It’s banker confession time. They are lining up outside the confessionals to say their Hail Marys before heading back out to do it all over again.
Lloyd Blankfein, the CEO of Goldman Sachs, took a 99.1% pay cut in 2008 – in 2007 he got $US70 million and last year he got $US600,000 (base pay only, no bonus).
So last night, from his recently acquired spot on the moral high ground, the chief of the firm that Rolling Stone magazine famously described as a “vampire squid wrapped around the face of humanity” was able to take a swipe at the remuneration practices of investment banking.
Much of the controversy over pay, he said, is “understandable and appropriate” and “there is little justification for the payment of outsized discretionary compensation when a financial institution lost money for the year”.
Which is easy for him to say. Goldman earned a profit of $3.4 billion in the second quarter of this year – more than it earned in all of 2008 – and has already put aside $11.4 billion from the first half of 2009 to compensate employees.
Blankfein’s bonus-free year in 2008 and his stay on the moral high ground will turn out to have been a brief moment in time, because this year he is probably in for a record pay day.
But in truth, his speech in Frankfurt last night was really a defence of excessive salaries, not a criticism of them, as well as an advertisement for working at Goldman Sachs, and, well, plain old spin.
He spelled out Goldman’s remuneration principles, the main one of which is that the percentage of compensation awarded as equity should increase as the employees’ total compensation increases, and that for senior people it should be deferred equity.
“We believe attracting and retaining the best people is vital to our effectiveness and that incentives are an important element in that process. But we also recognise that, misapplied, they can also encourage excess.”
He also said that the real problem was risk management, and that the industry let the growth and complexity of new financial products outstrip their social utility and the operational capacity to manage them.
Again, he’s “talking the talk” but is Goldman walking the walk? As the Wall Street Journal reports this morning, by the end of the second quarter, Goldman’s value at risk (VAR) had risen 33% from a year ago to $US245 million (VAR is an estimate of the amount the firm can lose in a single day). Shareholders don’t mind – the price is up 257% since last November.
Whatever bankers piously say now, their aim has been, and always will be, primarily to enrich their shareholders and themselves.
Tuesday’s confession at the same Frankfurt conference by the chairman of HSBC, Stephen Green, was a little blunter. He said: “At their worst, financial markets can be engines of destructive excess. In recent years, banks have chased short-term profits by introducing complex products of no real use to humanity.”
And: “Some parts of our industry had become overblown and certain products and services failed the tests of usefulness, suitability and transparency.”
The “priest” – Lord Turner, chairman of the UK’s Financial Services Authority – came out with a sermon last month in the form of an article in Prospect magazine, in which he got stuck right into the bankers.
He said the financial crisis had exposed much of banking as socially useless for everyone except investment bankers.
He said the debate about bankers’ bonuses was a “populist diversion” and the only way to cut banking down to size was a global tax on capital flows.
That reference to a ‘Tobin tax’ has produced an outraged reaction from the banking world, but Lord Turner has since refused to back down.
Perhaps the wisest words came from Alan Greenspan yesterday in an interview with the BBC: “The crisis will happen again… that is the unquenchable capability of human beings when confronted with long periods of prosperity to presume that that will continue.”
“Unless somebody can find a way to change human nature we will have another crisis.”
This article first appeared on Business Spectator.
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