CITY FOCUS: Bonuses back in vogue on Wall Street

By SIMON DUKE FOR MAILONLINE
Updated:

 

You can almost hear the sighs of relief on Wall Street. As the end-of-year bonus season approaches, the threat of a spiteful government pay clampdown is now just a distant, albeit painful, memory.

Just a year after the US banking system almost collapsed under its sub-prime losses, bonuses are now very much back in vogue on the Street of Dreams.

Improbable as it may seem, US banks have, by and large, re-paid their emergency taxpayer loans.

Sweet liberty: US banks have paid back most of their loans and cut ties to government control

Sweet liberty: US banks have paid back most of their loans and cut ties to government control

Freed from the yoke of President Obama's pay tsar, Wall Street bosses have managed to avoid the fate that now awaits Royal Bank of Scotland.

As part of its £25billion bail-out, the Edinburgh giant is handing control of its bonus pool over to the Treasury.

Yet the prospect of eye-watering sums being doled out to banking 'talent' has proved hugely controversial in the US, whose economy remains on life support.

With one in ten US voters out of work, Wall Street has been accused of crassly misjudging the mood on Main Street with sevenand eight-figure bonuses for 'star' bankers.

Goldman Sachs, for instance, is on track to hand its average employee a record £440,000 this year as profits pile up thanks to the unprecedented amounts of public money coursing through the financial system,

Like their counterparts here, Wall Street regulators seem powerless to change a bonus system that has cranked back into life with embarrassing haste.

payback


Goldman Sachs, JP Morgan and Morgan Stanley in June paid off their slice of America's $700bn bail-out fund - called the Troubled Asset Relief Programme.

Only last week Bank of America followed suit. After pulling off the country's largest-ever rights issue, BoA now has the firepower to buy itself out of TARP.

Even Citigroup - still suffocating under a $300billion toxic debt pile - is aiming to repay its $45billion taxpayer loan by the end of the year.

The resurgence in the investment banking industry this year has allowed Wall Street firms to repay their debts swiftly.

With the demise of Lehman Brothers and Bear Stearns, fees are rocketing for basic services such as executing share deals or arranging loans.

The might of the taxpayer is also helping the banks repair their balance sheets.

As billionaire investor George Soros last week noted, the huge profits are essentially 'hidden gifts' from governments around the globe, which have pumped trillions into the financial system and slashed interest rates to historic lows.

The US government now estimates that TARP will cost taxpayers some $141bn over the coming decade - some $200m below its August forecast.

In their conversations with regulators, Citigroup and BoA have argued that the pay restraints would create a second division of state-backed banks.

With top performers likely to defect to Premier League players such as Goldman, competition on Wall Street would have diminished further, they said.

For BoA, the ability to attract fresh recruits was equally as important.

At least half a dozen potential successors to departing chief executive Ken Lewis are said to have turned down the job amid disagreements about whether the group should be broken up.

Todd Hagerman of stockbroker Collins Stewart said: 'The exit from onerous governmental oversight materially reduces potential challenges in finding a successor to Lewis.'

The stigma of government support was another motivating factor. Vikram Pandit, chief executive of Citigroup, recently told staff that on the day the bank re-pays its loans 'people will stop writing that Citi is a troubled bank with a $45bn bailout package'.

Although BoA's exit from TARP is ostensibly a sign of strength, some observers believe it has been too quick to throw off the taxpayer shackles.

Just a year on from its disastrous rescue of Merril Lynch, its losses from soured loans continue to escalate.

If the US succumbs to a 'double dip' recession, BoA and others might have to return for another TARP handout.

That would be hugely embarrassing for an industry with a renewed sense of entitlement.

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