The dispute over City bonuses has escalated in reaction to new estimates that bankers’ rewards will increase by 50 per cent this year.

Bankers will receive an estimated £6 billion in bonuses for 2009, compared with £4 billion for 2008, according to the Centre for Economics and Business Research (CEBR).

The possibility of bumper payouts has caused a political storm because they come in a year in which the Government has had to step in with billions of pounds of support for financial institutions.

Lenders with investment banking units, including Barclays, HSBC and Royal Bank of Scotland (RBS), had an exceptionally strong first half of the year because of favourable market conditions, such as high levels of volatility and huge amounts of debt issuance by governments around the world.

Substantial amounts of that debt have gone to pay for the bailout of the financial system. Some banks were also big winners as competitors fell away, allowing the survivors to enjoy huge profit margins.

Vince Cable, the Liberal Democrat Treasury spokesman, attacked the forthcoming bonus round, which will be finalised at the end of the year and paid in January: “These bonuses are coming from the fact that banks are earning money from substantial government borrowing and are able to earn bigger profits because there is less competition.

"What is particularly galling is that all their activities are, in turn, underwritten by the taxpayer.”

The CEBR said yesterday that it had increased by £2 billion its estimate for 2009 bonuses after banks’ disclosure of large profits in the previous two quarters. Benjamin Williamson, CEBR economist, said: “Profits of major financial sector institutions have jumped sharply; therefore, bonuses, which to some extent are a profitsharing scheme, have also risen.”

However, windfalls will not return to their 2007 peak of £10.2 billion for several years, the CEBR predicted. Banks have also said that the second half of the year will not repeat the knockout performance of the first half because profit margins have returned to more normal levels.

Bankers’ bonuses are set to take centre stage during the general election campaign next year. Senior politicians have lashed out at banks for paying huge rewards to employees. The Government was considering imposing a windfall tax but has backed away from the controversial move, insisting that the onus is on banks to do the right thing.

RBS, which is 70 per cent-owned by the taxpayer, agreed with the Government to shake up its pay structure, so that all payouts are subject to clawback and deferral over several years.

However, the bank has drawn criticism over the pay packet for Stephen Hester, its chief executive, which could exceed £10 million for 2009. RBS has also hired Antonio Polverino, a star trader from Bank of America Merrill Lynch, on an estimated £7 million one-year package.

About ten bankers who worked with Mr Polverino in product sales have also been hired by RBS, with guaranteed bonuses of about £500,000 each. RBS has hired about 90 bankers in sales this year to replace others who left or were poached by rivals. It has been easier to recruit from Merrill than from other banks because many of its employees disapproved of the emergency sale to Bank of America last year.

Tosca fund prepares for bull run

Martin Hughes emerged yesterday bloodied but unbowed after his tussles with the collapsing stock market last year and predicted that shares prices were at the start of a bull run that could last for a decade (Robert Lindsay writes).

The high-profile hedge fund manager known as “The Rottweiler” said that his Toscafund — whose assets under management have fallen from $5 billion to $2 billion — was poised to benefit from a five to ten-year bull run.

He was also unrepentant about the 65 per cent fall that his fund racked up last year, which triggered a flood of redemption requests. He said that three weeks ago he paid off the last of those cash calls and closed the special liquidation fund set up at the end of 2008 to meet those demands. The Toscafund is up 47 per cent since the start of the year.

Mr Hughes said. “We are at the start of a very powerful structural bull market for equities. We just finished, at the end of last year, a bear market that lasted for ten years. Since the start of 2000 there were more years when the market went down than when it went up. This is what is catching people out.”

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