The government today announced plans to make banks disclose their high bonus data, after chancellor Alistair Darling earlier refused to rule out “naming and shaming” the highest paid.
This may excite anti-capitalists with picketing plans for bankers’ Chelsea houses but it misses an important point in bonus culture: mega-payouts are merely a symptom of a greater failing in the system. That failing is that investment banks charge too much for what they do.
One of the difficulties in the bonus debate is that there is little visibility on who ultimately pays for them, beyond a vague sense that somehow we all do. Leaving aside proprietary trading and normal retail and commercial lending, much of the “extra” income funding the rise in banker bonuses is from high transaction and trading fees. These are normally signed off by finance officers and traders, acting in their capacity as agents for their own investors and shareholders. These are the real clients, in the sense that they foot the bill but would never know how much is paid in their name. It includes all of us with a pension fund.
One way of addressing this agency problem would be to make fees for corporate banking services visible in the accounts of the companies paying them.
Under current IFRS rules, fees paid to banks for acquisitions, disposals, arranging and underwriting bonds and loans are normally not material enough to warrant a separate disclosure. Either they are capitalised as part of the acquisition cost, or they appear under other generic interest or financing costs, leaving shareholders in the dark about costs often running at 1% to 5% of transaction value. When those percentages are applied to a rolling multi-billion dollar bond programme, or an acquisition and disposal plan of any size, it is no wonder that banks pay huge bonuses. The former head of UK investment banking at Lehman Brothers, Anthony Fry, famously called these a super-tax on high finance.
I would suggest two accounting changes to make these hidden costs apparent. First, require banks to notify each client of the full cost of their services, including indirect fees and loan margins. Just as in retail finance, there should be no fudging of costs through bundling.
Second, require client companies to aggregate and publish bank costs in their accounts. Investors could then rank companies by bank expenses and take action where needed. From an accounting viewpoint, this would be an easy disclosure to make and would bring the costs into the open for scrutiny and monitoring.
In the past, institutional investors and fund managers have been uninterested in bank fees, perhaps as they work in the same profession and tend to accept that bankers are expensive. Making a new line in the accounts won’t change that overnight but it would at least enable a discussion about what is reasonable to pay for professional banking services, an essential pre-cursor to reining in excessive bonuses.
The same goes for lawyers, accountants and consultants, especially those giving up hourly billing in favour of banker-type success fees.
Investors would need some explanation of the numbers, which would fluctuate through funding and restructuring cycles. Perhaps in addition to simple reporting and narrative, they could be expressed as a percentage of each transaction, or rolled up across a number of years and shown as a long term impact on dividends. This would be similar to what happens with mutual funds, where retail investors are told about the impact of management fees on the projected long-term performance of their pension.
This is not to say that transaction fees are always exorbitant and it is true that many advisory mandates are won in competitive tenders based on costs. But the overall fee culture is strong enough for even low-ball advisors to charge more than a handsome margin. Maintaining the current secrecy about corporate bank fees – something propagated by both banks and their clients – only adds to suspicions that all is not well.