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Banker bonus cap removal will cause poverty (in Islington)
Plus a Halloween bloodbath & The UK government's one good trade
Tim Vollans & Fink Money
October 27, 2023 ⢠Estimated Reading Time: 7 minutes
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On to todayâs noteâŚ
đ§ The Big Brain
A Halloween Bloodbath
Two big events weâre watching next week. The Bank of Japan meeting & the US Treasury telling everyone just how much they need to borrow this time.
Itâs no secret that theyâre running a massive fiscal deficit. How desperate will they be?
Same vibes:
âI just need some liquidity, you know what Iâm sayinâ
Both have the potential to be market-moving events and set the stage for the remainder of the year.
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⥠The Spark
Higher poverty seen in Islington after bank bonus cap removed
There are always unintended consequences of government policiesâŚ
We had the energy price cap which has kept the cost of energy higher for no real reasonâŚ
We had Rishi Sunak removing stamp duty on homes during the panasonicâŚ
Causing the average price increase to outweigh the average savings (why didnât they đ§ Fink and use their brains?) leading to a bigger inflation of the housing market bubbleâŚ
And now the STUPID EU rules of capping bonuses (because the EU has got a shitty financial sector and theyâre just jealous of us) is being walked back.
Yay: this is definitely a good thing on average.
See, despite what the media might say, capping bonuses was a bad idea.
The cap meant salaries increased to compensate and there are two problems with this.
Higher fixed costs for banks makes it harder during times of stress to recalibrate their cost base.
Legally, you canât clawback salaries for misbehaviour (or at least, itâs VERY hard to), but you can clawback discretionary bonuses, because, well, theyâre discretionary.
After the LIBOR âscandalâ, Barclays clawed back ÂŁ150m of banker bonuses to pay off the fine they were chargedâŚ
Precedent: the point here is less to do with the âcrimeâ (I donât think any crime was committed over LIBOR and that people higher up should be in jail, such as those at the ECB and BoE) but the ability to shift risk onto banker performanceâŚ
With the cap, bankers are recompensed more on salary which doesnât incentivise them to take the correct risks, nor to perform âbetterâ.
Underperformers: the good thing though is those bankers cruising along on the higher salary will now have to workâŚ
And that might cause some destitution in the London borough of Islington where there are the 2nd most bankers (and Corbyn fans) in London as their salaries freeze and theyâre found out to be non-revenue generating entities!
Ignorance: this is one example of the general public simply not being presented the full picture. Makes it hard to grasp 2nd order effects, or risk vs incentive.
It happens a lot â not with you, since youâre subscribed to this â but the more you understand how surface level the general knowledge of finance and markets is amongst gen pop, the more you will recognise these deep misunderstandingsâŚ
And believe me, it gets more and more infuriating the longer you see it!
đĄ The Lightbulb
UK Government Nails The Trade
About time! Supposed to be a conservative government yet theyâre terrible at business.
Background: The UK government bailed out NatWest after the Great Financial Crisis. At one point, âthe taxpayerâ owned 84% of the bank.
In May, the UK government sold $1.6 billion worth of shares and absolutely nailed the timing!
Ever since, the NatWest share price has been under pressure, not helped by the whole client confidentiality/Farage incident which led to the CEO departing.
However, todayâs earnings did NOT go down wellâŚ
NatWest now sees a drop in profits ahead.
The net interest margin (the difference between the interest they pay and the interest they receive) is seen at 3% for the year, downgraded from the previous forecast of 3.15%.
One trade doesnât make the year: Even though they nailed that share sale, the UK government still owns a 38.6% stake in the struggling lender.
And theyâre determined to sell it all by 2025/26.
A surprisingly large number of people donât like that idea.
The gist of the argument:
Like a street hawker, Rishi Sunak will now sell whatâs left of NatWest, a banking group once known as RBS, for whatever the market will pay.
đđđ Business leader in @ObserverUK
â Ian Fraser (@Ian_Fraser)
8:46 AM ⢠Jul 26, 2021
One chart says it all:
The UK government paid 502p. The loss has been nailed on since 2011.
Did nobody tell them to cut losers early?
As for the question of why not keep a state-owned bankâŚ
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