Posted tagged ‘bananas’

Monkey Business

1 November, 2008

Rescued banks to pay millions in bonuses

Completely bananas

Completely bananas

In the UK;

RBS ‘making monkeys’ out of the government

 

Royal Bank of Scotland, which is being bailed out with £20bn of taxpayers’

money, has signalled it is preparing to pay bonuses to thousands of staff despite government pledges to crack down on City pay.

 

The bank has set aside £1.79bn to cover “staff costs” – including discretionary bonuses – at its investment banking division for the first six months of the year alone. The same division caused a £5.9bn writedown that wiped out the bank’s profits for the same period.

 

The government had demanded that boardroom directors at RBS should not receive bonuses this year and the chief executive, Sir Fred Goodwin, is walking away without a pay-off. But below boardroom level, RBS and other groups are preparing to pay bonuses to investment bankers who continue to generate profits.

 

The disclosure drew fierce criticism from Vince Cable, the Liberal Democrat Treasury spokesman.

“The government said they would attach strict conditions on bonuses and it is very clear they are doing nothing of the kind.

 

“The banks are just making complete monkeys of them.”

 

He suggested the government would not have agreed to bail out any standalone investment bank. RBS and others had become “entangled with casino-style investment banking operations”, he said.

 

Despite the continuing financial turmoil and widespread criticism of the bonus culture in the City, the bank is understood to believe the payments are defensible.

 

 

In the USA

 

The banking system

Screw Marx, from top to bottom, Investment bankers, the banks, the government and Joe the Plumber

 

When the Bush administration announced it would be injecting $250bn into US banks in exchange for equity, the plan was widely referred to as “partial nationalisation” – a radical measure required to get banks lending again. Henry Paulson, the treasury secretary, had seen the light, we were told, and was following the lead of Gordon Brown.

In fact, there has been no nationalisation, partial or otherwise. American taxpayers have gained no meaningful control over the banks, which is why the banks are free to spend the new money as they wish. At Morgan Stanley, it looks as if much of the windfall will cover this year’s bonuses. Citigroup has been hinting it will use its $25bn buying other banks, while John Thain, the chief executive of Merrill Lynch, told analysts: “At least for the next quarter, it’s just going to be a cushion.” The US government, meanwhile, is reduced to pleading with the banks that they at least spend a portion of the taxpayer windfall for loans – officially, the reason for the entire programme.

What, then, is the real purpose of the bail-out? My fear is this rush of dealmaking is something much more ambitious than a one-off gift to big business: that the Bush version of “partial nationalisation” is rigged to turn the US treasury into a bottomless cash machine for the banks for years to come. Remember, the main concern among the big market players, particularly banks, is not the lack of credit but their battered share prices. Investors have lost confidence in the honesty of the big financial players, and with good reason.

This is where the treasury’s equity pays off big time. By purchasing stakes in these financial institutions, the treasury is sending a signal to the market that they are a safe bet. Why safe? Not because their level of risk has been accurately assessed at last. Not because they have renounced the kind of exotic instruments and outrageous leverage rates that created the crisis. But because the market will now be banking on the fact that the US government won’t let these particular companies fail. If they get themselves into trouble, investors will now assume that the government will keep finding more cash to bail them out, since allowing them to go down would mean losing the initial equity investments, many of them in the billions. (Just look at the insurance giant AIG, which has already gone back to taxpayers for a top-up, and seems likely to ask for a third.)

Links

 

UK story;

 

http://www.guardian.co.uk/business/2008/nov/01/royal-bank-scotland-vincent-cable

 

 

USA story;

 

http://www.guardian.co.uk/commentisfree/2008/oct/31/useconomy-banking