Outlook: Getting fleeced by the City's insulting bonuses

Wakeham's Enron; House prices  
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The Independent Online

Only in the City would an annual bonus of £25,000 be regarded as an "insult". Appreciably more than the national average wage, it was even so this week deemed by an employment tribunal to be so insulting that the poor analyst who received it was awarded an astonishing £1.5m in compensation for the pain so caused. Poor dear.

Yet to some City folk even £1.5m would be thought insulting. Bruce Wasserstein, the newly installed chief at Lazard, is dangling stakes in the firm worth 10 times that to poach staff from his former employer, Dresdner Kleinwort Wasserstein. At least one of them is said to be taking his time over the offer. Nobody goes into the City except to make money, and even investment analysts deserve to be compensated for the futility of what they do.

Even so, the sums on offer seem to belong not just to another world, but to an altogether different dimension. Up and up they go, come rain or shine, and it sometimes seems as if the City inhabits a strange Alice in Wonderland playground in which the usual laws of supply and demand don't apply.

Now let's see if we've got this right. The more profitable an industry becomes, the more it pays its staff. High profits and high pay will always eventually mean more intense levels of competition, which over time will reduce returns to more normal levels. This is how the free markets so championed by the City are supposed to work. Only in wholesale financial services it does not seem to work that way.

A senior investment banker earning a million pounds or so a year is typically held to be capable of raking in £10m of fee income annually; in that sense it is easy to see why it might be worth paying salaries of such magnitude to attract these super salesmen. By the same token, a talented trader who makes his bank say $100m in a single year would seem cheap at the price for $10m. The more difficult question is why the fees and profits are so high in the first place. We are like entrepreneurs or top sportsmen, investment bankers and traders sometimes claim. The world is prepared to pay handsomely for our talents. Well, you can shilly shally around with the argument, but the reality is that global financial markets operate like a cleverly organised cartel.

On the surface it looks like a viciously competitive snakepit, but in fact they all charge much the same and the net effect of most securities and currency trading is to skim a tiny proportion of all economic activity into the hands of the bulge bracket firms of New York and London. The modern capital markets cartel began in America, land of the free, where it was and remains virtually impossible to break into the charmed inner circle of underwriters except by acquisition, and was then exported to the City after the openly admitted cartel of fixed commissions and dual capacity was dismantled at the time of the Big Bang.

As the economy enters a low-growth, low-inflationary period, bankers claim to be a vital wealth-creating force in facilitating the flow of capital to businesses that need it and identifying value-adding restructuring opportunities. But the truth of the matter is that we're being fleeced.

Wakeham's Enron

It's a common enough career path for ambitious go-getters with a liking for public life. Secure a career in politics, manoeuvre and spin your way into the Cabinet, then having served your time before the mast, exploit the contacts so developed to build a lucrative portfolio of non-executive directorships and part-time positions as you glide gently into the twilight years. There's nothing wrong with it. Politics is a precarious business and inevitably there will come a time when the prime minister or the electorate have had enough of you.

Only it is not always the bed of roses imagined, as Lord Wakeham is discovering. As a former energy minister, the one, moreover, who presided over Britain's pioneering privatisation of its electricity industry, he made a natural recruit for Enron, which paid him handsomely for his non-executive position as a member of the energy trading giant's audit committee.

The luckless peer's position placed him in the very thick of the accounting shenanigans which are now the subject of a criminal investigation in the US. Lord Wakeham would only say yesterday that he was precluded from commenting on the matter. All enquiries had to be directed at Enron, which understandably isn't saying much either. It's every non-executive director's nightmare suddenly to wake up and find the ship he was meant to be watching over has hit the reef, but in Lord Wakeham's case it was doubly so, since any audit committee that is doing its job must have known all about the off balance sheet finance that lay at the heart of the company's difficulties.

Who knows, it may even have been him who blew the whistle, which would plainly stand him in better stead than he seems to be in right now. But whatever his role in the affair, it's hard to see how a man who lists his clubs as the Garrick and the Carlton, chairs two British publicly listed companies, heads up the Press Complaints Commission and was responsible last year for a Government commissioned report on reform of the House of Lords, could also have been effective on the audit committee of a global company based in far away Houston. Not so much a question of the dog that didn't bark, as the dog that was simply never there.

Still, at least Lord Wakeham can count himself as among good company. Paul O'Neill, the US Treasury Secretary, John Ashcroft, the Attorney General, even Dubya himself, all found it impossible to resist Enron's embrace, as indeed did Britain's very own Labour Party, which was also pleased enough to take Enron's money when the company was still, in its own words, "laser focused on shareholder value". What's the old expression? If you jump into bed with dogs, you're bound to come out with....

House prices

Just as you thought the housing market couldn't possibly go any higher, up it goes again. Both the Nationwide and Halifax have reported prices rising at their fastest rate since the boom year of 1988, and though some moderation is expected for this year, most forecasters expect values easily to beat inflation again.

The latest surge is being driven by exceptionally low interest rates and what's more, the expectation that though they may move up a bit over the next year or two, they'll remain anchored at historically low levels. That makes borrowing more affordable and increases the size of the mortgage householders are prepared to tolerate.

There are plenty of other factors too, not least the continued shortage of supply. Believe it or not, new house completions are falling, despite rising prices and an ever growing pool of demand. Planning restrictions are part of the problem here, but they are by no means the whole explanation. When prices are rising as fast as they have been, it can pay to hold back on development in the expectation of even higher prices tomorrow. In the absence of a serious economic downturn, none of these pressures on the housing market will go away.

For those already on the property ladder, there's only one obvious fly in the ointment. Greater affordability is an illusion. The cost of the borrowing may be lower, but the amount to pay back is higher. Equity withdrawal is back at the levels it hit at the tail end of the 1980s boom. A whole generation of debt junkies is growing up in our midst.

j.warner@independent.co.uk

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