as George Osborne is fond of reminding us. So far, though, there is little evidence that bankers are even nearby.

City bonuses this year are expected to rise from £6bn to £6.8bn, according to the Centre for Economics and Business Research. Yesterday, HSBC revealed that it had set aside $2.52bn (£1.6bn) for its investment bankers in the first half, a $300m increase on last year despite a 1pc drop in net operating income to $10.3bn. "Performance-related costs were $246m lower, as performance declined from the exceptional levels reported in the first half of 2009," the bank said. Higher salaries, though, more than offset the decline in bonuses.

Remuneration reform is beset with difficulties, as bankers will remind you at every opportunity. The marketplace is global and competition fierce. UBS banned all bonuses in 2008 and lost so much talent profits in its investment bank collapsed. Politicians dare not take that risk on a national scale. Changes in the structure of bonuses have been implemented, with as much as 60pc paid in shares and deferred for three years, but size has been left unregulated. As a result, a lot of mediocre bankers are still vastly overpaid, as one top investment banker readily admits. "Put it this way," he said. "There are an awful lot of Emile Heskey's getting paid far more than they are worth."

One problem, according to the bank executive, is how to measure pay. Investment banks use a compensation-to-income ratio that tended to settle at about 50pc. Barclays' annual report defines the ratio as "staff compensation compared to total income net of insurance claims". But the measure excludes provisions on bad debts, so strips out the worst mistakes made by staff in previous years. Barclays' ratio in 2009 was 38pc, which was applauded. But, including the £2.6bn of provisions, the ratio was 49pc. The bank executive reckons a simple improvement would be to measure the ratio "net of insurance claims and provisions".

Policymakers want to go further still. Andy Haldane, the Bank of England's executive director of financial stability, has described much of banks' profits in the past decade as a "mirage" and believes an entirely new measure of shareholder return needs to be developed to better capture the cost of risk.

"Banks' profits may have been flattered by the mismeasurement of risk," he wrote in a recent paper. "Risk illusion, rather than a productivity miracle, appears to have driven high returns to finance. The recent history of banking appears to be as much mirage as miracle."

The mirage is clearly evident when return on equity is measured against return on assets. Think of a £100,000 house bought with a £10,000 deposit. If prices rise 10pc, the house is worth £110,000. As the mortgage remains £90,000, the homeowner's return on equity is 100pc. However, the return on assets is just 10pc – the growth in value of the home.

As Mr Haldane puts it: "Virtually all of the increase in the return on equity of the major UK banks during this century appears to have been the result of higher leverage. Banks' return on assets – a more precise measure of their productivity – was flat or even falling over this period."

In other words, bankers were not being smart, just borrowing more. And reward structures encouraged them to do so. Little surprise, then, that "those banks with highest leverage are also the ones which have subsequently reported the largest writedowns", Mr Haldane notes.

So the bonus pool has managed to increase by 13.3% and the economy has grown by how much? Global GDP has increased by what margin this year?

I've not seen any nation record 13.3% GDP growth this year and yet the bankers have managed to extract more value from everyone else to justify an increase in the bonus pool of 13.3%.

It's clear I do not understand high finance and what they genius wealth creators actually do.

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....banks appear to be operating a cartel .....they are borrowing your money (savings) and paying a half per cent p.a. and they're lending it out as approved overdrafts at 19% p.a. on the personal banking side....any fool can make money that way ....it's almost as bad as back street lending and in many cases credit cards are cheaper....this has all happened in the last year ...time the Government broke this practice up ....there is no reflection of risk control in the rates charged just greed...and where is the competition ?......it smells....big fines should be threatened and rolled out where necessary ...where else do you get spreads of 18% ...?....it's theft .... :rolleyes:

Edited by South Lorne

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My understanding of the latest profit figures is that much of it is down to reducing write-offs for bad debts. If there is another million unemployed and a double dip, I expect those numbers to be reversed again.

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My understanding of the latest profit figures is that much of it is down to reducing write-offs for bad debts. If there is another million unemployed and a double dip, I expect those numbers to be reversed again.

So the bankers have bought into the recovery then to boost their bonuses?

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My understanding of the latest profit figures is that much of it is down to reducing write-offs for bad debts. If there is another million unemployed and a double dip, I expect those numbers to be reversed again.

true...but also Houses have risen about 8% this year....thats an 8% increase in their asset backed securities holdings...all profit...on paper.

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I already wrote this a while ago but its needs reiterating :-

The banking bonus culture is dead. Take it from me. The vast majority of Investment bankers this year have seen a rise in base salary IRO 50 - 200% . Bonus payments are now base salary. It avoids any bonus payment windfall tax, and lumps it into normal PAYE. They can then legitamtely declare next year that bonuses are way down on previous years.

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"Remember, there's only three ways to create real wealth - you can grow something, mine something or manufacture something. All other activities are simply skimming off other's production - all the paper-pushing, "market-making" and "CDO-creating." None of that creates one nickel of actual GDP." as written by Mr Denninger

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I already wrote this a while ago but its needs reiterating :-

The banking bonus culture is dead. Take it from me. The vast majority of Investment bankers this year have seen a rise in base salary IRO 50 - 200% . Bonus payments are now base salary. It avoids any bonus payment windfall tax, and lumps it into normal PAYE. They can then legitamtely declare next year that bonuses are way down on previous years.

So any fiction that their earnings are performance related is now dead too. All that's left is the proximity theory- because they are closest to the source they capture the most loot.

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So any fiction that their earnings are performance related is now dead too. All that's left is the proximity theory- because they are closest to the source they capture the most loot.

They are the source.

They lend us our money supply, our essential means of exchange.

We pay them to provide us with numbers.

http://www.housepricecrash.co.uk/forum/index.php?showtopic=133934&st=0&p=2327202&fromsearch=1entry2327202

Can you see what it is yet?

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They are the source.

They lend us our money supply, our essential means of exchange.

We pay them to provide us with numbers.

True- but the 'bonus culture' at least allowed the fiction to be preserved that there was some tenuous link between their income and some kind of measurable effort or ability.

But it seems this fiction is to be sacrificed in order to avoid inflaming the public with big one off payouts- now the money is to be given intravenously via direct transfusion- a far more discreet form of vampire bloodsucking than the bonus driven dive into the jugular.

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LOS ANGELES (AP) -- The number of U.S. homes lost to foreclosure surged in July, another sign lenders are moving quicker to take back properties from homeowners behind in payments.

Lenders repossessed 92,858 properties last month, up 9 percent from June and an increase of 6 percent from July 2009, foreclosure listing firm RealtyTrac Inc. said Thursday.

Banks have stepped up repossessions this year to clear out the backlog of bad loans. July makes the eighth month in a row that the pace of homes lost to foreclosure has increased on an annual basis.

Meanwhile, homeowners who are falling behind on their payments are being allowed to stay in their homes longer because lenders are reluctant to add to the glut of foreclosed homes on the market.

The number of properties receiving an initial default notice -- the first step in the foreclosure process -- rose 1 percent last month from June, but tumbled 28 percent versus July last year, RealtyTrac said.

Initial defaults have fallen on an annual basis the past six months.

The latest data reflect a foreclosure crisis that continues to drag on as many homeowners struggle to make their monthly payments amid high unemployment, slow job growth and an uneven rebound in home prices.

Economic woes, such as unemployment or reduced income, are now the main catalysts for foreclosures. Initially, lax lending standards were the culprit, but homeowners with good credit who took out conventional, fixed-rate loans are now the fastest growing group of foreclosures.

Lenders are offering a variety of programs to help homeowners modify their loans, but their success rates vary. Hundreds of thousands of homeowners can't qualify or fall back into default.

The Obama administration has rolled out numerous attempts to tackle the foreclosure crisis but has made only a small dent in the problem. More than 40 percent, or about 530,000 homeowners, have fallen out of the administration's main effort to assist those facing foreclosure.

That program, known as Making Home Affordable, has provided permanent help to about 390,000 homeowners, or 30 percent of the 1.3 million who have enrolled since March 2009.

Still, RealtyTrac estimates more than 1 million American households are likely to lose their homes to foreclosure this year.

In all, 325,229 properties received a foreclosure-related warning in July, up 4 percent from June, but down 10 percent from the same month last year, RealtyTrac said. That translates to one in 397 U.S. homes.

The firm tracks notices for defaults, scheduled home auctions and home repossessions -- warnings that can lead up to a home eventually being lost to foreclosure.

Among states, Nevada posted the highest foreclosure rate in July, with one in every 82 households receiving a foreclosure notice. The number of properties in Nevada receiving a foreclosure warning last month rose nearly 7 percent from June, but fell nearly 30 percent from the same month last year.

Rounding out the top 10 states with the highest foreclosure rate last month were: Arizona, Florida, California, Idaho, Michigan, Utah, Illinois, Georgia and Maryland.

Las Vegas continued to be the city with the highest foreclosure rate in the U.S., with one in every 71 homes receiving a foreclosure notice in July -- more than five times the national average

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  • 238 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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