The return of the mega-bonus

(breakingviews.com) -- The outrage over supersized banker bonuses has barely died down but the stage is already being set for the return of the mega-payouts. It'll feel icky and almost surely reignite the fury of taxpayers and lawmakers. This time around, however, the banks should be in a better position to defend against public scrutiny.

Start with revenue. Despite the upheaval in the industry, many investment banks managed whopping fees from trading debt and arranging capital hikes in the first quarter, and are continuing to do so in the second. Much of this revenue may be connected with putting together deals to patch up the mess caused by a financial crisis which the banks helped create. But that's the way the investment merry-go-round works.

After a 50% fall in revenue in 2008, Goldman Sachs (GS, Fortune 500) is back on a pace to match the $38 billion it generated in 2006. JPMorgan (JPM, Fortune 500) is boasting of its record 9% share of the European investment banking market through May. Star producers will expect to be paid for such results.

Next, banks are shedding their government shackles. Ten U.S. banks are paying back the taxpayer-injected funds that saved them, and the wider financial system. They are also starting to wean themselves off state-guaranteed liquidity. Stress tests have been passed and capital cushions elevated. In effect, these banks are doing all that has been asked of them to operate independently, and more safely.

What's still missing in many cases -- but won't be for long -- is how banks plan to stretch annual pay over several years to ensure no banker or trader walks off with the spoils of a deal and stuffs the costly residual risk with the institution and its shareholders -- and ultimately taxpayers.

Banks will also probably put themselves in position to claw back individual bonuses if the house is crumbling, as well as pay more in shares to lower ranks. Even if bank bosses themselves wait to accept bigger payouts, these longer-term incentive structures should make it easier for them to explain away headline bonuses of $10 million or more for their rainmakers.

Some politicians have already begun to cry foul at the prospect. They rightly point out that some of this year's fat-margin deals will have been made possible only with the aid of government capital, funding guarantees and insurance schemes. But regulators will only have themselves to blame for providing this aid too cheaply. U.S. authorities, for example, charged only 100 basis points for their seal of approval on liquidity.

If banks have repaid their taxpayer debts, rebuilt their balance sheets and restructured their pay schemes to the satisfaction of watchdogs, the pitchfork-wielders will find it harder to make their case this time round.

Investors will have a more legitimate beef. They have accepted the idea for too long that it's OK for banks to pay out such a high percentage of revenue to employees. It may be too late for regulators to exercise further moral suasion to curb the excesses of banker pay. But shareholders may still have some sway if they act soon.