In a previous blog I speculated about Government management of the banks in the City through attempting to control bonuses.
The success, albeit small, of this attempt is now clearer. A pattern has emerged of major banks taking a variety of actions to comply, in part, with Government controls. Two of the biggest banks, J.P.Morgan and Goldman Sachs have reduced the percentage of their revenue given over to their bonus pool. For J.P.Morgan the reduction was from 40% in 2008 to 11% in 2009. Similar figures for Goldman were from 48% to 35%. These reductions seem to imply that more money has been retained by the bank. This retention may be to create a greater base of capital to ensure future stability; or it may be for quite other reasons. Only time will tell.
The Treasury may well have expected banks would increse the size of their bonus pools to compensate for the "loss" of the 50% tax imposed before Christmas. The opposite seems to have happened. Further, Morgan Stanley has put more of its bonuses in shares than cash. The shares are deferred for up to 3 years, and there is a possibility of clawback depending on performance. Goldman has reduced the size of the bonus pool by giving $500.000 to charity. Morgan Stanley has also agreed to share the 50% tax amongst all it’s employees world wide; and not let it just fall on it’s 7,000 employees in London. Credit Suisse in London has agreed that it’s top executives will take a 30% cut in their bonuses, to create a larger pot for it’s other employees.
Despite all this J.P.Morgan’s profits has doubled in 2009 from 2008. Goldman’s profits, from a low base in 2008, has grown five times! This has prompted more aggressive calls for a "levy" on banks in America. This has implications for future bonuses next Christmas. Many of today’s bonuses may well be much higher than 2008, because profits are much higher. And why is that? Firstly, there are fewer banks than last year. Secondly, there is the very contentious "recovery" in the world’s financial markets; more takeovers.
The banks have changed their practices on bonuses; but other practices need to change in the coming year!