G20: Fat cats brought down to Earth with a bump
The declaration shows how little political influence is now wielded by Wall Street and the City of London
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- guardian.co.uk, Thursday 2 April 2009 18.59 BST
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Fears that the G20 might shy away from taking on the big beasts of global finance should be assuaged by the detailed reform measures published today.
In one fell swoop, hedge funds, investment bankers and derivative traders are all now subject to a range and depth of international regulation which would have been unthinkable only a few months ago.
Some of the measures have already been proposed by national regulators. Britain's Financial Services Authority, for example, has also suggested linking bank bonuses to how much money they can lend. But the key difference is that this sort of rule will apply wherever these light-footed global institutions choose to roam. No longer can bankers in London or New York warn that their best brains will leave to do business elsewhere. Even the island tax havens are now under the global regulatory umbrella.
Potentially, the G20 declaration also goes much further than national governments have thus far dared. While the FSA left it to banks to police their own pay arrangements, the G20 has explicitly ruled out short-term bonuses. Given that the crisis has shown how big deals can take years to unravel, it ought to change the culture of annual bank bonuses substantially.
Whether it does or not depends on how proactive the new global regulator – the Financial Stability Board – will chose to get. Whatever happens, it should be busy. Another surprise is the level of regulation now forced upon the fiercely-independent hedge fund community. The "hedgies" of Mayfair and Manhattan will all have to disclose how much they have borrowed – a major blow to those who use leverage to juice their performance.
Accountants will also have to grapple with the end of the so-called "mark-to-market" approach. In future, long-term assets can be treated as more valuable than short-term market prices might suggest. But banks and companies must also apply a haircut to any assets deemed "illiquid" – or difficult to shift in a hurry.
For some it will never be enough. There are also worrying gaps in the detail such as how G20 governments plan to deal with toxic bank assets.
Bankers rage at G20 'witch hunt' against bonuses and buccaneers
Basic pay bumped up as City tries to retain risk-taking 'talent', warning it may go abroad
- The Guardian, Saturday 4 April 2009
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Bankers and hedge fund managers were furious yesterday at attempts by the G20 to cap their pay and regulate them for the first time, calling it a "witch hunt" by world leaders.
"Regulation is generally bad. You should let the market decide what the people will get paid," said Matthew Prest, managing director at Close Brothers investment bank. "Sometimes regulation has the opposite effect of what you want and I think bankers' salaries regulation would fall under that category. I don't hear anybody calling for Hollywood star salary caps. This is a trendy, fashionable thing to do, it will have bad consequences."
The end of light-touch regulation heralded by the G20 summit will lead to far-reaching changes to the conduct of business in the City of London.
Bankers in Canary Wharf or Moorgate could face caps on the hefty bonuses they have enjoyed for almost a decade, whilst secretive hedge fund managers in Mayfair will have to start disclosing their positions or strategy. The changes, which are still to be specified in detail, may bring to an end an era that brought financiers astonishing levels of money, status and power.
"Supervisors will assess firms' compensation policies as part of their overall assessment of their soundness," world leaders agreed on Thursday.
Bankers are furious about the possible collapse of a system that inflated their basic pay: thousands of City jobs pay between £80,000 and £110,000 a year, with another £30,000 to £50,000 from bonuses, whilst senior management enjoyed multi-million pound bonuses.
"Salaries in the banking and corporate finance world are not outrageous. The big reward is in the bonus," said Larry Schechter, a director at Schechter & Co, a boutique investment bank in Mayfair. "I am not a proponent of arbitrary compensation restrictions. I believe that bonuses - the rewards - should be commensurate with the level of success. You cannot have the whip without the carrot, and vice versa."
The G20 wants to restrict compensation that rewards short term risk-taking. Investment bankers banks received bonuses for taking big bets in the markets that may have led to longer term losses.
Many bought complex derivative contracts that proved to be worthless and now count among the toxic assets sitting on banks' balance sheets. They lent millions to companies that cannot repay their loans and must lay off thousands of staff.
"While I do not believe in rewards for failure, I do not think it is right for good, successful bankers and corporate finance executives to be shot for the sins of others," Schechter said. "The free market economy is based on risk versus reward and if you remove the incentive, then you run the risk of removing the creativity."
Bankers say their bonuses contributed to tax income and were spent on cars, restaurants or homes that indirectly created other jobs. Those who flew from New York to London over recent years as the capital established itself as the world's financial centre, may now move east if bonus caps limit the attraction of the west.
"This will drive talent out of the industry because if we regulate in London, but not in the Middle East or Singapore, people will go elsewhere," Prest said.
Still, banks may find a way around the new regulation. They have already started increasing salaries, sometimes doubling or trebling them to make up for the lack of bonuses. Car, home or holiday allowances may be an alternative, although cash remains the preferred option as it gives "choices," a banker said.
Few bankers argue with bonus caps imposed on part-nationalised institutions. "Compensation should be a combination of short term, long term and company performance," said a credit analyst at a top investment bank. "But in a dreadful year, you ought not to pay excessively."
Hedge funds have received a double hit from the G20. Apart from possible restrictions on pay, they will also face tough regulation. Some 8,000 hedge funds around the world control assets worth about $1tn and are usually registered in tax havens such as the Cayman Islands or places with lower registration requirements, including the Irish Republic.
In Europe, hedge funds congregated in St James's, London, perhaps employing two people and a few screens to buy and sell assets according to complex mathematical models. They have been accused of provoking chaos by betting bank shares would fall, causing prices to drop further. Funds will now have to disclose their positions to a regulator.
"It's a witch hunt," said a newly-redundant hedge fund manager. "When you look at things in reality, the problem was at banks that are regulated, that's where the tax money is going. Hedge funds haven't required injections of capital - why do you need to regulate something that hasn't caused any problem?"
Hedge funds and credit derivatives - where the G20 will also impose tighter controls - exploded over recent years, creating a shadow economy that contrasted with the regulation of banks and other financial institutions. New rules will shed light over the whole system, analysts say.
"More regulation and tighter risk controls of systematically large hedge funds will ultimately lead to a stronger financial system," said Vivek Tawadey, head of credit portfolio strategy at BNP Paribas. Hedge funds may profit from more regulated system that brings confidence back to the market and clients.
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