It was a tough call: which gratuitous headline should I lead with lead this week? Euro slides on Greece was one; Dubai built on sand another. But with bankers’ remuneration such a touchy subject – and the UK seemingly in the lead in punishing them for their misdemeanours – there was only one candidate. The thinking seems to run that the bankers (in itself a new swear word) are wholly responsible for the economic meltdown of the last couple of years; and so, as they have cost taxpayers a fortune, there is no way they should be rewarded.
This week UK Chancellor Alistair Darling unveiled his pre-Budget report. In reality, it was a pre-election budget, which appears to have been more about political sound bites than solid economic measures. Various governments around the world have stated their intention to clamp down on the bonus culture, but so far few have acted. Darling’s announcement that he will levy a one-off 50% tax on the bonus pools earmarked for the staff of all banks operating in UK will probably be just the first of many such attacks. The measure may please UK voters, even if those responsible for the carnage are mostly long gone.
As HM Treasury’s release this week of details about the asset protection scheme agreed between the UK Government and RBS showed, the problems blamed on the bankers are still rolling on. RBS is liable for a larger first loss than first agreed with the Treasury back in February – up from £42 billion to £60 billion. However, it has insured a smaller pool of dodgy assets – a mere £282 billion instead of £325 billion, which is some improvement at least. What is perhaps most surprising is which assets RBS has put into the scheme.
The so-called delta derivatives portfolio, which contains £30.6 billion of assets – around 10% of the total insured pool – is made up of “derivative exposures, including swap products, options and foreign exchange derivatives.” This is a bit of a surprise to me – I thought RBS’s problems were mainly caused by a foray into illiquid products traded in opaque markets. The revelation prompted one senior trader to ring me in disgust, saying it looked like RBS had done a load of deals with some really hooky clients that must have had a fatter margin and which have been lumped into the protection scheme after profits were booked up front.
In fact, as the Treasury document states, the assets are going into the scheme on the basis of counterparty risk. A spokesman for RBS explains: “We had to insure either all derivatives with a counterparty or none.” The result is that “a few” FX options and interest rate swaps have got caught in the net; so rather than showing some sharp, let’s-book-the-profits-up-front-and-let-some-other-bugger-unravel-the-trades-later mentality, it illustrates how badly run RBS was and how blind the bank must have been to credit-worthiness. For me, this raises questions about how much risk would be concentrated if FX and interest rate products are forced through a clearing house, but that is a different article for a different day. Whatever, Joe Public will continue to ask why bankers should be rewarded now – even if they have done a good job – when the institutions they worked for were so reckless in the past.