It’s time to cut bankers’ wages once and for all
Once upon a time there was a bank run by Wokies
Didn’t hedge, now it’s brokies
A biased deposit basis, ironically
Time to pass the hat
What a week. This time it’s different, but it feels like déjà vu again. Big movements in the markets. discount window. I devoted myself to poetry to stay sane. My funds are bloody. Yours too I guess.
The temptation to “do something” is overwhelming. Sell. Do not buy! Put your cash in a suitcase. British readers also digest a budget that’s unusually crammed with appetizers. More on that next week.
The best approach is to keep the investor’s perspective. Relate each event to asset price movements. Where are the reviews now? What is discounted? Balance risk and reward. Keep calm and analyze the numbers.
Let’s start with Silicon Valley Bank. Personally I wouldn’t have given a penny for it – lenders with names like Morgan or Rothschilds in them or banks that sound like countries preferred. A bunch of start-up loving beanbag sitters on the west coast? No way.
Like many others, including European regulators, I am surprised at the generosity of the US bailout, not to mention the irony in it. Those were the disruptors. They prided themselves on breaking things. A small tear, however, and they ran to Mama. Also in Great Britain.
For investors, however, I think SVB and subsequent spasms are helpful. I wrote last week that if rates were to rise, policymakers would eventually “bott up” – too painful. But how without losing face? The European Central Bank rose 50 basis points on Thursday but scaled back its hawkish stance. Others can follow.
The markets agree. On Monday, futures briefly price in two 25 basis point cuts by the Federal Reserve this year. Weeks ago, a further increase was expected for this month. No wonder bonds flap like geese in a storm. This week alone, 10-year Treasury yields are up more than 100 basis points.
Yields are now lower across the board, which will comfort equity holders when the dust settles (wrongly, but here we go). And with inflation still there, real interest rates may have peaked for now. This helps traditional bonds and their inflation-linked cousins.
Meanwhile, bailouts, looser money and lifelines for companies like Credit Suisse and First Republic will provide short-term support for bank stocks. But lower net interest margins are ultimately bad for bank earnings. However, at 1.1 times book value, the sector is cheap.
And there are quality banks with hardly double-digit price-earnings ratios. A counter-argument is that tighter regulations and capital requirements are sure to come. Perhaps. No doubt Wall Street rushed to deposit $30 billion in First Republic to show they can take care of themselves.
As an investor, I’d welcome a little more intervention — if not from regulators. To understand why, sit with me across from Congressman Barney Frank at the White House Correspondents’ Dinner a dozen years ago. We swapped war tales about the financial crisis while a senior banker showed us photos of his new yacht (hint: she’s probably rigged and ready to sail).
If you had told Barney back then what banks would look like today, he would have laughed. His Dodd-Frank Wall Street Reform and Consumer Protection Act recently overhauled everything from consumer protections to derivatives trading. change came. And yet banks today are more or less the same.
We knew there would be more crises. But at least everyone was hoping that Section 951 of the law would make a difference. It gave shareholders a “right to have a say in payment”. If the banks were essentially backed by the state, we thought, the inflated wages would surely be pushed down over time.
This also did not happen. Taking the top 10 US lenders, for example, according to CapitalIQ data, average employee compensation as a percentage of revenue is four percentage points higher since the financial crisis than in the previous boom years.
shameless But it explains why the banks tried their best to make us forget we bailed them out. Yet bankers are still remunerated as if they were owners or entrepreneurs taking personal risk.
Hopefully this time the Fed’s $300 billion in support will remind everyone what nonsense that is. Especially shareholders, who have seen employees of many banks line their pockets while suffering below-cost returns on equity.
But I see this as a glass half full. Profit multiples for banks are already enticing, as I have shown above. They would be even more attractive if bankers oriented salaries and bonuses more closely to other professions, such as accountants and lawyers.
By my calculations – again for the top 10 US – a reduction in bankers’ salaries by just a third would increase net income margin and return on equity by 10 and four percentage points, respectively. For an industry with middle-office workers making six-figures, I think halving pay is more like the right thing to do.
This not only suggests upside potential for stocks, but would also help eliminate moral hazard. Lenders know they get paid like rock stars in the good times, while idiot taxpayers pick up the tab when the stage lights explode and set everyone’s hair on fire.
All of this means that I am currently very serious about banking sector ETFs. I wrote about this briefly in January when stocks were much higher than they are now. Does anyone have any fund suggestions to share? If not, a poem?
The author is a former portfolio manager. E-mail:firstname.lastname@example.org; Twitter:@stuartkirk__
This article has been amended to correct the increase in ECB interest rates
https://www.ft.com/content/5cda12a6-5296-4bd9-ad6a-28f3b564ea0e It’s time to cut bankers’ wages once and for all