Ben Chu: Investors beware - at Barclays, three years is seen as the 'long term'


Outlook Antony Jenkins, who says he aspires to make Barclays the "go to" bank, instructed Bob Diamond's old comrade-in-arms, Rich Ricci, to go forth and multiply. And so yet another wing of the Wall Street wannabe banking house that Bob built is knocked down. Good riddance.

But as we wave off the American racehorse enthusiast, let's not overlook the fact that Mr Ricci performed a valuable public service last month. On Budget Day (suspicious timing from a supposedly reforming bank), Barclays announced that it had awarded him 5.7 million shares. And the opulently monikered one offloaded the lot immediately. With the shares worth 308p each at that time, Mr Ricci realised £17.5m.

We could not have hoped for a better demonstration of why the remuneration systems in our giant banks remain a giant machine for shafting shareholders.

The banking lobby, of course, solemnly inform us that the pay problem in banks has now been resolved. Yes, things got out of hand in the boom, they concede, but bankers’ bonuses are now mostly paid in shares. This fully aligns their interests with those of their shareholders.

We're told that bonuses are now deferred for a number of years, meaning that if the bank gets into trouble those generous bonuses can be withheld. The old moral hazard problem where bankers were paid huge wedges before anyone knew whether or not their investments had blown up is a thing of the past.

There will strictly be no more rewards for failure. So move along everyone, nothing to see. But then, helpfully, up pops Mr Ricci with an act of such staggeringly insouciant greed that no one with eyes in their head can possibly ignore it.

A chunk of his most recent bonus pot (we're not told by Barclays how precisely how much) was payouts from his "long-term incentive plan". Long-term sounds good, doesn't it? Sounds comforting.

But what does it mean? Precisely how many years does a banker need to wait before he gets paid under this plan? Have a guess. Ten? Twenty? Wrong. Try three. Yes for Barclays (and also the rest of our big banks, including the majority taxpayer-owned Royal Bank of Scotland) the "long-term" translates as three measly years, or 36 months. Even a mayfly plans further into the future than that.

The deferral periods on the ordinary bonuses paid to lower-ranking traders are just as incredible. Bankers, again, only need to wait for around three years before they get their hands on their shares – a period that the Bank of England recently pointed out is shorter than even the most abbreviated credit cycle on record.

But the gravest scandal is that bankers can sell their shares awards the moment they receive them, as Mr Ricci has shown us. In other words, the interests of bankers and shareholders are aligned only up to the moment the banker gets paid.

Barclays briefed that Mr Ricci sold the stock because he was overexposed to the bank's equity and he needed to rebalance his portfolio. But over exposure is the entire point. Rational shareholders should want him and other bankers to be overexposed to Barclays because then these guys will be gambling with their own money.

Note that Mr Ricci wasn't alone in cashing out of his employer's equity last month. Of the 13 million shares handed out to nine Barclays directors, 11.7 million were immediately sold. Antony Jenkins himself offloaded just over half of his 1.8 million award as soon as it vested, sucking in £2.9m in cash for himself.

Mr Jenkins has had a personnel clearout at Barclays. It may even continue. But it's not just about people. It's about behaviour. Perhaps when Barclays' employees start to regard three years as the short term, rather than the long term, it will be time to take his reforming spiel seriously.

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