In the opening scenes of Wall Street 2, Gordon Gekko leaves jail after serving a fraud sentence. But that has yet to happen in real life. While millions of families watch their homes and savings go up in smoke, the bankers, hedgies, insurers and other financial managers are hanging on both to their jobs and to the vast bonuses they accumulated over the past decade – bonuses paid on falsely declared profits.
The IMF estimates the total value of all writedowns by banks and other financial institutions at roughly US$3.4 trillion.
That comes after a decade of profits which have since turned out to be largely illusory. Its a fair assumption that the value of the writedowns is equal to the value of the falsely declared profits, and the bankers were paid bonuses on those profits (bonus pools in the financial industry tend to be 30% of profits).
Do the math
That is one trillion dollars that could help bail out the banks, pension funds and other financial businesses.
Western countries, coincidentally, have spent at least a trillion on the bail-out.
There is one big, fat unanswered question at the heart of this scandal.
Why should the financiers hold onto their bonuses?? Why is there no call for them to repay the money to the companies they worked for?
Every financial company that is now issuing the writedowns has detailed the size of its bonus pool, and that money could now be recovered from individual receipients, on the grounds that it was based on falsely declared profits – assets which were inflated in value to the point where actual dishonesty took place such as Lehman’s. Or in some cases the profits just never existed at all, such as John Thain’s decision to pay Merrill Lynch bonuses a month early, just ahead of the BoFA takeover.
It is a fact that Lehman Brothers were warned by their auditors and accountants that they were overstating their profits the year before they went bust. The board however decided to ignore this advice and declared the profits they did. As a result they got larger bonuses.
The big |Auditors, like Ernst & Young were a key part of the scam, and sanctioned the accountants reports for which their executives should now be arrested and charged. At the time, many in the financial world were openly boasting about the over inflation of derivatives and CDOs which they were conniving with. But the auditors all somehow missed this.
If Directors award themselves a bonus from a company and then the company finds retrospectively that the director behaved in a dishonest way, the company can go after the director and ask for the bonus back. Plus its a criminal offence – breach of fiduciary duty.
UBS which is based in Switzerland is specifically looking into this. UK and US banks and finance houses could do the same .
And when they retrieve the money, they could either use it to repay some of the taxpayer’s aid they have since squandered, or preferably lend it to high-risk, small businesses on generous terms.
Disgruntled financiers could if they wanted sue the companies they had repaid, but meanwhile, the financial industry would receive the boost to its liquidity that might stave off the double dip.
Why these financiers have not been lined up and interrogated about each and every deal that led to the global financial meltdown is a question only history will answer.
What they do for the loot (from The Sunday Times)
BELOW the level of chief executive in investment banks is a whole host of senior people paid eye-watering amounts of money.
Head of equity capital markets: £3m-£5m — This person is top of the pile and can easily earn £3m to £5m in salary plus bonus. He or she raises money for companies by stock market listings, private placements or special warrants. The equity capital markets people also deal with derivatives such as futures, options and swaps relating to companies.
Head of proprietary trading: £2m-£4m — He comes hot on the heels of the capital markets specialists. Although the “prop desks”, whose job is to use the bank’s own funds to invest across any asset class, were blamed for many of the writedowns throughout the credit crunch, they are again making big profits. Take-home pay of £2m to £4m is common. “Their packet is totally driven by what they make [on investments],” said one banking insider. Prop trading has one of the highest burn-out rates in investment banking with people lasting no more than four or five years in the top positions.
Head of mergers and acquisitions: £1.5m-£3m — He orchestrates takeover and buyout deals and easily earns £1.5m to £3m when times are good. During fallow times, however, he will have to make do with a base salary of about £300,000 and a much smaller bonus.
Head of prime brokerage: £1m-£3m
The prime brokerage department looks after hedge funds. It lends them stock, provides debt financing, and manages their cash. A global head of prime brokerage at one of the big investment banks can earn £1.5m to £3m. The regional head has to make do with £1m to £2m.
Head of trading: £1.5m-£3m
His job is to oversee the bank’s trading desk and keep an eye on the hundreds of traders who do thousands of deals every day in shares, debt, derivatives and currencies.
Head of sales: £1.5m-£3m
This person will take home a similar package to the head of trading. He or she sells shares, debt products, derivatives and currency to clients, including hedge funds and banks.
Star analysts: £1m
Their role is to examine companies and sectors and spot trends. The investment banks do not want to get caught out in the way they did in the years leading up to the credit crunch, so they are happily paying analysts £1m a year.
Head of credit finance: £800,000
This person is in charge of lending to companies and then syndicating those loans on to other financial institutions.