From the TUC

Outrageous new way to evade bonus restrictions

28 Jan 2011, by in Economics, Pensions & Investment

UPDATE: we’re pleased to see that the BBC’s Robert Peston has covered this issue (with the same degree of appalled admiration!) on his blog – but you read it here first!

Amid all the justified outrage and government inaction over top bankers’ huge bonuses, there seems to be a common view (not shared by the TUC I should note) that one way to prevent bonuses incentivising short-term risk taking is to pay part of the bonus in shares that can’t be sold for several years. Indeed George Monbiot wrote on the Guardian website on Monday about how the Government had resisted EU attempts to force up the proportion of the biggest bonuses that had to be paid this way.

On the same day, a flyer from Saxo Bank fell out of my Financial Times, advertising a new service that turns that idea on its head. “Paid in shares this month?” it asked, and explained how Saxo could totally subvert the point of share bonuses. All you have to do is deposit the shares in a Saxo Bank account, and they will let you use 75% of the face value as collateral for margin trading – thus effectively monetising a huge chunk of the supposedly restricted bonus overnight, through one of the shortest-term, riskiest financial manoeuvres around.

Inventive, certainly. Exposing the fallacy that paying bonuses in shares in any way restricts risky financial incentives, that too. And also, of course, further evidence that some parts of the financial world are so devoid of social benefit as to be worth actually making illegal. Or better still, subject to the Robin Hood Tax. That would be a real disincentive for short-term margin trading.

4 Responses to Outrageous new way to evade bonus restrictions

  1. Tweets that mention Outrageous new way to evade bonus restrictions | ToUChstone blog: A public policy blog from the TUC —
    Jan 28th 2011, 1:57 am

    […] This post was mentioned on Twitter by ToUChstone blog, James Anthony. James Anthony said: RT @touchstoneblog: Outrageous new way to evade bonus restrictions […]

  2. The Squeeze
    Jan 29th 2011, 10:07 pm

    Do you want to ban roulette, poker and spread betting on sport too? Or just spread betting on financials?

    It doesn’t seem to have occurred to you that financial products can be used to reduce exposure to risk as well as take it on.

    For example you deposit your stocks and short them. Besides, there are plenty of ways to realise cash from a bonus paid in stocks, such as take out a loan secured on them.

  3. Owen Tudor

    Owen Tudor
    Jan 29th 2011, 10:25 pm

    My main concern is simply that a payment designed NOT to be made in cash is being converted into cash.

    But I think margin trading is more risky for the economy than roulette and betting generally, and therefore ought to be controlled.

  4. The Squeeze
    Jan 30th 2011, 1:20 am

    Taking out a mortgage is a form of margin trading, and house price and credit bubbles are very risky for the economy.

    If a spread betting firm or a hedge fund goes bust hardly anyone will even notice.