One wonders if this is a face saving exercise

[Power Lunch Club]

Yesterday it was annouced the several of the non-executive directors of RBS were to be retired with immediate effect.

But they are still debating whether or not to pay out bonuses. It's a catch 22 situation, as they will be using no doubt the taxpayers money to pay them. Which I personally think is morally wrong to do right now. Especially then when they are not helping small business with credit facilities, but they seen to have the momey to pay the bonuses.

I think there will be a witch hunt if they do pay.

Here's the full story on the BBC.

BBC NEWS | Business | RBS announces boardroom clear-out

 

[shredder]

Bonuses in the banking industry are part of the culture, its expected that if you do your job well you will get a bonus, thats why bankers accept a lower basic salary than they otherwise would. There are lots of individuals working in banking who did a good job last year and met their targets, why don't they deserve their bonus? Controversial I know but if you did your job and the problems were caused by people in another department or area of the bank then there must be at least an argument for rewarding the people who did do a good job - and in some instances bonuses are contractual i.e. if they met their target last year then they are contractually entitled to be paid.

I find the current attitude to the banks curious - arguably the banking problems occurred because banks made loans which they should not have done, they took too much risk on borrowers and lent money where there was not a good prospect they would have it repaid. Now they are being criticised for not lending to SME businesses, who in the current climate must be one of the most risky borrowers. The banks are learning lessons and not lending to people who are unlikely to default - we cant have it both ways.

Even in todays climate its easy to borrow money from a bank - all you have to do is demonstrate you can pay it back! Having some form of security i.e. an asset helps convince the bank the loan can be repaid. Banks should not be expected to take equity risk - there is a reason banks charge 2-3% above libor and equity expects a 15% - 25% return. Its because equity investment is more risky. As equity you take a chance that the investment may not pay off.

I think the solution for SMEs at the moment, if they need working capital or investment capital is to raise equity finance not bank debt. We have been very fortunate in the last few years, as small business owners, that the banks have been prepared to lend on the terms they did and we did not have to raise equity funding and thus dilute our shareholding.