Another year over, another bonus season in the City, another outburst of unseasonal rancour and envy among those not part of the charmed circle. But this time I believe it is different.
First, there is the sheer amount of money sloshing around. Never before has a single trader been singled out as trousering £50 million, as has Driss Ben-Brahim, head of proprietary trading at Goldman Sachs. (Goldmans insists the claimed figure is “ridiculous”; but no one is saying how far behind £50 million the poor man's bonus lagged. Not much.)
Relatively ordinary fund managers who switched to hedge funds are revealed as being worth hundreds of millions. Dull accountants and lawyers pull in salaries counted in millions. The average lottery winner would be turned away by Morgan Stanley, we learnt this week, as too impoverished for its private client business.
Second, these are far from boom times for anyone else. Historically, waves of enrichment have benefited society as a whole, if only through the trickle-down method. “A rising tide lifts all boats.” But not this one. The only spin-off for those outside the charmed circle in the Sourth East is negative: higher house prices, daft restaurant bills, soaring school fees.
The outsiders, those in professions whose salaries merely track the Bank of England’s published rate of inflation, are poorer this Christmas. It is an accepted quirk of the inflation figures that they do not reflect the expenditure of the average middle class household, who spend disproportionately on domestic services and medical cover, whose costs are rising at a much higher rate. School fees have gone up an average 6 per cent over the past decade.
Then there are unavoidable costs. Gas and electricity prices, council tax, mortgages — all are on the up. Anecdotal evidence suggests that, while pre-Christmas trade this year in Harrods and other emporiums of the rich is booming, the average suburban high street is subdued.
This week one newspaper, in its leader column, expressed what many are thinking. It is all a bit Versailles, circa 1788. This was not The Guardian, but the Daily Mail, a paper that, like it or loathe it, has a genius for identifying and expressing the views of Middle England. There is anger, too, at the changing nature of the City. Stockbrokers have traditionally become rich by supplying industry with the capital to expand, by putting it in touch with investors.
The new money on which today's bonuses are based is spivvy money, casino money. It is from highly leveraged bids from overseas, often taking advantage of tax breaks for Britain plc.
Mr Ben-Brahim’s job at Goldmans is not putting investment funds into the system, it is gambling his employer's money on the chance movements of commodities and other investments. Derivatives trading is designed to allow companies to hedge against future price movements, but in reality it is a huge and not entirely understood gaming circle. Private equity, another source of today’s riches, is not about investment. It is about taking companies off the stock market, stripping them of any ounce of excess, and then selling them on at a profit. It is only in future years that we will discover if that “excess” is in fact much-needed investment.
If the financial mega-rich become social outcasts, it will not take much for some attention-seeking politician to suggest misplaced and ham-fisted measures of wealth redistribution. A windfall tax on hedge funds, anyone? Or private equity? Or proprietary trading? It would play well in post-affluent suburbia.
Martin Waller
The case for
True enough, the Goldman Sachs bonus round does not naturally foster a spirit of brotherly love. And, I freely admit, it doesn’t look good to be on this side of the debate, finding common cause with Gordon Gekko and Mammon.
But the politics of envy is nothing to be proud of: the tendency to be suspicious of financial success — to sneer at people who “buy their own furnture” — is not only unedifying; it is, economically speaking, uneducated.
It has been a bumper year for the City, which has meant that the best-paid bankers and traders are getting bonuses which afford them not just one Bugatti Veyron (top speed 400 km/h; price $1.3 million), but 50. Still, by comparison with previous years, Goldmans is actually spending less on employees as a percentage of its total earnings and more on its investors. Rather than distributing half its net revenue to staff, it has dropped its compensation ratio to 42 per cent and increased the amount it passes on to shareholders.
Certainly, the trickle-down effect is overblown. Goldmans’ partners save more and spend less as a proportion of their earnings than the average British worker. Indeed, they plough a chunk of their money back into Goldman funds. By the same token, the impact of these bonuses is over-estimated. To hold them responsible for London’s traffic jams, housing shortages and expensive bottles of Chianti is absurd. Just a couple of dozen people at Goldman have got multimillion-pound bonuses, hardly enough to skew the capital’s entire housing market. (Incidentally, Driss Ben-Brahim, the head of prop trading, did not get anything like £50 million. Instead, he has been doubly embarrassed: a) by the publicity surrounding his misreported payout; b) by the fact that he had a rather ordinary year on the desk.)
The boring truth is that the bonus system is an incredibly powerful tool for banks to recruit and retain talent. Hollywood pays its film stars a fortune; Formula 1 lavishes riches on its drivers. These stars anchor those industries. Derivatives traders and investment bankers anchor London’s most valuable business, financial services. If they weren’t paid best here, they would go elsewhere — and, greatly, to Britain’s cost: the Corporation of London calculated that the City accounted for £20 billion worth of economic output and 200,000 jobs. And the rest of the country feels the benefit. Londoners account for 12.5 per cent of the population but pay nearly 20 per cent of the tax. Goldman Sachs bankers get paid their bonuses here and, via the Exchequer, we all share a slice of them. Much better to have them in London, then, than Frankfurt.
Ultimately, the argument will be sealed by the behaviour of the bankers themselves. They could do a lot worse than follow the guiding principles of the bank’s founders, Marcus Goldman and his son-in-law Sam Sachs. They argued that wealth creation for their customers and themselves was good, ostentation was appalling and philanthropy was expected — enduring guidelines for the bonus bracket.
james.harding@thetimes.co.uk
