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Blankfein, Dimon, Mack, Moynihan
From left to right: Lloyd Blankfein, chief executive of Goldman Sachs, Jamie Dimon, chief executive of JP Morgan Chase, John Mack, chairman of Morgan Stanley, and Brian Moynihan, chief executive of Bank of America. Photograph: Kevin Lamarque/Reuters
From left to right: Lloyd Blankfein, chief executive of Goldman Sachs, Jamie Dimon, chief executive of JP Morgan Chase, John Mack, chairman of Morgan Stanley, and Brian Moynihan, chief executive of Bank of America. Photograph: Kevin Lamarque/Reuters

Bonus season sees banks come under renewed fire

This article is more than 14 years old
As the size of this year's pay pots are revealed, the stand-off between Wall Street and the public seems certain to escalate

Boos resounded around the splendid ballroom in London's Grosvenor House Hotel on a wintry night last week: Goldman Sachs had just donated £20,000 to Save the Children in an annual fundraising event. While it's a sizeable sum to most people, in this room – filled with more than 1,000 bankers sporting black ties and quaffing champagne – £20,000 seemed paltry, particularly when it was coming out of the pocket of the great survivor of the financial crisis.

In just a few days' time, Goldman will hand out bonuses to its staff in what is turning into the most politically charged bonus season in living memory. A £20,000 donation will feel like small change to those individuals, who will walk away with telephone-number-sized payouts after what is expected to be a record year for the bank, barely a year since the financial system hovered on the brink of collapse.

Attendees at the dinner faced a dilemma: give too little and look mean, give too much and appear to be flaunting the runaway profits that banks are already achieving thanks to the support of a debt-laden taxpayer. In the end, more than £1m was raised – funds that bankers joked would at least avoid the chancellor's 50% bonus tax.

The tax, which is deeply unpopular in the City, was the subject of much discussion on the call held by JP Morgan's chief executive Jamie Dimon as he kicked off Wall Street's bank reporting season on Friday. It alone could end up with a tax bill of "several hundred million dollars" after giving the first hint of pay levels on Wall Street in 2009: remuneration for its investment bank staff has jumped 21% to $9.3bn (£5.7bn). This year-on-year rise was achieved even though in the fourth quarter the bank dramatically scaled back the proportion of revenue used for compensation from almost 40% in the previous nine months to just 11%.

Dimon, who had called Alistair Darling at the end of last year to complain about the tax, also gave the chancellor cause for cheer. The pay restraint shown in the fourth quarter was in part to help the bank pay the bonus tax. As the rest of the US banks report this week, analysts and shareholders will be looking for evidence that the other players with big operations in the City – particularly Morgan Stanley and Goldman – also reduce their bonus pool in the fourth quarter as a way of shouldering the burden of the bonus tax.

JP Morgan reported just 24 hours after President Barack Obama launched his new tax on banks, which is designed to bring in at least $90bn over 10 years to recoup losses on the $700bn financial-sector bailout. Even as Dimon warned that "all businesses tend to pass their costs on to customers", Obama made it clear he would not be moved: "If these companies are in good enough shape to afford massive bonuses, they are surely in good enough shape to afford paying back every penny to taxpayers."

Earlier last week, Dimon had lined up beside Goldman Sachs's chief executive Lloyd Blankfein, Morgan Stanley chairman John Mack and Bank of America boss Brian Moynihan to be sworn in for an appearance before the bipartisan US government commission investigating the origins of the financial crisis. As they raised their right hands at the start of the hearing in the US Capitol in Washington, photographers unleashed a barrage of shutter clicks. The image appeared in newspapers across the world, giving Americans a slate of villains on whom to focus in lieu of fundamental systemic reforms to resolve the problems at the heart of the crisis.

The four admitted they underestimated the severity of the financial crisis and apologised for past mistakes. It was a nod to the soaring public anger at Wall Street, whose banks are set to reap record profits as US unemployment remains at a 26-year high. Even so, the bankers were keen not to invite unwanted new oversight or punitive taxes. They sought to shift blame away from their institutions and lay it on mortgage lending practices, under-regulation of the mortgage broking industry and the government's promotion of home ownership.

Created in May by an act of Congress, the inquiry is modelled after the Pecora commission, which was established in the 1930s to uncover the causes of the Great Depression. Its tenacious investigation led to Congress passing the Glass-Steagall Act in 1933, which separated commercial and investment banking activities – reforms whose repeal in 1999 contributed to the current calamity.

The panel includes former economic policy advisers to President George Bush and Republican Senator John McCain's presidential campaign and it held its first session in a chilly room at the Capitol on Wednesday, chaired by Phil Angelides, a former Democratic treasurer of California. In his ringing opening remarks, Angelides said of the disconnection between the taxpayer-funded bailout of the banking industry and the continued huge bonuses: "People are angry. They have a right to be."

The bankers defended their huge pay packages, provoking criticism that they remain obtuse. If Blankfein's smirks, half-hearted apologies and condescension did not send that message, the numbers do: the world's biggest investment banks are expected to pay out more than $65bn (£40bn) in salaries and bonuses this month, even as US unemployment holds stubbornly at 10% and the government faces a $1tn budget deficit. Wall Street's apparent concessions to public outrage include a shift to paying bonuses in company shares rather than cash, some claw-back provisions in case investments and trades go bad in future, and links to performance that critics say are bound to improve if banks are allowed to play the financial system further.

The closest the City has to the US hearings is the Treasury select committee of MPs, led by irascible Labour stalwart John McFall. During its session last week, bonuses were also on the agenda, prompting Royal Bank of Scotland chief executive Stephen Hester to concede that even his own parents – both academics – thought his potential £9.7m pay packet was too much. Hester, who next month will need to negotiate bonuses for 22,000 RBS investment bankers, emphasised that the bank had to pay bonuses to match rivals and for this reason was a "prisoner" to the market.

He refused to predict a mass exodus from the City because of the bonus tax. Others, though, cannot contain their frustration. Stuart Fraser, chairman of policy and resources at the City of London Corporation, the City's local council, criticised attacks on bankers as overdone, and lashed out at the rise in income tax to 50% for higher earners.

He said: "As a matter of urgency, we must reassert a consistent tax regime that balances global competitiveness with fairness. The 50% rate of income tax and, in particular, the supertax on bonuses have tarnished our international reputation – we simply cannot expect firms to operate in a business environment defined by such hostility and uncertainty. These measures must be revisited or, in the case of the supertax, revoked as soon as is practically ­possible."

Fraser was speaking to a gathering of City executives, lobbyists and government officials last week at the London Chamber of Commerce. He said the government should do all it can to get the City back on its feet and retain its ­status as the most internationally focused banking centre in the world.

"If you go to Shanghai, as I do quite often, you could ask for a new tube ­system and it would be built. If you need a new office building, planning permission will be granted. Nothing gets in the way," he said.

Like many in the room, he believed the "rainmakers" at the major investment banks, hedge funds and private equity firms should be indulged for the benefit of the nation. "A lot of damage has been done by the 50p tax rate. It is targeted at the best and most talented people in the business, the people who make the bank its money, the rainmakers. It is not a fair world. When they handed out intelligence they didn't give it to me but they did give it to others who will go elsewhere unless they are rewarded."

Simon Walker, head of the trade body for private equity firms, the BVCA, joined the criticism of the taxes on higher earners and non-domiciled residents, which he said have made "London a profoundly unattractive place to do business".

The shadow financial secretary to the Treasury, Mark Hoban, was also at the Chamber of Commerce event as part of a Tory charm offensive that includes meetings and lunches with bankers and major investment houses. "You don't encourage a more balanced economy by cutting down the tallest flowers – you allow others to grow," he said at the London Chamber of Commerce meeting.

Hoban is in the difficult position of defending the City, but not its excesses. He is keen to tell his audience that a Conservative government will be kinder, but not have the resources to reverse the extra taxes. Attacks on bankers, he tells them, are also something he and his colleagues will continue while excessive bonuses remain on the table.

On the basis of the figures published so far by JP Morgan, the stony atmosphere between banks and the public is likely to continue. Union leader Brendan Barber wasted no time in branding JP Morgan's pay plans as "obscene", saying: "Banks are meant to support society, but instead taxpayers support guarantees that, whatever happens to the economy, banks will continue to pay gigantic bonuses."

This time, the boos are not just aimed at Goldman.

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