Justin Fickling received an unexpected phone call from a headhunter last week.
Was he interested in a position at an American bank? It was a similar role
to the one he had held at another City institution until he resigned late
last year.
Fickling listened, but he wasn’t really paying proper attention. He recently
embarked on a completely different career away from the financial world. But
that didn’t deter the recruiter.
“They’ll pay a one-off bonus worth twice what you earned in your previous best
year,” the headhunter said. That would have been $20m (£12m) – a
jaw-dropping amount even for someone used to taking home at least a
seven-figure sum.
Fickling, whose name has been changed, was astounded but stuck to his guns.
The woman on the other end of the line persisted. “The money is absolutely
flying about,” she said. “The banks want to write cheques for the right
people. If you change your mind call me.”
When he put down the phone, Fickling had to pinch himself. “I couldn’t believe
what I’d just heard. This was an offer from a bank that was bailed out by
the US taxpayer. Haven’t they learnt anything?”
Despite last year’s financial meltdown, politicians and investors fear that is
exactly what has happened. Banks, which are rebuilding among the rubble of
their rivals, have begun to spray money round to recruit what they regard as
the best talent – even though some of those people are the ones that took
the reckless decisions that forced governments to step in to prevent the
whole system from crashing down.
It is not just the investment banks that are offering to pay top dollar. At
the start of last week, Stephen Hester, chief executive of Royal Bank of
Scotland (RBS), was awarded a £9.6m package, including a £6.4m bonus if he
can double the share price in three years.
The previous Friday, Sir Philip Hampton, the RBS chairman, hosted a breakfast
at the bank’s Bishopsgate base. A dozen people, made up of the main
shareholders, gathered to rubber-stamp the pay deal. A 70% stake in RBS is
owned by the government through UK Financial Investments (UKFI), which
manages the taxpayers’ stakes in Britain’s state-backed banks.
“We could just see the headlines,” said one person who was present as the
croissants were passed round. The next day, those images became a reality.
The Daily Mirror lambasted RBS for its “Repugnant Bonus Scandal”. At The Sun,
Hester was labelled “Stevie Wonga”.
The award seemed to make a mockery of Gordon Brown’s proclamation last October
that “the day of big bonuses is over.”
Fickling may have turned down his offer but many others in the City are
succumbing to the lure of a fat cheque.
Another senior banker said: “I’ve heard of someone who has been asked to run
the investment-banking division of a well-known bank. I almost fell off my
chair when I heard what they were offering – £4.5m a year for five years. A
£22.5m cheque just like that. “I know another guy who has been given a £3m
one-year guarantee to run the convertible desk at one bank and an insurance
analyst poached for a £1.5m salary.”
One former Morgan Stanley banker who was planning to start a hedge fund
scrapped the idea because a bank made him an offer he couldn’t refuse. His
new employer is UBS: the loss-making Swiss bank that announced plans to
raise £2.1 billion in a share sale last week.
Such deals have not gone unnoticed. Last Tuesday, Lord Turner, head of the
Financial Services Authority, noted the resumption of aggressive hiring of
traders by investment banks, suggesting a return to irresponsible pay deals
and “business as usual”. FOR outsiders, it will be surprising how fast the
wheel has turned. In truth, for the very top earners, the crisis of last
autumn was barely a blip in their current accounts.
It is little over nine months since the tearful London staff at Lehman
Brothers packed their belongings into cardboard boxes in the most visible
collapse of an investment bank. As pictures of them making their way across
the Canary Wharf concourse were carried on the news, the British public
briefly sympathised with the latest casualties of the financial crisis.
Such support for the City was fleeting. As UK unemployment touches a 12-year
high at 2.2m with the threat of more jobs to be lost, the top echelons of
the financial-services industry are once again decoupling from the rest of
the economy.
Lehman, Bear Stearns and Merrill Lynch may have failed and UBS stumbled, but
the new kings of Wall Street are prospering. In the next month, investment
banks will deliver second-quarter results that should confirm staff are
again on course for giant bonuses. Many already know they will be getting
big payouts.
To cement their position, banks have been grabbing highly rated staff like
Fickling. Barclays Capital, which swooped on the American arm of Lehman,
began earlier than most. It has taken on more than 600 staff since the last
quarter of 2008, guaranteeing this year’s bonus for a significant proportion
of them.
At the same time, corporate activity has been returning. While mergers and
acquisitions are still scarce, fundraisings by debt-laden companies such as
Land Securities and Rio Tinto have been manna from heaven for the investment
banks. So, too, is the dingdong battle developing between miners Xstrata and
Anglo American, which is expected to generate the best part of £100m in fees.
Even before that, foreign exchange and commodities trading enjoyed a bumper
first quarter. “All the investment banks are trying to build up fast,” said
one banker. “Credit is actually one of the really hot areas because a lot of
banks downsized there and now they realise they need help.”
JP Morgan’s global compensation and benefits pot stood at $3.3 billion after a
record first three months of 2009. The bank argues some of that is accounted
for by severance packages from the cost-cutting drive it announced in
November but it is still a significant step up from the $1.2 billion set
aside the same time last year.
The same is true over at Goldman Sachs, which unveils half-year numbers in
mid-July. The bank allocated $4.7 billion to compensation, including
bonuses, marking an 18% increase on the same time last year. It puts the
jump down to higher revenues.
Such a strong start to the year has raised hopes that, against all odds, banks
could deliver record-breaking profits in 2009.
At least outwardly, some are preaching caution. “If you have perfect vision or
an extremely good crystal ball you can be very confident,” said one City
partner. “I don’t have either.”
What is certain is that personal earnings will rebound strongly. Partners at
Goldman saw their bonuses pared by 75% last year. At Barclays Capital,
compensation was down 50%.
Against that backdrop, Johnson Associates, the pay consultancy, forecasts that
bankers in equities, fixed income, currencies and interest rates could see
an increase of between 20% and 30% compared with 2008.
Although several banks have been recruiting top-earning rainmakers, many have
reduced overall headcount since the end of last year. It means the spoils
will be shared between fewer big earners. IF politicians want to take the
pulse of the nation, these days they turn to the internet. After Hester’s
award at RBS, bloggers were baying for blood. “What can we do about this?
There must be something we can do to encourage the government to get these
scum under control,” wrote one.
Another said: “We know that the unbridled greed encouraged by the bonus
culture caused the last crash, so surely we need to prevent another?”
Those in Westminster share the same view – although they express it more
eloquently.
Lord Oakeshott, Liberal Democrat Treasury spokesman, said: “UKFI should never
have signed off Hester’s bonus package. Royal Bank of Scotland is so highly
geared that he could easily hit that short-term share price target [which
triggers the bonus payments] without lifting a finger. His prime task is to
lend more to British businesses and families. That’s what his bonus must be
based on.”
MPs and peers may be jumping up and down in horror, but if the largest firms
are going to heal themselves and generate big returns for government and
taxpayers in return for their largesse they need to hire the top brains.
However much regulators would like to control pay in banks that have
received state support, it could backfire by restricting their ability to
capture the top talent.
“We do need to get away from the idea that nobody should get a bonus and that
bonuses are intrinsically evil,” said Robert Talbut, chief investment
officer at Royal London Asset Management. “Some variable pay can be a good
thing. But importantly we are getting better at looking at it being
deferred, the potential for clawback and taking into account risk – all
those things are increasingly becoming best practice and I expect to see
many more of those schemes in the next 12 months.”
However, many fear the banking industry is trying to move on too quickly,
without learning from its recent past.
As recently as April, Mervyn King, Bank of England governor, said: “Banks are
paying the price for designing incentives packages that are not, in the long
run, in the interests of the banks themselves. I would like to think that
would change.”
Richard Saunders at the Investment Management Association, said: “I’ve become
increasingly concerned that the banking sector is too keen to move on. It’s
important that we do not lose sight of the enormity of what has gone on and
that changes have to be made.”
The trouble is, many people have. By the end of the year, they could be
popping champagne corks and partying like it is 2007 all over again.
Cash without the flash
BONUSES may be set to roll again but the big difference this year is that top
earners are reluctant to be seen to be splashing the cash.
Although yacht sellers in America are reporting an increase in interest,
conspicuous consumption in Britain is out for 2009 as reality bites.
“These guys have a house in London, a place in the country, somewhere in the
sun, three kids in school, an expensive wife and a few cars – that’s a lot
of liabilities and they have realised that they need to pay some of that
off,” said one former banker.
“Remember these people were really looking down the barrel last year and they
realised that if the trigger had been pulled they would have been bankrupt.
They need to take care of their responsibilities and not be the person
standing up in the middle of the room bidding £16,000 for a bottle of wine.”
Hedge-fund manager Arki Busson’s annual Ark charity ball tipped its hat
towards the tougher economic climate this year. Instead of palatial
splendour, it was staged in the draughty former Eurostar terminal at
Waterloo station. It raised £15m for good causes, down from £25m last year.
There were also fewer shows of public wealth at a Formula One bash at the V&A
in London two weeks ago to raise money for children at Great Ormond Street
Hospital. On that night, the room went quiet when one especially flashy
auction lot came up.
One guest said: “It was a ride in a ridiculously flash car and the feeling was
‘I don’t want my name attached to that.’ It didn’t sell so it was
reauctioned as a chance for a Great Ormond Street patient to have a ride
instead. The bids flowed in after that.”
