In the war against bankers’ pay the EU has a secret weapon:
Banks should pay bonuses in debt, which would be wiped out if a bank failed, an EU banking report will suggest as Europe attempts to step up the fight against bankers’ pay.
I’ve been sort of fond of this for a while. It’s a way for bankers to eat their own cooking: if you’re a banker, what you produce, more or less, is debt, so you might as well stand behind the basic soundness of that debt by owning lots of it. You can fine-tune this theory – for instance, Credit Suisse circa 2008 produced asset-backed securities, and Credit Suisse circa 2011 produced derivatives-counterparty credit risk, so that’s what its bankers got – but the basics are sound. In particular, if you are a banker, one thing that you don’t produce – that is sort of an unwanted byproduct of your operations, imposed by regulators but not particularly liked by you – is equity, so getting paid in equity is a little perverse.1
There’s a little theoretical tension here, though, which is that there’s also good reason to think that bankers should be the lowest on the totem pole in terms of getting their money back if they blow up their banks. You could just about imagine a bank capitalized with 10% equity, 10% banker-pay junior debt, and 80% senior debt, say, failing and recovering 85 cents on the dollar. So the real debt gets paid off 100%, but where does the 5 cents go? Classically the “debt” that the bankers get is senior to the “equity” that public shareholders get, but it seems a bit rough to pay the nasty bankers before you pay the widow-and-orphan shareholders. Read more »
There’s a thing called socially responsible investing where
(1) you invest other people’s money,
(3) but it’s okay because you’re doing it not to make them money but to save the whales, er, penguins, and they like penguins, so they keep paying your fees. This is a good racket as rackets go but it turns out that people mostly don’t like penguins as much as they like money so it is sort of a limited racket. The trick if you can manage it is to appeal to people who like penguins to give you other people’s money, because people typically like penguins more than they like other people having money. This can be great for you and also for penguins, and for the right value of “you” and “penguins” can be a diabolical way to achieve real social good, which is my favorite.
Two great recent stories in that vein. One is a proposal to use eminent domain to seize underwater mortgages and refloat them. The idea, schematically, is (1) seize property,* (2) sell it back to homeowner at fair value, and (3) lend money to the homeowner to pay for the house, which the municipality then uses to pay fair value to the mortgage lender whose collateral was seized in step (1). Any dope of a municipality could presumably get their act together to do (1) and (2), but the problem is (3) coming up with the money for new mortgages to pay fair value to the old mortgagee. You could see why oh I don’t know BANKS would not like this scheme – it will cost them in servicing rights and refinancing fees and second-lien writedowns** – and so the money has to come from non-banks. Some folks think they can find the money, for a small fee of course, and so are roadshowing the idea to municipalities. It seems to be popular in California, go figure.
The other is this gloriously cynical play from TCI to try to extract some value out of Lloyds Bank while also improving the stability of the British financial system, maybe. Read more »