Saturday, January 16, 2010

Without Touching The Sides

Worth £30 mill of anyone's money

When cuddly Alan Sugar was chairman of Tottenham Hotspur, he precisely captured the big problem with football club economics: all the money gets pooped out to overpaid prima donna players, passing straight through the club "without touching the sides".

Which is why one of the key "metrics" employed in analysing football club finances is the wages/turnover ratio. During Sugar's time at Tottenham the average wage/tunover ratio across the Premier League soared from forty-something percent up to a scary sixty-something:

We can all see how it happens - revenues ultimately depend on footballing success, and footballing success ultimately depends on the prima donnas on the pitch. Nature therefore ensures that the money gravitates down through the alimentary canel and deposits itself in their greedy ingrate offshore accounts. And that's how in 2001-02 the Italian clubs ended up paying a totally bonkers 99% of revenue in wages.

And talking of greedy ingrate prima donnas, it's bank bonus season again.

So what percentage of bank revenues do you reckon get paid out in pay and bonuses? 60%? 70%? Given all the noise and fury, you might even guess an Italian job 99%.

But no. A recent analysis by the Wall St Journal reckons that although bankers pay and bonuses will soar by an average 18% this year, the overall cost of compensation and benefits will total an extraordinarily modest 32% of bank revenues, down from 40% in 2008 (figures refer to the 38 largest US banks and securities firms, but you have to guess the position won't be very different here).

Wha!??! you squawk. That can't be right! The WSJ must be lying on behalf of its evil capitalist paymasters!

Hmmm... maybe. But most of these banks are public companies and the true information will be in the public arena soon enough to make lying unattractive.

The fact is that bankers' pay is sky high not because they as individual bankers are holding their employers to ransom, but because bank revenues are up so strongly. Revenues have jumped 25% not in comparison with miserable 2008, but in comparison with booming 2007. Here are some current headlines:

Now, you and I and most of the non-banking world, understand that this extraordinary earnings boom is not down to the prima donnas on the pitch, but to us - the poor bloody taxpayers. We're the ones who've provided the loans, guarantees, and low interest rates from which the banks are profiting so handsomely.

And we did it not so the prima donnas could get wedged even more comprehensively, but so the banks could rebuild their capital reserves and start lending again to those famous hard-working families and viable small businesses. We are being taken for schmucks.

So what to do?

The idea of the moment is St Obama's new $90bn tax on banks. Yes, it's political, and yes, the cost may eventually get passed onto bank customers, but actually - and Tyler is amazed to hear himself agreeing with the Saint - it's A Good Idea Ltd.

As we've blogged many times, we taxpayers ultimately have no choice but to guarantee the banking system, and it's only right that they pay us a proper insurance premium to compensate us for the risk. Yes, the costs may get passed on to the customers, but as in any line of business, customers should always pay the true cost of the service - we should not subsidise banking any more than we should subsidise manufacturing.

And good for George for today embracing the insurance idea - he should step a plane across to Washington soonest to coordinate some details with the yanks.

But, as we've also blogged many times, we need to go further (eg see here). We cannot afford banks that are too big to fail, and it is a dangerous delusion to think we can solve the problem through better regulation. As we saw from the clownish antics of the FSA and the SEC during the bubble years, our regulators will never be that smart.

One widely canvassed idea is to increase the cost of being big. Either through higher percentage insurance premia/bank taxes for megabanks, or through more onerous reserving requirements, Big could be made so expensive that it became commercially unattractive. The banks would then break themselves up into smaller units which we could afford to see fail.

There is some merit in that idea. But we do need to remember the key historical lesson retaught to us by the Crock - failure can never mean retail depositors losing out. Otherwise the entire banking edifice collapses in a maelstrom of pavement queues and piles of cash stuffed away under mattresses. Only a bank's equity holders and wholesale depositors/bond holders can be allowed to go down.

Another idea - one we've supported many times (eg here)- is to split High Street retail banking away from investment casino banking, ie a new Glass-Steagall Act. The High Street banks would continue to enjoy a taxpayer guarantee on the bulk of their liabilities, but would be subject to significant retrictions covering both borrowing and lending. The casinos could do pretty well whatever they liked within the law, but if they got into trouble they could not come crying to taxpayers for a bailout. They'd be left to sink.

One thing's for sure, the banks cannot be allowed to carry on biz as usual. We taxpayers have had enough. And if the Saint and George are to be believed, our politicos have at least now realised they need to take some action. Another dose of political posturing will not be enough.

PS Other people's pay is endlessly fascinating. The world's highest paid footballer last year was reportedly a certain Mr Becks Golden Balls Beckham on €32.4m (£28.7m), although the vast bulk of that came from off-pitch ads for pants (pic). The highest paid on-pitch was Lionel Messi of Argentina and Barcelona, on €28.6m. Britain's best paid banker is reputed to have been Roger Jenkins of Barclays Capital, who is said to have coined £75m in 2006 (although in fairness, that slumped to a derisory £40m in 2008).

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