Blog:Let The Bankers Have Their Bonuses
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Phil Yorpoketts, Banking Correspondent, 22 January 2011
Bankers’ bonuses are an emotive topic and Barclays Bob Diamond’s saying “There was a period of remorse and apology for banks - I think that period needs to be over” adds fuel to the fire whilst taxpayers are still paying the price for bankers’ recklessness. An end to the remorse and apologies would only be appropriate if the fundamental causes of the financial crisis of the last couple of years had been corrected such that taxpayers are never going to have to pick up the pieces ever again. But this is not the case, the banks are eager to return to the risk taking that got us into the mire in the first place and resistant to the idea that they need to be properly regulated. The remorse and apologies have not been genuine and until they are there is no case for “that period to be over”.
Diamond also said that he did not believe that failing banks should be bailed out. The man is clearly living in the clouds. If we were talking about investors’ money then that is the risk of owning shares and not a problem. When we are talking about customers’ savings and current accounts then it would be impossible for any Government to stand idly by and the failure of one bank with customers losing all their cash would have an inevitable domino effect. We only trust banks with our life savings because whatever happens we won’t lose them. And the banks rely on, and exploit, that position. Barclays was not bailed out by the taxpayer directly but benefited hugely from the UK Government’s guarantees to retain the confidence of customers. Had there been no safety net then Barclays would almost certainly have been in big trouble.
We have to separate risky investment banking, where most of the bonuses are paid out, from retail banking – the current and savings accounts and mortgages. The former should be allowed to fail and the latter regulated so they can’t. Consolidation of high street banks over the last 20 years has to be reversed so the risks that still exist in retail banking are spread and the Government can start by splitting up the two banking groups it has huge stakes in.
There are arguments being made by the banks that if we regulate them too much or cap their bonuses they will up sticks and move elsewhere. It is possible that some banking will go elsewhere but who else actually wants them and has the infrastructure to assume the risks. Ireland and Iceland are lessons for all other smaller nations of the dangers of putting all your eggs in the financial services basket. No country big enough to accommodate a relocation of the City of London banking sector would want the risks that go with light touch regulation so ultimately the threats are empty – in practical terms there are few places they could go and fewer that provide all the global advantages of London. It is an empty threat by and large and the loss of a few wide-boy banks who do not accept regulation, and are therefore the biggest risks to the UK, is probably a good thing.
But all that said, pay the bonuses. Bonuses are a big bright red herring that is conveniently diverting public attention from the fact that the fundamental issues lie somewhere else entirely. 50% of the big bonuses come back to the Treasury as income tax. Of the remainder a chunk again ends up in the Treasury by way of VAT on goods bought with the bonus. Spending the bonuses keeps shop and bar workers, builders, kitchen fitters, car dealers, and the girl that makes the thing that drills the hole that holds the spring that drives the rod that turns the knob that works the thing-ummy-bob in work and profit and themselves paying taxes – it all gets spread around in the end.
And it isn’t all our money being dished out. 21 of the 25 banks in the City are foreign owned and nothing to do with the British taxpayer. Only 2 major banking groups were bailed out by us and if you cap the bonuses at Lloyds and RBS then the brightest and best will move to one of the other 23. That would devalue our investment. Better that we hive off the Lloyds and RBS investment banking arms as quickly as possible and have no public interest in their reward schemes. The arguments for paying the bonuses, whilst sounding like, and being, pure and obscene greed are probably quite legitimate.
It is interesting that in the USA reckless bankers are escorted in handcuffs to a police car whereas in the UK we let them retire temporarily before giving them a knighthood or peerage and letting them move onto the Board of another top company. At fault is the old boys club that exists in the City where the owners of the banks and other big companies are represented by fund managers (managing your and my own pensions and unit trusts) and the fund managers work in and for those very same financial institutions we are all complaining about. The lines between owners and customers and the bankers are extremely blurred. The guy that manages my unit trusts should be working for me; he takes a commission after all. But he/she actually works for RBS and is not going to exert pressure on RBS not to pay bonuses on my behalf. So there is another level of separation required; fund managers must be independent and legally obligated to act in the interests of the investors in those funds, which they cannot do effectively under the current arrangements. Perhaps I should have a legal right to vote as a shareholder in the companies where my pension and unit trusts are invested. And make it a legal requirement that annual bonus packages must be approved by a vote of all shareholders.
So stop being emotional about it and pay the bonuses. In the great scheme they are the public but irrelevant manifestation of the immorality of modern banking. The real issue is about making some radical changes to the structure and regulation of banking in the UK. Never mind about having global agreement, where we lead others will follow and those that don’t can take the risk to their economies. Separate out retail banking so personal and small company funds in current and savings accounts are, as we would expect them to be, guaranteed risk free. Separate fund management from the banks and make them legally responsible to the fund investors not their banking employers.
Oddly many of us will end up paying more for banking services as a result of clearing up all the muddles and murky and incestuous dealings. For much of personal and small business banking in the UK is cross-subsidised. My personal and business banks combined make less than £80 a year from me yet I have 4 pages of transactions per month on various statements. They make losses on me but huge profits overall, so it must come from somewhere else – overcharging on higher risk products such as sub-prime mortgages for example, the origin of the global financial collapse. Had they made a fair profit from me, per the model in place years ago when I opened my first account, and had no need to invest in high risk sub-prime markets then we may not be in the mess we are in. It is interesting that no Australian or New Zealand bank collapsed as a result of the global financial crisis. In New Zealand everyone pays bank charges and there were no 100% mortgages, the old UK model. Is it coincidence?
© Evrose, 2012
