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Business Comment

Jim Armitage: Goldman Sachs, the cleverest of banks, was always going to find a way around Brussels' efforts to put a limit on its lavish bonuses

Global outlook: Whatever deal Goldman has struck, expect other global banks to follow

We should have guessed. Goldman Sachs, the bank that created the most complex alphabetti spaghetti derivatives, options, swaps and other financial “instruments”, the bank that invented devices enabling Greece to game the euro entry rules, the bank which found a way to make the US taxpayer repay it 100 cents in the dollar for its multibillion-dollar exposure to the collapsed AIG, was never not going to find a way around the European bonus cap.

This cleverest of banks, stuffed with the smartest, most ruthless money-making minds in the world, was always going to be the first to ensure its famously lavish pay structures would survive the best efforts of Brussels.

And so it is that “GS”, as its simple Wall Street ticker code calls it, has reportedly found a way around the system yet again. British regulators, working for a Government which never liked the caps in the first place, have approved a plan reputedly as complex as the most baffling CMBS, CDS or other exotic derivative that Goldman ever created.

It’s easy to imagine the watchdog-mandarins being suckered in like those saps of Colonel Gadaffi allegedly were in Libya’s sovereign wealth fund. Think Mowgli gazing into the kaleidoscope eyes of Kaa.

Nobody knows precisely how Goldman has done it, so we are left to guess.

The phrase “role-based allowances” is apparently to be used instead of “bonus” for part of the variable pay contracts. But quite what that is we can but conjecture.

Clearly, it cannot be individually performance based or it will fall foul of the EU rules. We know that allowances will be paid monthly and vary depending on the “economic conditions”. This is, the bank argues, to give itself some flexibility with the payroll for when the next big downturn, or upturn, comes. If you won’t let us slash bonuses in times of financial famine, at least allow us variable allowances based on the economy, it argues.

But “economic conditions” seems a weaselly expression. Do the economic conditions being experienced by the bank not depend at least partly on the success of trades carried out by its staff? economic conditions for John Paulson’s hedge fund were just dandy during the financial crisis, because he had a bet the size of Fort Knox against the subprime mortgage market. The point is that all banks have different views on what the ideal economic condition is, and they adjust their exposures accordingly.

Hopefully, the regulator has forbidden any such trickery about the economic definition and has insisted on some fairly straightforward measure. European GDP and employment growth would be nice, given that the purpose of these giant banks is to invest and support European enterprise. Perhaps even a blend of GDP growth, jobs and net lending by banks.

But don’t expect anything so simple.

Meanwhile, don’t be surprised if the pay related to those external factors is geared so the wage rises exponentially on the up and falls only slightly on the way down. Heads we win, tails Brussels loses.

Whatever deal Goldman has struck, expect other global banks to follow. We know Barclays has already started negotiating on its own role-based allowance scheme. Just don’t expect it to be as clever.