The banks' culture of entitlement runs deep, writes Proinsias O'Mahony

THE YEAR 2008 was seismic in financial circles, not least in attitudinal terms. Greed is no longer good in financial circles, with bankers across the globe agreeing to scrap their bonuses - for now at least.

In November, UBS chief executive Marcel Rohner and 11 other top executives led the way by agreeing to forgo bonuses. Morgan Stanley this month slashed compensation for its top 35 executives by approximately 65 per cent. Deutsche Bank, Barclays, Goldman Sachs and Merrill Lynch have also demonstrated their new-found frugality.

It's not surprising. The British Financial Services Authority (FSA) has threatened banks with nationalisation unless they "get a grip" on bonuses while US authorities have made clear that that big bonuses are a definite no-no now that taxpayers are involved.

Whether the bonus culture is dead for good is debatable. The culture of entitlement runs deep, as demonstrated recently by Merrill Lynch chief executive John Thain requesting a $10 million bonus for 2008 (reportedly, he initially requested as much as $40 million). New York attorney general Andrew Cuomo intervened, pointing out that Merrill reported losses for every quarter in 2008 and lost more than $11 billion for the year as a whole.

Asking for a bonus was "oxymoronic" and "a thumb in the eye to taxpayers", Cuomo said. Thain backed down.

In selling off Merrill to Bank of America and saving the firm from almost certain demise, Thain probably felt he had earned a bonus, especially compared to his predecessor, Stanley ONeal, who walked away with $161.5 million after being shown the door in 2007, despite the fact that disastrous bets on subprime mortgages made under his tutelage led to losses of $8 billion.

Citigroup chief executive Chuck Prince brought similar ignominy on that storied institution but still received a golden handshake of $38 million in 2007. Lehman chief executive Dick Fuld earned $485 million between 2000 and 2007. Goldman Sachs shelled out a record $18.8 billion in bonuses in 2007, including $68 million to chief executive Lloyd Blankfein.

In Britain, one report found that the chief executives at Barclays, HBOS, HSBC, Lloyds TSB and RBS earned more than £52 million between 2003 and 2007.

Such extravagance fuels populist outrage but the real problem with outsized bonuses is the risk engendered. US trader Brian Hunter received a $75 million bonus after his enormous bets led to big profits for hedge fund Amaranth in 2005. The bets went awry in 2006, leading to the collapse of the $6 billion fund.

The Amaranth disaster was replicated on a global scale with the leveraged bets on subprime mortgages. Chief executives and traders profited when times were good while shareholders were saddled with the eventual losses. Heads I win, tails you lose.

The template for future reform has been provided by UBS. Bonuses will now be paid out over several years, with a provision to reduce payouts in the event of poor company or individual performance. UBS wants a "cultural shift" that will reward those "who deliver good results over several years without assuming unnecessarily high risk".

Morgan Stanley has opted for a similar claw-back provision, withholding a portion of employee bonuses for three years. "If you're a trader and you've had a huge year and you get paid a lot of money and then the following year it turns out you were taking outsize risk, we can go back and ding your pay from the year before," said a spokesman for the company.

Not everyone is on board, however. AIG, which has been bailed out by the US taxpayer to the tune of $152 billion, is giving out $92,500 to $4 million for 168 employees earning salaries between $160,000 and $1 million. Not paying out these "cash awards" or "retention bonuses" might lead to the departure of key executives, AIG said, thereby "doing a disservice to the taxpayer".

Toronto-Dominion Bank chief executive Edmund Clark has also rejected pleas to give up his bonus. "To be frank, no," said Clark. "Obviously I feel badly about it, but you don't exaggerate the situation."

Goldman Sachs is expected to distribute around $12 billion to employees in 2008. The New York comptroller said that bonuses would be down around 50 per cent this year - a big reduction, but one that still leaves $16 billion in bonuses for New York alone. Considering how disastrous 2008 has been for financials - the sector lost $12 per share in 2008, compared to a gain of $15 a share in 2007 - a mere 50 per cent reduction looks generous.

In the UK, a survey by recruitment firm Armstrong International found that, while payouts were to be slashed "back to 2003 levels", three-quarters of City bankers still expected a bonus in 2008. Doubtless, the pressure to follow the UBS/Morgan Stanley model will mount in 2009. The actions of John Thain, AIG and others indicates that predictions regarding the imminent death of bonus culture may yet be premature, however.