Who wants to be a millionaire?

A.D. 1125: In this year sent the King Henry, before Christmas, from Normandy to England, and bade that all the mint-men that were in England should be mutilated in their limbs; that was, that they should lose each of them the right hand, and their testicles beneath. This was because the man that had a pound could not lay out a penny at a market. And the Bishop Roger of Salisbury sent over all England, and bade them all that they should come to Winchester at Christmas. When they came thither, then were they taken one by one, and deprived each of the right hand and the testicles beneath. All this was done within the twelfth-night. And that was all in perfect justice, because that they had undone all the land with the great quantity of base coin that they all bought.

The Anglo-Saxon Chronicle, 1124-27

It may have come to some of your’s attention that, as of last week, yours truly is not an investment banker any more. And none too soon, it seems.

Yesterday, in anticipation of the approaching shopping season, UK minister of finance Alistair Darling launched, to quote the Epicurean Dealmaker, a scathing attack against “chalk stripe suits, Soho strip clubs, and London property values,” by announcing that all discretionary bonuses in the industry north of £25,000 stand to get taxed at non-deductible rate of 50% against the employer’s net income. And a day later, Nicolas Sarkozy tentatively agreed to join the ride with Obama summoning a meeting of top bankers in the White House on Monday with an ominous agenda of “discussing bonuses and the economy” (although it currently seems that the US caps are going to be much more lenient). Firing a warning shot over the heads of London’s banking community, HM Treasury has also ruled that loans to staff, deferred bonuses, share-based payments and temporary salary increases will all be caught. There seems to be some confusion as to whom precisely this modern-day castration applies. If it is indeed “businesses regulated under the Financial Services and Markets Act” rather than simply “banks” as most of the news agencies report, then we’re also talking of hedge fonds, advisory boutiques and independent asset management firms. The only thing that the ruling doesn’t cover seems to be “guaranteed bonuses”, as extending the tax claim to those would apparently had exposed the Treasury to a legal challenge under the Human Rights Act (sic!).

Expectedly, this all has London’s contemporary mint-men howling with rage.

It would, of course, be beyond naïve to expect that investment bankers now shed their bespoke suits for sackcloth and sprinkle ashes on top of their heads–and that the industry will subsequently adjust to the annual £25,000/pp bonus cap (which honestly is an insult when compared with present levels of renumeration in the City). It simply means that for accountants and tax lawyers Christmas has arrived early this year, and will probably run well into Q2 of 2010. The UK regulators have created a hydra that they will be very, very busy battling with for years to come.

And the reason why this fight is such a desperate one is because, while no doubt pleasing the torch and pitchfork crowd to no end, the current ruling deals with effects rather than causes. The bankers’ bonuses did not create the financial crisis. They were not helping, for sure, but neither were they the cause. The idea of investment bankers living for their year-end windfalls and not giving a dime about what happens after December 31 is a deeply flawed one–I will not get into this here, but if you’re interested then go and read this piece. It really is a case of a goose that lays golden eggs and every investment banker sleep-deprived analyst can explain you that it is a trivially easy choice to sacrifice a couple of those eggs (which is what Goldman’s executive board seems to have done this week) in order to keep the goose alive and in good health.

So, the reason why investment bankers make obscene amounts of money is because investment banks make it by boatloads, and that it simply happens to be a business where people matter a lot, and as long as there’s a lot of money to be distributed, it will, one way or another. Thus the proper way to curb those 7- and 8-figure bonuses is not to apply a tax from hell to payouts but to cap the profitability of the banks themselves. For this, however, I am not holding my breath. It is both a lot easier and probably also a lot more popular to wage a valiant battle with the hydra of bankers’ bonuses.


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