November 18, 2010

It is not about the bonuses, it is about the artificial profits from which bonuses are made of!

Sir I am so tired hearing about the discussion about unreasonable and outright shameful bonuses paid without making any reference to the fact that these must be based on outright shameful profit margins that are in large a direct result of regulatory interference, Patrick Jenkins, "Remuneration still the big sticking point", November 18.

If a bank when lending to a triple-A rated client were only permitted to leverage its equity as much as when lending to a small unrated business, namely 12.5 to 1, then the bank, if it made a .5 percent on a loan to a triple-A rated client would generate a 6.25% yearly return on equity, good, but nothing to pay huge bonuses on.

But since the Basel Committee authorized the banks to leverage 62.5 to 1 on these loans, the yearly returns, on supposedly risk-free investments, would with the same margins explode upwards to 31.25% a year, and that is indeed something to pay out huge bonuses on.

Forget about regulating bonuses, regulate the regulators instead.