On Radio 4 last night we had the pleasure of hearing from Chris Nicholson – http://www.linkedin.com/in/oraca . Chris is an equity analyst focusing on telecoms and media. His view is that banks should pay bonuses to encourage continued creativity and to ensure market efficiency. This is an extraordinary claim in light of recent events, here’s why.
Efficient markets are important. How efficient they have to be is open to debate. Banks have been spending a fortune on IT and on motivating staff over the last couple of decades and the result has been that the best can win more. The result has not been a better allocation of capital as Chris suggests.
Creativity is important. Motivating people to so creative that they package up junk mortgages and resell tranches as triple A rated securities to pension funds is certainly creative. unfortunately this has also been the cause of the demise of the finanical sector.
Chris also mentions the allocation of capital to risky enterprises. Well, Chris, you are very out of touch. There are almost no venture capital firms or VCTs investing in anything approaching early-stage and this has been the case for many years. 3i, the stalwart of early-stage investment did so well out of its leveraged late-stage deals (notably Go) that it leveraged its balance sheet and focused almost exclusively on leveraged deals!
Explain to me Chris how the creativity and efficiency of the markets has helped finance entrepreneurs in the UK over the last 20 years?
I have managed three companies over the last 10 years and in my last company I had to cut costs – we were losing money and I was brought in to turn-around the business. I refocused the business, changed the product offering and let 60% of the people go.One thing that I know is that if the leadership articulate the issues and the vision for resolving them then freezing salaries is not nearly as painful to the business as those insiders think.
High street banks must focus on their main tasks, UK consumer and corporate banking and if they won’t do it then find someone that will!