Banker bonus cap removal will cause poverty (in Islington)

🧠 The Big Brain
A Halloween Bloodbath

Two big events we’re watching next week. The Bank of Japan meeting & the US Treasury telling everyone just how much they need to borrow this time.

It’s no secret that they’re running a massive fiscal deficit. How desperate will they be?

Same vibes:

“I just need some liquidity, you know what I’m sayin”

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 policies…

We had the energy price cap which has kept the cost of energy higher for no real reason…

We had Rishi Sunak removing stamp duty on homes during the panasonic…

Causing the average price increase to outweigh the average savings (why didn’t they 🧠 Fink and use their brains?) leading to a bigger inflation of the housing market bubble…

And now the STUPID EU rules of capping bonuses (because the EU has got a shitty financial sector and they’re 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 can’t clawback salaries for misbehaviour (or at least, it’s VERY hard to), but you can clawback discretionary bonuses, because, well, they’re discretionary.
  

After the LIBOR ‘scandal’, Barclays clawed back £150m of banker bonuses to pay off the fine they were charged…

Precedent: the point here is less to do with the ‘crime’ (I don’t 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 performance…

With the cap, bankers are recompensed more on salary which doesn’t incentivise them to take the correct risks, nor to perform ‘better’.

Underperformers: the good thing though is those bankers cruising along on the higher salary will now have to work…

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 they’re 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 — not with you, since you’re subscribed to this — 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 misunderstandings…

And believe me, it gets more and more infuriating the longer you see it!

💡 The Lightbulb
UK Government Nails The Trade

About time! Supposed to be a conservative government yet they’re terrible at business.

Background: The UK government bailed out NatWest after the Great Financial Crisis. At one point, ‘the taxpayer’ 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, today’s earnings did NOT go down well…

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 doesn’t make the year: Even though they nailed that share sale, the UK government still owns a 38.6% stake in the struggling lender.

And they’re determined to sell it all by 2025/26.

A surprisingly large number of people don’t like that idea.

The gist of the argument:

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 bank…

Simple. Because banks don’t behave like other companies