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Jan 11
2010

A Mexican standoff in the U.K.

Posted by kcates in Financial Services Authoritycompliancecompensationbonuses

kcates

A Mexican standoff is shaping up between U.S. bankers and regulators in the U.K. over a 50 percent surtax on bonuses.  

And what's more watchable than a Mexican standoff?  Doesn't matter where you come down on this issue, it's a riveting showdown -- stakes are high!

One side sees it as slippery-slope social engineering and market tampering. The other (and probably the biggest, if you're just counting heads and not assets) thinks it's a justified recession-era restraint on an industry that is still on its feet only because of the vast corporate welfare it absorbed in 2008-2009. It has the feel of a Tory/revolutionary divide.

The banking industry itself doesn't like it, of course, ergo you have headlines this morning like, "London Mayor Says 9,000 Bankers May Quit City Over Bonus Tax."

The obvious question: "Quit and go where?"

The delicious irony in the article, from Bloomberg, includes the following passage: "One ‘major global bank' has told the mayor's office that 1,600 workers have asked for help in moving away from the U.K."

They need help?  There are lots of populist demagogues who'd be happy to assemble a mob.

It makes for a riveting Petri dish, if the phrase "riveting Petri dish" isn't too oxymoronic.  Say, for the sake of argument, that bankers are fruit flies - no offense intended and I hope none taken, it's just for sake of illustration. This experiment will show us how fruit flies will be affected by a change in their environment. The omnipitent and unfeeling lab tech is the the government of the U.K., which is changing how the nutrient in the dish is supplied. The nutrient in the dish is all those pounds sterling -- fed by a tube that comes from a source awash in, well, nutrient. The goal is to see whether the fruit flies and their suppliers (a) adjust and stick around or (b) go find another Petri dish.

Salient-fact alert: The 50 percent tax is on bonuses that exceed £25,000, or about $40,000. But the tax rate on incomes in excess of £150,000 pounds now goes to 50 percent as well. That's a big tax. There's also a new rule from the Financial Services Authority that says bank executive who make more than £1 million per year in compensation cannot receive more than 40 percent of the amount in cash - the rest must be placed in deferred payouts that have to be held for three years.

There's a simple way around all this. Securities firms could just raise salaries, and their execs would presumably go on as usual with their lives. Their stock holdings wouldn't be as immediately available as before, but they wouldn't be taken away, so at the end of the day (or the decade) those holdings would still be there, assuming the institution performed well, which is what bonuses are supposed to reward in the first place, right?

The standoff, then, is less about whether execs will be paid well than what it will cost banks to pay them. This has been a banner year for the industry, profits are huge, propserity in the sector is off the charts. My money is that the banks will blink first, and that the fruit-fly experiment will (a) document an adjustment in the nutrient supply.

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