Monday, January 14, 2013

Furor over timing of banker bonuses misses point...there shouldn't be any cash bonuses

The mainstream media in both the US and UK have a number of articles discussing how the bankers are manipulating the timing of their bonus payments so as to reduce the taxes owed on these bonuses.  Examples include Goldman awarding shares to senior management before the end of 2012 and banks in the UK delaying bonuses until April when tax rates decline.

By focusing on the timing of bonus payments to minimize taxes, all of these articles miss the real issue.   So long as governments are pursuing policies related to restoring the global economy to health as a result of the bank solvency led financial crisis there shouldn't be any bonuses paid in cash.

These policies like bailouts, regulatory forbearance, suspension of mark-to-market accounting, zero interest rates and quantitative easing are primarily intended to protect and boost bank book capital levels.

If the goal is to protect and boost bank book capital levels, then the last thing that should occur is that bankers should be paid bonuses in cash.  The reason being that the payment of bonuses hurts bank book capital levels by slowing down the pace at which banks can retain earnings.

In essence, the bankers through their bonuses receive money that the government intended should be used for recapitalizing the banks.

But what about paying bonuses in stock?

Your humble blogger is fine with bankers' receiving their bonuses in stock.  This supports recapitalizing the insolvent banks.

I suspect that shareholders will have something to say on just how much stock bankers can receive, but that is a discussion between the shareholders and the bankers.

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