Wednesday, March 4, 2009

Fruits of failure

Former Northern Rock chief gets £800,000 payout as repossessions soar

"Northern Rock revealed yesterday that it was forced to pay disgraced former chief executive Adam Applegarth more than £800,000 last year in pay and pension top-ups following his departure from the bank after he failed to find another job. Applegarth was paid £731,000 after he quit the bank in November 2007 following a deal that awarded him a year's pay until he found another job. The Newcastle-based bank also had to stump up an extra £108,000 to fund Applegarth's guaranteed £305,000-a-year pension which pays out from the age of 60." Funny how bankers seem to be so careful with their personal financial arrangements.

Posted by quiet guy @ 01:58 AM (842 views)
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6 thoughts on “Fruits of failure

  • There is a problem really with the measurement of success and failure, which is to do with accounting. Trading other peoples money can be subject to a “management” charge or a profit commisson. However how is “profit” measured? With a large loan book and a margin between SHORT term wholesale borrowings and LONG term retail loans, its a no-brainer. The loan book gets bigger and bigger and the profits get bigger. Linear projections mean that there is no end in sight to the money to be made (we will provide mortgages to the whole of the country by next tuesday). Fine and dandy, but how do you get out at the top? OR do you assume there is no top? And what happens if the wholesale funding dries up and/or some of the loan book becomes delinquent?

    Is it really the fault of these boys or wasnt that EXACTLY what they were encouraged to do by lax supervision; and sensible internal controls that were overwritten by a dash for cash?

    The industry needs to look at itself and decide that the compensation to the boyz at the top for determining strategy is way too much. Performace related – yes but in what timeframe?

    Flashman has it right when he says yes take a commission on “closed out trades” in the aggregate… but how can that be measured for building societies / banks etc. Do you have to wait 25years to conclude that YES a mortgage HAS performed and you can then take a percentage of the profit on that mortgage? And how exactly would you account for mortgages taken out before the tenure / and during the tenure some of which may mature during your tenure and obiously most of which wont (particularly in value terms).

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  • Incidentially in the insurance world they have had a similar thing happen in the past. LLoyds wrote long term liabilities but closed off accounts that still had liabilities by a Reinsurance To Close. They ESTIMATED the liabilities and the outgoing investor had his profit reduced by this payment to transfer the remaining liabilities to the following year, this kept going so every year the people investing in the most recent period were paid a premium in respect of claims against all prior years.

    Fine EXCEPT when they realised there were long term liabilities that were coming out of the woodwork which hadnt been charged properly in prior years but where current year players were being told to stump up.

    What annoys me about this is situation is that its not new. The S&P crises in the states was caused by similar (but not identical) issues, so you would have thought we would have learnt SOMETHING.

    As someone once said – the only thing we learn from history is that we learn nothing from history. It will need something dire to cause us as a society to re-evaluate all sorts of things. I hope it doesnt cost (in all meanings of the word) too much!

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  • Tenyearstogetmymoneyback says:

    techieman said

    “Do you have to wait 25years to conclude that YES a mortgage HAS performed and you can then take a percentage of the profit on that mortgage?”

    I work for an Italian owned engineering company and their accounting practice is that they won’t count a project as being in profit until the customer “signs it off” to say they are happy with it and won’t make any claims on it.
    It’s common sense really. To give another example when a company sells a new car they haven’t really made any profit until the guarantee runs out.

    Of course during a project stage payments can be made. Applying these to a mortgage, getting half way through
    (i.e half the money paid off) would be a measurable achievement.

    :- Duncan

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  • Thanks for your thoughts Techieman.

    “Do you have to wait 25years to conclude that YES a mortgage HAS performed”

    No, not 25 years but surely staged renumeration over 5 or 10 years is possible? I’m sure this would be fiercely resisted and present some difficulties but the current arrangements look totally bananas to a layman like me.

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  • The main argument for big bonuses seems to be that they are required in order to retain the best people. What better way to retain them than making them wait for their bonuses until their transactions have proved fruitful? If all the banks did it then there would be no jumping ship immediately to a competitor who pays more.

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  • letthemfall says:

    It seems to me that bonuses and arguments about ability are just a means or an excuse for the people in the right places to go on paying themselves huge sums, which they have the wherewithal to do because of the immense cash flows in finance. The notion of value creation is equated to figures on a balance sheet, or some other sheet, which have nothing to do with “wealth creation” beyond rabbits out of hats. Modern banking is much about a handful of Pauls robbing an awful lot of Peters.

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