Tuesday, 11 December 2012

We just didn't understand. Well, that's my story and I'm sticking to it.

Dear Readers, 

Today I bring you an article verbatim by Dana Flavelle, Business Reporter for the Toronto Star and below that, an article by Suzy Jagger of the Times from 2008 to provide some balance to what you are about to read. As usual, my response is below and there is room for your comments, as well.

The Royal Bank of Canada led the way as Canadian banks bucked a global trend and boosted bonuses by 7.5 per cent this year....photo by Mark Blinch/Reuters

RBC leads big bonus parade for Canadian banks

Canada’s banks have set aside $10.3 billion for bonuses, a 7.5 per cent increase over last year, bucking the global trend toward pay cuts and even job losses on Wall Street and in London. From tellers to investment bankers, the individual payouts in Canada can range from a few hundred dollars to millions, according to industry experts.

Still, the days of the really big payouts followed by year-end spending binges may be moderating, some industry experts said. Since the financial crisis of 2008, more bonus money is given in deferred shares and bank culture discourages flashy displays of wealth that might put off some clients, compensation and recruiting experts said.

“Porsches? That’s more of a Hollywood dramatization. I think Canadians are very aware our household debt is at record levels. I think most bankers go out and pay off their mortgages,” said Bill Vlaad, president of Toronto-based recruitment firm Vlaad & Co.

Two of Canada’s banks tied for the biggest increase in what’s called “variable compensation” for the year ended Oct. 31, according to their reports. The largest bank by assets, Royal Bank of Canada, tied with sixth-largest lender National Bank of Canada, each boosting their bonus pools by 11 per cent.

Royal Bank spokesperson Rina Cortese said the increase reflects the bank' strong performance this year.
The only bank that trimmed its bonus pool was Canadian Imperial Bank of Commerce, down 2 per cent from last year.

CIBC blamed a slower equity market, fewer initial public offerings and less merger and acquisition activity.
As a group, the country’s lenders posted record profit for the year, with growth partly lifted by trading and gains from investment banking.

The size of the bonus pool didn’t surprise Ken Hugessen, a principal in Hugessen Consulting, an executive compensation advisory firm in Toronto. “They generally try to manage these pools to track the earnings and stock prices,” he explained. “They’ve had a respectable year. They’re a little bit concerned about how next year is going to look. So, it’s a gentle up.”

Bank earnings and bonuses don’t swing as wildly as they did in the pre-Recession era, Hugessen said, partly because the financial crisis of 2008 has led to tighter controls. Still, most investment bankers receive up to 75 per cent of their compensation in the form of a bonus, he said, and $1 million payouts aren’t unusual in that group.

“The Canadian bonuses are not remarkable, but relative to what their peers are getting in London and the U.S., it’s great,” Vlaad said. “We never saw the true upside of the glory years in the bull market, but we’ve reaped the rewards now by not having the abysmal downside in the tough years.”

In comparison, Wall Street workers are facing reduced pay or job losses this year as revenue growth wanes and shareholders demand higher returns. JPMorgan Chase & Co., the largest U.S. lender, may shrink average bonuses by 2 per cent, while Citigroup, ranked third largest, may cut the bonus pool by 10 per cent, according to people familiar with the situation. Bankers and traders in Europe can expect at least a 15 per cent cut in pay as bonus pools may be reduced by half.

Among Canada’s banks, here’s how the bonus pools look for 2012:
  Royal Bank’s variable compensation rose nearly 11 per cent to $3.65 billion, reversing two years of declines.
  National Bank’s rose just under 11 per cent to $690 million.
  Bank of Nova Scotia rose 9.4 per cent to $1.48 billion.
  Toronto-Dominion Bank rose 7.8 per cent to $1.56 billion.
  BMO rose 5.2 per cent to $1.64 billion.
  CIBC fell 2 per cent to $1.24 billion.

Suzy Jagger from The Times
October 13, 2008

Monday Manifesto: Irony is not lost on the Dean of Harvard Business School

Jay Light, the Dean of Harvard Business School, believes that we are only midway through the current market disorder

Confidence and capital may be in limited supply on Wall Street, but if you are looking for irony, there's plenty, so much, in fact, that it could be packaged up, securitised and sold on in unfathomable derivatives. It is not lost on the Dean of Harvard Business School.

"We originated at a time that was very similar to now, to the circumstances we are currently facing," Jay Light, the Dean, said. Indeed: the world's most eminent finance college was set up to address a failure of financial leadership in the United States. In 1908 America fretted that its bankers and businessmen lacked the skills and wherewithal to drive what would become the world's biggest economy, a dearth of talent exposed by the banking crisis of 1907 and the economic depression that followed.

Today, as it celebrates its 100th anniversary in a world overwhelmed by another perfect storm of banking collapses and economic misery, one wonders whether the legions of Harvard Business School graduates who run the world's biggest banks, private equity firms and global corporations have addressed that failure of leadership - or have simply made it worse.

                                                      Hank Paulson, ex. Goldman Sachs

Of the 30 bankers summoned to the New York Federal Reserve's headquarters a month ago to devise a rescue plan for Lehman Brothers, about half were Harvard Business School graduates. Henry Paulson, the US Treasury Secretary and, according to Professor Light, a close friend, graduated from the school in 1970, the same year as the Dean. Christoper Cox, the chairman of the Securities and Exchange Commission, also sat at the Lehman operating table, having graduated in 1977.

Also in the Fed office were John Thain, chief executive of Merrill Lynch (graduated in 1979), Jamie Dimon, chief executive of JPMorgan Chase (1982) and Bob Diamond, head of Barclays Capital. Admittedly, none of these has presided over a bank that has gone bust, yet. The pariah of Wall Street, Dick Fuld, the former chief executive of Lehman Brothers, went to New York's Stern School of Business.

The joke is not lost on Professor Light, an affable, unpretentious expert on capital markets: "The challenge now is to work out how to develop leaders who are better this time, well, that's my story and I'm sticking to it."

                                                                        Dean Light

 Jay Light is an unlikely dean of the world's most famous business school. Among the corporate academics who are experts at building and marketing their own brands, Professor Light is low-key and self-effacing. Having trained as an engineer at Cornell, the Ivy League university, in the 1960s, Professor Light became an expert in satellite guidance, working in California. After completing his MBA, he specialized in writing papers on capital markets and asset management and teaching students how to do a deal - the core skills of a corporate financier. Those skills helped him to secure the school's financial footing by raising $600 million (£350 million) for its coffers.

So, having taught capital markets since the 1970s, what does Professor Light make of today's banking catastrophe? "There is no such thing as a capital markets expert, especially in these markets," he said. "We are going to be living with the effects of this for some time. I don't think we are in chapter one of the crisis, but we are not in the last chapter, either. We are only in the middle of the game.

"My reasoning for this are current real estate values. Historically, if you plot house prices against household incomes, you will see that real estate is still overvalued in the US. The housing market needs to come down halfway again, another 50 per cent. House prices are still too high by historical standards."

He explained: "The losses will be very severe, but what we just don't know is what the economic effects will be, the effect of the loss of confidence at the heart of the credit system. This is going to go on for a while."
Could Professor Light not have pointed this out earlier? Had no one in the academic community spotted the threat of global financial meltdown? "I suppose one could accuse us of that," he said, "but academics did pick up on the individual pieces. It was widely known, for example, that there was a housing bubble.

There was also a lot of talk about the sub-prime issue. There was a good deal of talk on the fact that Fannie Mae and Freddie Mac were too big, I have been teaching that since the late Seventies. "But nobody had put all the pieces together. We just didn't understand how interwoven the different elements were and how we would get this conflagration. None of us really realized that this course of events would expose such a fragile structure."

At the very least, the bailout of Fannie Mae and Freddie Mac (the mortgage giants), the collapse of Lehman Brothers, the nationalization of American International Group (the insurer), the $700 billion rescue plan and co-ordinated strategies among central banks will provide much of the school's curriculum for years to come.

The school is already devising a course on the collapse of Bear Stearns, to be taught to first-year students in April next year. Given that during recessions, Harvard Business School applicants rise about a fifth as Wall Street stops hiring, it may well be that some of the students examining this year's banking collapse may have worked earlier in the same financial institutions themselves.

They may also find themselves being taught by their old bosses. The school already boasts as professors past Wall Street titans such as Clayton Rose, the former vice-chairman of JP Morgan Chase.

Are there any plans for Harvard Business School to have a Henry Paulson chair of catastrophe management and sleep deprivation, once the Treasury Secretary steps down in January? "There are no specific plans for Henry Paulson to join us," Professor Light said. "He is a terrific guy and we would sure be interested, but there are no discussions."

If you could change one thing in the financial and commercial environment, what would it be?
I'd like to restore the system of trust we once had
Who, or what, is your mentor?
I've been fortunate to be mentored by many people throughout my career. Today, I get advice from a broad range of people — faculty colleagues, my wife, Harvard's president — but I'm more focused on the mentoring I can provide
Does money motivate you?
No, it doesn't motivate me, though I've spent a good deal of my career studying it in the context of the global financial system

my response....
well, my initial reaction when I read the Toronto Star article this morning was abject disappointment and then my second reaction was horror! Don't these folks realize that greed and avarice are their (and our) enemy? Ontario has lost 25% of our quality manufacturing jobs with McGuinty at the helm....that's a decrease of 250,000 from almost 1,000,000 good paying jobs since 2003. Private sector union membership among employed workers has now dropped to the teens...and falling fast. To make matters worse in Toronto, 6 homeless lost their lives in November!

At a time when we need jobs, we have a government that isn't listening..or even working and bankers who are content to 'reap the rewards now because they did not have an abysmal downside in the tough years'.

Is it going to take a little bit more than these folks are willing to give to turn this ship around?


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