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Wednesday, 2 February 2011

“Banking World cannot function without Bonusses”, says Jan Hommen, Chairman of ING Bank... Oh, Really?!?

I used to be a renegade,
I used to fool around
But I couldn't take the punishment,
and had to settle down

Today a delegation of Dutch Top Bankers visited the 2nd Chamber of Parliament in The Netherlands (compare: House of Commons / Representatives) to explain why the bonusses are back on the agenda in the Dutch international banks ING, ABN AMRO and Rabobank

Jan Hommen, CEO of ING Bank and Gerrit Zalm, CEO of ABN AMRO Bank – both in the Top 75 of biggest banks in the world – were very firm in their statements in reference to the B-word towards the members of parliament.

“I can’t run a company if we would abolish all bonusses. I’m not going to make it…” was the statement of Jan Hommen. “We can’t punish a whole company for mistakes that our USA-based ING Direct branch made when purchasing those subprime mortgages”
Gerrit Zalm responded in a similar way: “If we have to compete with other banks for the best personnel in places like Hongkong and Singapore, it is inevitable that we have performance-related pay”.
When you read the following lines, you must know that I’m not a populist and that I don’t like populism, as it often states the obvious without looking at both sides of the story. But some things need to be said in my humble opinion.

Especially the statement of Jan Hommen about the USA branch of ING is very interesting: if you looked at the consolidated balance sheet of ING in 2008 – which I did – you would know there was a little bit more going on within the ING bank than a few odd subprime and Alt-A mortgages.

Without the financial help of the Dutch Government (10 billion EUR) the ING would have had a leverage of 70:1 for the ratio debt:equity. This would mean that a depreciation of the assets of 2% would have slashed the total equity of the bank. As a consequence the bank probably would not have survived the credit crunch of 2008. And this 10 billion Euro was not the only government support that the bank received: a package of subprime mortgages with a probable market-value at the time of 55% of nominal value was sold to the Dutch government for 90% of nominal value. How is that for state support?!

ABN AMRO Bank actually did not survive the credit crunch in 2008 as this bank and the Dutch part of Fortis Bank were both taken over and merged together by the Dutch government in order to rescue them.

Besides that the names of large Dutch banks kept popping up with some of the opaque trades that took place in recent years. Credit Default Swaps and other insurances gone awry at AIG, Bernie Madoff, Greek and Irish sovereign bonds, Special Investment Vehicles (SIV’s), Off balance sheet investments, you name it. Partly this was caused by the sheer size of these banks, but partly it was poor judgment on the subject of risk management.

Moral hazard and bonusses were often mentioned in the same sentence: the bonus-driven hunt for financial targets and return-on-investment caused bankers to close their eyes for the risks of investments and to trust blindly in the ratings that rating agencies supplied. Subprime mortgages with AAA-ratings were treated like pure gold, which obviously they weren’t.

To cut a long story short: these large Dutch banks do not have a perfect trackrecord over the last years and therefore their CEO’s are not the persons to trust blindly in the bonus-discussions.

My opinion: there are enough intelligent, wise and decent people in the world that are prepared to work very hard and smart for a fixed salary of 50,000 – 200,000 EUR and that can easily do without a Porsche 911 4s, a 1,000,000 EUR penthouse in the City and 1000 EUR lunches. Those people, however, are not necessarily the current generation of bankers that are inhabiting the City, Wallstreet, the Amsterdam Zuidas, HongKong and Singapore.

The arms race for salaries in the financial world has had a lot of unintended consequences, of which moral hazard was the worst one. Please stop with the bonus culture and pay decent people a decent salary of which they can have a good and prosperous life…

And don’t listen to the Pied Pipers and financial drug addicts that tell you they can’t stop using those bonus drugs… because they can’t stop using those bonus drugs.


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