http://www.nakedcapitalism.com/2009...oints-out-bonuses-were-paid-fruadulently.html City people have always been paid well relative to others, but megabonuses are quite new. From my own experience, in the mid-1990s no more than four or five employees of Barclaysâ then investment bank were paid more than Â£1m, and no one got near Â£2m. Around the turn of the millennium across the market things began to take off, and accelerated rapidly â after a pause in 2001-03 â so that exceptionally high remuneration, not just individually, but in total, was paid out between 2004 and 2007. Observers of financial services saw unbelievable prosperity and apparently immense value added. Yet two years later the whole industry was bankrupt. A simple reason underlies this: any industry that pays out in cash colossal accounting profits that are largely imaginary will go bust quickly. Not only has the industry â and by extension societies that depend on it â been spending money that is no longer there, it has been giving away money that it only imagined it had in the first place. Worse, it seems to want to do it all again. What were the sources of this imaginary wealth? First, spreads on credit that took no account of default probabilities (bankers have been doing this for centuries, but not on this scale). Second, unrealised mark-to-market profits on the trading book, especially in illiquid instruments. Third, profits conjured up by taking the net present value of streams of income stretching into the future, on derivative issuance for example. In the last two of these the bank was not receiving any income, merely âbooking revenuesâ. How could they pay this non-existent wealth out in cash to their employees? Because they had no measure of cash flow to tell them they were idiots, and because everyone else was doing it. Paying out 50 per cent of revenues to staff had become the rule, even when the ârevenuesâ did not actually consist of money.