Banking bonus culture doesn't add up

By Scott McCulloch on Dec 4, 09 04:29 PM in Banking

The Treasury appears to have won its battle with the Board of Royal Bank of Scotland over a speculated £1.5bn bonus pot for its investment banking arm.

RBS, having bowed to intense political pressure, has now agreed to pay bonuses at the "low, low end of the scale" - even if this means it will lose staff to better paying rivals.

Lloyds have also announced a bonus package for its top 200 executives of up to 80 per cent of their salaries, in a shares only package spread over three years.

And this on the same day the National Audit Office revealed the actual cost to the taxpayer so far for the banking crisis currently stands at ￡850bn.

Investment bankers have been cleaning up in the rush to offer their 'expert advice' to the Treasury, with Credit Suisse alone reported to be in line for ￡15.4m in fees.

Since the financial crisis began to April of next year, investment bankers will have pocketed an estimated ￡107m.

So it's not too surprising RBS' Global and Markets Division (its investment business) is on track to make ￡6bn in profits this year.

With the government having pumped ￡200bn into the financial system in quantitative easing, the investment bankers could hardly lose when they are allowed to borrow money at 0.5 per cent and then lend that money at a much higher rate.

The bonus culture has undoubtedly come from the United States and US banks are reluctant to curb the rewarding of success.

This week Bank of America said it would repay $45bn in government loans which will free it from executive compensation restrictions imposed by executive pay czar, Ken Feinberg.

What is interesting is Bank of America's debt repayment plan, consisting of $26.2bn in "excess liquidity" and $18.8bn in securities.

All nine US banks who received TARP loans from the US government are now desperate to pay those loans back to escape the executive compensation provisions.

How exactly Bank of America amassed $26.2bn in 'excess liquidity' in such a short space of time, especially after reporting a $1bn dollar loss in the three months from July to October this year, remains unclear.

However, the US Treasury has already surmised the US tax payer will be "extremely unlikely" to receive a full return on the reported $700bn bail outs.

Whether the UK taxpayer will see a return on its investment also remains to be seen.