Europe’s Bankers Face Calls to Forsake Bonuses Amid Fines

Executives of Europe’s biggest banks are under pressure to surrender their bonuses after six companies were fined a record 1.7 billion euros ($2.3 billion) for manipulating benchmark interest rates.

Top management at Deutsche Bank AG, Royal Bank of Scotland Group Plc and Societe Generale SA, the firms that received the biggest penalties, should forgo bonuses for this year and 2012 to set an example for others, said Davide Serra, founder of London-based asset management firm Algebris Investments LLP, which oversees $1.3 billion of bank shares.

“The guy that runs the show has to take the hit,” Serra said in an interview with Bloomberg Television. “If the top is not accountable, no one at the bottom of the food chain will be accountable.”

Calls by investors for chief executive officers to be penalized are intensifying after the European Commission’s record antitrust fine yesterday pushed sanctions for rate-rigging to $6 billion. Firms and their shareholders still face the pain of years of civil lawsuits related to rate manipulation, as well as regulatory settlements stretching from U.S. mortgages to attempts to rig foreign-exchange markets.

Michael Golden, a spokesman for Frankfurt-based Deutsche Bank, declined to comment for this article, as did Linda Harper, a spokeswoman for RBS, and an official for Societe Generale.

Investors’ Wrath

Europe’s biggest banks have racked up more than $77 billion in legal costs since the financial crisis, five times their combined profit last year, according to data compiled by Bloomberg. The total includes $20.9 billion set aside for future legal expenses. Deutsche Bank, Europe’s biggest investment bank by revenue, accounts for 36 percent of the costs.

Bankers have incurred the wrath of politicians, investors and clients for selling products that helped cause the 2007 U.S. housing-market meltdown and the financial crisis a year later. The scandal around the London interbank offered rate, the benchmark for more than $300 trillion of securities, has claimed the jobs of executives including Barclays Plc CEO Robert Diamond, 62, last year and that of RBS investment-banking chief John Hourican in February.

“Excluding the Barclays case, sanctions can be summed up by this sentence: ‘All guilty, no one responsible,’” Jacques-Pascal Porta, who helps manage more than 600 million euros at Ofi Gestion Privee in Paris, including shares in Deutsche Bank, Societe Generale and Barclays, said by telephone. “Fines are becoming banal.”

Hitting Profit

While the penalties are hitting profits, part of which are used to pay dividends, European banking stocks continued to climb. The 44-member Bloomberg Europe Banks and Financial Services Index advanced 15 percent this year, led by Bank of Ireland and Spain’s Bankinter SA. It rose 23 percent in 2012.

Deutsche Bank’s third-quarter profit was almost wiped out after the firm was forced to increase its litigation reserves by 1.2 billion euros to 4.1 billion euros at the end of September from three months earlier. UBS AG, Switzerland’s largest bank, posted a net loss in the fourth quarter of last year after booking a fine for trying to rig global interest rates and costs tied to job cuts.

Deutsche Bank and its peers will probably have to set aside more cash for fines and settlements next quarter, Andreas Plaesier, an analyst with M.M. Warburg, said by phone from Hamburg. He recommends investors hold Deutsche Bank’s stock, which is up 4.2 percent this year. Even after the third-quarter legal costs, the firm had a $2.03 billion-euro profit in the nine months through September.

Trader Blamed

Societe Generale, whose stock has jumped 43 percent this year, attributed responsibility for its penalty to a lone former trader it didn’t identify. Management weren’t implicated, the Paris-based firm said yesterday. Deutsche Bank has said an internal probe found its executive board members weren’t guilty of any wrongdoing. Co-CEO Anshu Jain, 50, led the investment banking arm at the time of alleged misconduct.

Juergen Fitschen, 65, has run Deutsche Bank with Jain since last year. Frederic Oudea, 50, has served as CEO of Societe Generale since 2008. Ross McEwan became CEO of Edinburgh-based RBS in October. Investor calls for senior executives to be held accountable are focusing most on leaders whose tenures overlap periods when misconduct occurred.

‘In Denial’

“Banks appear to be in denial about accountability and are attributing the wrongdoing to rogue behavior by individuals,” said Colin McLean, founder and CEO of SVM Asset Management Ltd. in Edinburgh, which oversees about $970 million including shares of RBS and Societe Generale. “We’d like to see boards make executives accountable for total risk control and not just financial performance.”

Yesterday’s European Commission penalties were for manipulating the yen Libor and Euribor.

RBS said it would claw back three-quarters of the money from bonuses and awards already paid to the firm’s employees after it was fined $612 million for manipulating rates in a separate case over Libor in February.

Deutsche Bank said yesterday its reserves almost cover its 725 million-euro fine, which was the largest among the six banks. RBS said reserves cover its 391 million-euro penalty. Societe Generale, which had 700 million euros of litigation reserves at the end of September, said the 446 million euros it’s required to pay won’t affect financial goals for this year.

“I wish I could tell you that it is the beginning of the end,” Christopher Wheeler, an analyst at Mediobanca SpA in London, said in an interview on Bloomberg Radio yesterday. “We have plenty more litigious issues to deal with.”

The European Commission calculated the fines based on market share and the period of time banks were engaged in wrongdoing, it said.

More Coming

The biggest investment banks are likely to be hit more than others because they’re a lot more involved in Libor and foreign exchange, Shailesh Raikundlia, an analyst at Espirito Santo Investment Bank in London, said by phone. Investors are expecting some large numbers, he said.

Deutsche Bank, Zurich-based Credit Suisse Group AG and London-based HSBC Holdings Plc and Barclays have Europe’s biggest investment banking operations, according to 2012 revenue data compiled by Bloomberg.

Legal investigations are also extending to the foreign-exchange market. Bloomberg News reported in June that traders at some banks said they shared information about their currency positions through instant messages, executed their own trades before client orders and sought to manipulate the benchmark WM/Reuters rates. Those rates in the $5.3 trillion-a-day market determine what many pension funds and money managers pay for currencies.

U.S. Costs

Several banks also face probes into U.S. lending practices and commodity markets as well as litigation specific to their business, said Wheeler. “The list in endless,” he said.

Libor probes could cost global investment banks $46 billion, and investigations into manipulating currencies could trigger another $26 billion, analysts at KBW, a unit of Stifel Financial Corp., said in a report last month. That’s in addition to settling claims over faulty mortgages with the Federal Housing Finance Agency, which may total $24 billion, wrote the KBW analysts, led by Andrew Stimpson in London.

Last month, JPMorgan Chase & Co., the largest U.S. bank, agreed to the final terms of a $13 billion settlement over its sales of securities backed by mortgages. Legal costs for banks in the U.S. exceeded $100 billion since the crisis, Bloomberg News reported in August.

Chief executives shouldn’t get good payouts if they oversaw departments found to have broken the law, said John Smith, who helps manage more than 2 billion pounds ($3.3 billion) including shares in Barclays and HSBC at Brown Shipley & Co. in Manchester.

“I do feel management should get a far-reduced bonus,” Smith said. “If they were responsible at the time these breaches of regulations were made then they should be tied a little closer to shareholders.”

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