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Friday, 10 February 2012

A whole load of fish eggs.

Big noise on the  news at the BBC today is Bob Diamond's bonus and those at the rest of Barclays.

Profits are down slightly, bonuses down even more, but Mr Diamond is said to be in line for £3 million whereas in the past he has got even more, but the BBC as ever misses the real issue and goes off on its meanderings.

The big issue is ROE.  That isn't capitalised fish eggs but return on equity.  Last year's ROE at Barclays was somewhere around 10%.  They are targeting 15%, but this year with profits down slightly they hit 5.9%.  The low number is because they had to increase their equity base,.so investor returns are diluted, even though profits are slightly lower.  If anything, if assets stayed broadly the same more equity should have meant higher profits because equity displaces some borrowing, but the fact that it didn't shows that costs are too high.

Now call me old fashioned, but if I was a majority owner at Barclays here wouldn't be any bonuses if the return on equity was only 5.9%.  I can get 4.1% from 30 year Treasuries, and I get the principal back in 30 years time, so an extra 1.8% for the dubious pleasure of letting Barclays play with my money doesn't sound like a great deal. hey I could probably get some sort of deal of Barclays swap desk that paid more than 5.9%.

So this may be the end of the big bonuses for many at banks.  Investors aren't going to put equity into banks for such poor returns.  The trouble is that too many traders were too used to building books on minimal capital after Basel II.  Trouble is that with new rules,.that regulatory arbitrage doesn't work so well, but the traders haven't yet learnt that some thing has to give.  With investors getting 6% on their money, it looks like traders will have to shed a bit of bonus (or lose their capital).

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