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Guardian's "Road to Ruin" and the bonus culture

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Today's Guardian has a few excellent articles about what created and fed the credit crisis. The bonus culture has driven this costly fiasco that everyone else is now paying for these days. What continues to amaze me is how much the US executives had made compared to the bloated comp plans in the UK. Europeans have been angry and stepping up action against their executives who are very well paid, but it's nothing compared to their US counterparts.

Such eye watering sums of money have been paid out in City bonuses for two decades but the City minister Lord Myners - who sat on the board of NatWest at the time of the RBS takeover - has proclaimed the "golden days of huge bonuses in the investment banking arms are gone".

"I have met more masters of the universe than I would like to, people who were grossly over-rewarded and did not recognise that. Some of that is pretty unpalatable," Myners said last week.

Adair Turner, the chairman of Financial Services Authority, has gone further still, suggesting the vast rewards on offer sucked talent from more productive parts of the economy. "In the years running up to 2007, too much of the developed world's intellectual talent was devoted to ever more complex financial innovations, whose maximum possible benefit was at best marginal, and which in their complexity and opacity created large financial stability risks," he said.

The concern about City bonuses has not just been their size but the way they are structured. In existence for long before the credit crunch, they were once regarded as a legitimate way to pay staff in an industry that has cyclical earnings and only one real cost: people.

Richard Lambert, director general of the CBI, said: "Before all this happened you would say bonuses were the right way to reward people where the highest costs are salaries and revenues are very volatile."

In the old-style City partnerships the profits were distributed among partners at the end of each year. They were largely profits generated from giving advice to companies and did not involve taking big risks that could backfire later.

But when US investment banks started to operate in the City 20 years ago they took bonuses to new dimensions: the major US players used their balance sheets to bolster profits by allowing traders to use the banks' own money to take bets on the financial markets. Bonuses were bigger because profits were bigger. And rival banks were paying even bigger sums which drove up bonuses in a never ending spiral.
And then the really bizarre investment tools were introduced. The new tools took advantage of the system of easy credit and lax oversight. And the rest...

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