The return of Banking Bonuses is a good thing

It would seem that bankers have replaced real estate agents as the profession to hate right now. The new hate wave is starting again with the announcement of some large Christmas bonuses for the supposed architects of our worldwide recession.

No-one deserves all that cash

The general opinion of the masses seems to be that the bonuses are too big, these guys don’t deserve them and it’s our money. Or it could just be jealousy!

We all should be jealous and it’s natural so let’s not go looking for a moral high ground to fire our arrows into the boys in the tailor-mades. The reality is that nothing has changed – multimillion dollar payments have been going on for the last twenty or thirty years – my direct boss got paid $28m in 1997 and sure the green eyed monsters way back then said he didn’t deserve it but hold on – these payments have always been approved directly and indirectly by shareholders – as they are now. And why are they approved?

For three reasons: 1. The organisation made a profit 2. The individual performed well and 3. The shareholders made money

Who DOES deserve the cash?

So surely the only reason for complaints now is jealousy? Just like premiership footballers or US baseball swingers the money (profits remember) can either go to the players (footballers or bankers) or the fat cat shareholders. What’s more in most G20 countries they pay higher rates of tax – up to 50% in the UK next year! So again what’s the problem? I can hear you screaming from here and it’s all about the level of Government intervention – be it TARP or European bank bailouts – $20 trillion of our money poured into the economy. Without that money the banks would not be in existence and they wouldn’t be able to pay bonuses now, so the argument goes.

Correct – and every pension holder would have a load of worthless paper to take into their retirement, every mortgage holder would be in negative equity and every high street would be a boarded-up reminder of our greed. In short the world would not resemble anything like the world we have known since the 1980s. It is a fact that financial markets would have collapsed and lots of fat cats would be out of work – along with millions and millions of ordinary Joes - the plumbers, the shopkeepers, the workers - the real people would be on the streets with no money, no jobs and no hope.

Cash is King – For all of us

So why get so hot under the collar now with the bankers? They didn’t make the rules. They are not the governments who bailed out their old college mates with no constraints and no rules. They are just doing what they have always done – executing extremely smart financial engineering and taking percentage points of huge profits for themselves in return. If we don’t like that then best we stop borrowing money and best we stop living in houses valued at x10 our annual salaries. Let’s go back to the good old days in the 1960’s and 1970’s when we paid 20%+ interest rates on mortgages and credit was virtually non-existent. That’s right folks stop the bonuses, stop the smart guys working in banks, stop the banks making too much money and they’ll start charging you more – or maybe not even doing business with you at all so you go back to living in your parents terraced house until you are married, travelling by bicycle and paying everything off in cash over three and four years.

You know what is folks – it’s jealousy – it’s human and its fine but it’s also a necessary evil of our lives. The fat cats are necessary evils. You don’t have to like them and to be honest on the whole they are deluded, self obsessed horrors – much like our elected politicians who have demonstrated that they haven’t got the first clue of how to manage an economy or regulate the smart guys. Deal with it – and if you can’t just make sure your kids do their sums at school and become the next generation bankers.

It may not be popular but these bonuses work for us and improve our lives too.

Luck, Leverage and Theft in the Markets – Mama knows

So you’ve seen the media hype from the socialist journalist middle classes who take every opportunity to stick it to the bankers – Fred the Shred, Dick Fuld – “Greedy *ankers” - the story that is pure porn in the business pages these days! But do you believe it?

Arrogance to blame
Mamamarkets doesn’t know the individuals but she knows the type - extreme hubris and upper percentile intelligence is a pre-requisite on the floors of the city – success and environment invariably lead to a glitzy marble sheen of arrogance.

But is that arrogance enough to cause global meltdown on the scale we are seeing? Don’t you believe it and don’t believe the hypocrisy of the fawning city journalist – promoted by snippets of planted knowledge over the years – now pushed to the fore and pretending to be the voice of the people – the arrogant “greedy bankers” still paying his kids school fees and holiday in St. Barts.

The fault is ours – yes you and I - and every single one of us that sat on our new B&B sofa in our lateral space apartment boasting of the 100% growth in our house value over the last three years and the 25% returns on our stock portfolio.

Ask yourselves the question – How do you think YOU made those returns? You must know it’s impossible with cash. If you lent $100 to anyone how much would they pay you for the use of those funds – 5% yes; 10% maybe; 15% unlikely unless they are worried they can’t pay back the principal – 25% - come on get a life – they aren’t going to pay it back.

So how did your fund manager, your advisor or your stock portfolio perform so well? There are 3 ways; 2 legitimate and 1 Madoff - let’s ignore the latter because a hustle is a hustle whether that be short-changing in the supermarket or short changing at the Board table.

Legitimate 1: – you got lucky and bought Google at a buck – well done – now just don’t expect to get lucky again and again. Even Buffet failed this year.

Legitimate 2: You invest in normal market products with yields of 10% and you leverage it 4 times meaning a gross return of 40% and net 20% (assuming interest rates at 5%). Does this look risky to you? Well it is and you still only make 20% a year. Remember who pays you 10% a year when the market is 5%?

Ignorance no defence
Don’t plead ignorance now please and pretend you didn’t understand leverage – you bought a house didn’t you?

So yes blame every investor and shareholder including yourself. Investment banks have targeted returns every year of over 25% return on capital - impossible but what’s the worst that could happen if you worked there – you didn’t make it – lost the lot, blew up the bank and lost your job. If you didn’t try and gave back the capital you lost your job anyway and the next sharp shooting arrogant master of the universe rolled straight in from Harvard. Investors and shareholders demanded 25% returns – Which as we have already established takes luck, leverage or theft.

Who were these investors and shareholders? – That was You and Mama here with an arrogance to match that of Mr Fulds and Mr Goodwin but at least they got to keep the house and a pension to pay for it I guess.

Mama knows her markets
Mamamarkets