Summary
Given that RBS and Lloyds are in a complete mess, thanks to their own inept management, I don't fully "grasp" how it is that any senior manager is entitled to receive a bonus.
By paying part of the bonuses in shares, the current shareholders will find their holdings diluted, and the management will be incentivised to talk the value of the shares up in future (a la Enron) in order to maximise their personal gains.
Is this really an improvement in the corporate governance of these two failed banks?
Analysis
The Royal Bank of Scotland Group Plc (RBS), the wreck of a once fine bank now 70% owned by the taxpayer, saw its shares fall by up to 14% yesterday morning as it announced that it may be forced by the EU to sell more assets than planned.
Quote:
"It remains RBS's goal that any required divestments do not threaten its recovery plan."
Up for possible sale are Churchill, Direct Line and Green Flag insurance operations; along with more than 300 bank branches and its Global Merchant Acquiring card-processing unit. It will also have to downsize its investment banking arm.
Whilst these brands all have value, being part of the forced sale will inevitably reduce much of that value and the price that RBS hopes to be able to extract from any deal.
Thus both the private shareholder and taxpayer lose out.
The forced sale is in order to satisfy EU policy that attempts to ensure that RBS doesn't have an unfair advantage in the market. The EU is also gunning for Lloyds Banking Group Plc, which may have to sell assets and branches, and Northern Rock which is splitting into two.
Alistair Darling, Chancellor of The Exchequer, tried to spin this positively, by saying that the creation of three new banks will stimulate competition.
All very well, but if this is such an important issue, why did the government not intervene some years earlier in order to stimulate competition and provide consumers with more choice?
To add to the misery, the Royal Bank of Scotland (RBS) announced that a further 3700 jobs (on top of the 16000 already lost) will have to go and also announced that it will be deferring the bonuses of higher paid members of staff (on over £39K per annum) and board members until 2012.
In fact both RBS and Lloyds will defer bonuses, in return for an additional £40BN of UK taxpayers' money.
Part of the bonus payments will be deferred, and part will be paid in shares; ie there is no "bonus cut" as such, merely an adjustment as to how and when the bonuses will be paid.
Given that these two banks are in a complete mess, thanks to their own inept management, I don't fully "grasp" how it is that any senior manager is entitled to receive a bonus.
I would also note that by paying part of the bonuses in shares, the current shareholders will find their holdings diluted, and the management will be incentivised to talk the value of the shares up in future (a la Enron) in order to maximise their personal gains.
Is this really an improvement in the corporate governance of these two failed banks?
