Creditflux Newsletter

This month, there are many issues exercising Wolseley as he writes, from where to go on holiday to whether or not to take the children to a swine flu party, but one dominates – and it may well have disturbed the peaceful summers of Creditflux’s readers, too.

That issue is, of course, the regulation of bankers’ compensation. Paragons of the political right, Nicholas Sarkozy, president of the French Republic, and George Osborne, likely future chancellor of the exchequer in the United Kingdom, have both spoken of the need for it.

Should bankers worry? Wolseley spies a dangerous dog. Let me explain. The dangerous dogs act was a law introduced in the UK in 1991, following a hot summer in which, with little else to write about, newspapers seemed to be dominated by stories about dogs biting children. Some of these incidents were tragic and some of the dog owners culpable. A sense of outrage developed. “Something must be done,” came the cry.

Behind closed doors I’m sure that some civil servant said to her minister: “Minister, there is nothing we can do to prevent dogs biting people.” But the minister, Canute-like, insisted that the public demanded action. The result was a useless piece of legislation, widely ignored and ridiculed. Dogs still bite children.

For “dangerous dogs” read “bankers’ pay”. This summer journalists have found that remuneration is red meat for the baying crowd. One commodities trader opened his morning paper at his beach hut in Brighton to read the details of his compensation splashed all over the front page of a major newspaper. I only hope his wife didn’t get a shock.

Wolseley predicts that moral outrage and the bile of the mob will likely translate into some populist minister instructing a hapless civil servant to draft a half-hearted provision to secure the headline “Minister squeezes the rich”.

Meaningful impact? None. But lawyers, accountants and tax specialists will rub their hands with glee at the prospect of the fees to be earned from helping consenting employers legally pay higher compensation to consenting employees.

Even the tentative, informal compensation caps that state shareholders have attempted to introduce at client institutions have produced bizarre, Byzantine circumventing structures. It’s easy to encourage highly paid employees to leave and set themselves up as consultants, providing services to their former employer. No wonder the FSA has registered a big rise in start-ups in the City of London.

Intelligent participants know this. Lord Turner, master of cerebral detachment, and likely last head of the UK’s FSA, has washed his hands of the issue, telling his political masters that if they want compensation regulated they had better do it themselves. Well said, Lord Turner.

One firm that isn’t worrying about compensation is asset manager KKR. Not content with establishing an in-house investment bank, it is also restructuring a number of its companies. One of these is Kion, the forklift trucks maker, LBO-ed in a wildly successful transaction a couple of years back.

KKR announced its plan for Kion at the end of July. The masterstroke is this: restructure when all your lenders are on holiday, and show how reasonable you are by giving them until the end of August to come up with alternatives.

Wolseley estimates there are more than 200 lenders in the syndicate, so you know who to blame for all those Blackberries you heard buzzing on the beach.

Wolseley is a leading practitioner in the credit market. Feedback is welcome at wolseley@creditflux.com