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In Thursday’s Telegraph blog, Iain Martin put forward an interesting perspective on City Bonuses by pointing out that in the “cut and thrust” of the City, Bankers and Traders feel no loyalty to their employers because they know, their employers have none to them. At the first sign of any turndown in trading, the employees get shown the door’.

The consequence is that “big bonuses” are the only way to recruit and retain the available talent. I suppose from that, the argument must follow that in the current economic circumstances, you need the best talent and that means bonuses, whether the Bank is partly owned or even fully owned by the taxpayer. I do not know whether that is true or not…

Is It the Right Business Model ?

I only ever did two 3 month stints in the City as an IT Contractor and whilst I admired what they did particularly the ‘old boys’ who knew where all the bodies were buried, it was not a great working environment and you always had to watch your back

I really have no problem or issue with the concept that “bank employees” in the City have no sense of obligation to their employers but whether that or the bonuses are the problem, I just don’t know, to me the main problem seems to be the “business model” which is based on a concept of Monopoly Money rather than real wealth creation.

Ignoring the Bankers, the biggest single problem in the City lies in the major ‘owners’ which are pension and insurance funds and are always pressing for high annual returns over long term solid growth. These Fund Managers are under constant pressure to produce high yields to benefit their policy holders and so on.

The Consequences

The real problem has been the same for many years – “Short Term Views” of any business which has led to far too many spurious deals. There have been many “demergers” and “mergers” that have taken place merely to produce “activity, commissions and earnings” but no commercial benefit to the businesses involved. The object has been to create capital growth and cash it in quickly before the bubble bursts.

The problem with this is that “capital” has been used as “income” and therefore like the hyper-inflation of property prices, shares too became massively overvalued. The value of any business lies in the profit and income it can generate for its owners, the shareholders and whilst “technical breakthroughs” by a business that project future increases in profitability can increase the share price, it is the decoupling of capital value from income generation that has most harmed the Financial Sector in both the UK and the USA.

Not Just Damage to Businesses

The other side of the ‘balance sheet’ as it were lies in a massive erosion of business talent, the type of individual who can actually run a going business. What this has seemed to have produced is a type of “Top Executive” common in the Boardrooms of major Public Companies that frankly couldn’t manage a piss up in a Brewery but who know how to play the “City Game”.

Conclusion

The City Bankers with or without their bonuses are likely less of a problem to the economic well-being of the UK than the Fund Managers of the large ‘Institutional Investors’ whom they serve. We clearly need to develop genuine “wealth creating businesses” rather than the constant trading of brand names, the UK needs to “get back to work” at a very fundamental level.

Although by instinct I am opposed to “Legislation” in free market matters, there may be a case for forcing Institutional Investors to invest say 20% of their income in long term publicly accountable and managed enterprises or projects. We need to break the “Spiv Mentality” that has grown up and is inhibiting long term growth of both businesses and, the expertise to manage them. Should such ‘investments’ be in non-trade able 5 year bonds of some kind ? I have no idea but restricting some of the “churn” might contribute to a more stable market.

One should not castigate all “churn” as bad, it isn’t because even sound businesses and managers need constant pressure to perform at their best and be made to question their own assumptions. The problem over the past 5-10 years has been, it increasingly became all “churn” and no value.