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  • Apr 18, 2014
  • Updated: 10:08pm

Bonuses just another bafflement in world of investment banking

PUBLISHED : Tuesday, 08 March, 2011, 12:00am
UPDATED : Tuesday, 08 March, 2011, 12:00am

HSBC bonuses unacceptable

Letters to the editor headline

March 7

I shall make this one bald statement stand for all the many complaints we have published of its kind - how can you investment banks have the gall to pay huge bonuses to your already high-paid staff so soon after a financial crisis that you yourselves were instrumental in causing?

I shall also have to make my disclaimer. In my years in the investment business I also partook of a few good bonuses, some of them in the lead-up to the 1997-98 Asian financial crisis, which I was not instrumental in causing but did not do much to help my clients avoid.

And I understand the dilemma of the investment bank directors who throw up their hands in gestures of helplessness when chided about their bonus policies and say 'Yes, but if we don't pay our top people these bonuses they'll just get up and leave and go to someone who does.'

It's true. They will. They do. I have seen it happen.

Yet the complaints have merit. It is an insult to the rest of society when a few people are paid huge amounts of money generated by activities that, in fact, have undermined the stability of the financial system on which the rest of society depends.

I might equally ask, however, why the key players of some football teams are paid astronomical amounts of money and not enough is left over to maintain their stadiums in good repair.

The communities get little. Professional sport is also very parasitical sometimes, although not as destabilising to society as bad investment banking practices can be.

Okay, that's an aside only. The fundamental problem is not so much that investment banks pay some of their employees too much as that these banks are themselves paid too much.

It used to be that investment banks underwrote every share offering they introduced to the market. No longer. They now negotiate the price with their clients, and only when they are satisfied that an offering will be fully taken up do they finalise the price, sign the deal and publish the prospectus. They no longer take any risk. But they still take the full underwriting fee.

They have also virtually managed to abolish the rights issue, a highly efficient and equitable way for listed companies to raise more money. Rights issues do not land them big fees.

And what they cannot get from issuance they increasingly pick up by flogging complicated derivatives to retail investors. This is in line with Jake's No 4 Rule of Investment - 'For every adjective you add to the instrument you add 2 per cent to the fee'. That's just the stated fee. It takes no account of how much you get ripped off in determination of the price.

I think the biggest reason that investment banks get away with it is that you, their intended victim, too often tell yourself that you don't understand anything about investment and must leave it to the experts. The expertise of these experts, however, lies in parting you and your money. The real skill required in investment banking does not amount to much. It mostly consists of a sales job of convincing companies seeking to list their securities that you can get them a better price than your competitors can.

To do it you use big investment words, present these companies with mounds of paperwork they have no hope of understanding and otherwise call on all your resources of bafflegab.

The real work, however, is done by lawyers, accountants and surveyors who are paid separately for their contributions.

I also think the ever greater regulatory framework of the investment business is to blame. This hurdle is increasingly set so high that fewer people can jump it without the backing of very big financial institutions. This just reduces the competition.

But whatever the reasons, it won't do to focus only on the payment of big bonuses. The problem lies not in how the money is distributed, but in how it is generated in the first place.

The hills of Lantau are alive with the sound of angry mountain bikers, upset that they are barred from the Olympic Trail.

SCMP headline, March 6

One of the hazards of going for a walk in the country parks is being made to jump into the snake grass at a second's notice by a surprise visitation of mountain bikers barrelling down behind you with get-out-of-the-way hoots and calls.

So the authorities are finally beginning to recognise this nuisance for what it is, are they? How good to know. Some activities are simply not suited to our increasingly well patronised country trails.

If you must go mountain biking, fellas, find yourselves some place across the border.

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