There are some home truths here which all - but especially governments - should read, mark, learn and inwardely digest.
To summarise:
== If bankers are so socially useless why does it matter if they should decamp?
== If banks have to hold more capital, then the people will pay more for their mortgages
== If long-term bonuses were the answer why was it that the worst crashes were in banks with - er - long-term bonuses
== Why were the worst British crashes in banks (Northern Rock, B&B) most favoured by this government?
== Why did the government make themselves (that’s us, folks!) lender of last resort by encouraging the granting of uneconomic mportgaes to people not able to repay them?
That’ll do for the moment but it shows how all this talk about bonuses is politicians enjoying a rant. They are the really socially useless people.
Christina
SUNDAY TIMES
6.9.09
Cut bankers’ bonuses and we will all suffer
Dominic Lawson
It’s a global business in which Britain, most unusually, is pre-eminent; its leading exponents take enormous risks for vast rewards; yet its critics would argue that it serves no useful purpose — indeed, is socially useless, even damaging. Yes, that’s Formula One.
Of course, there are differences between the grand prix business and banking: when Lewis Hamilton or Jenson Button wins a race it makes many Britons feel a warm glow of happiness. Yet when people get a cheaper mortgage because some financial whiz-kid on the trading floor did some clever forward buying in the currency markets, they don’t feel any particular sense of gratitude to the bank. Even in the good times, politicians are not likely to be misjudging the public mood if they propose to do something a bit nasty to bankers.
This explains the tenor of a letter signed by Gordon Brown and his French and German counterparts (Nicolas Sarkozy and Angela Merkel) calling on the G20 heads of government meeting later this month to “explore ways to limit total variable remuneration in a bank either to a certain proportion of total compensation or the bank’s revenues and/or profits”.
The language of the proposal exposes the true likelihood of action, for all the stark headlines the communiqué generated — “Brown joins French and Germans in call for global crackdown on bonuses”. When a resolution calls for ways to be explored, you know that no action will be taken. Apparently, the vapidity of the text (and the delay in its publication) was down to Brown, who refused to sign up to the idea of an absolute cap on bankers’ bonuses, as drafted by Sarkozy and Merkel.
The prime minister was right — and that’s not a phrase you hear much these days. It follows on from the government’s dismissal of the suggestion last week by Lord Turner, chairman of the Financial Services Authority (FSA), that some special additional tax should be levied on financial activities that were “socially useless”.
As Turner went on to admit, it is impossible to know in advance, or even at all, which financial transactions are “socially useless”; and even if such a tax were so imposed, how do you prevent the cost of it from being passed on to the purchasers of the supposedly socially useless investments, rather than taken out of the salesmen’s bonuses?
Indeed, the FSA chairman, in a much less widely quoted part of his remarks, put his finger on the real reason for the credit crunch, which had next to nothing to do with bonuses.
“Bad remuneration policies ... were far less important in the unravelling of the crisis than hopelessly inadequate capital requirements against risky trading activities. If we had had a perfectly designed and globally enforced remuneration policy, but with inadequate capital requirements on trading activity, the financial crisis would still have happened roughly as it did.”
Sir Martin Jacomb, perhaps the wisest old owl in the City, who in his long career has seen more booms and slumps than most, was typically precise in his contribution to the debate last week: “At the heart of the catastrophe was a single regulatory error: the failure of the Basel international [banking] rules to impose weighty capital requirements on the super-senior tranche of securitised mortgage obligations held in banks’ trading books. It was there that vast quantities of the toxic stuff accumulated. Because these securities could be held with minimal capital backing, banks thought it was all right to do so ... when these holdings turned out to be unsaleable except at a huge loss, the disaster was exposed.”
The regulatory authorities internationally are now addressing this fundamental point; the requirement to have much greater capital backing in future for such activities will make them much less profitable — and this will inevitably reduce bankers’ bonuses from this sort of business.
This, however, is not enough to meet the need of politicians to demonstrate that they are punishing the guilty. If a Treasury minister tells a Today programme interviewer that “we are imposing greater capital requirements on super-senior tranches of securitised mortgage obligations”, it is unlikely to resonate with the bleary 7am listener wanting to hear the noise of a banker having his head rammed hard into a wall.
The conventional wisdom among finance ministers remains that another crisis could be averted if only the financial remuneration in banking were based more on “long-term” company performance. Yet all the senior men at Lehman Brothers and Bear Stearns, the two biggest financial disasters on Wall Street, were paid overwhelmingly in long-term stock options. They thus lost billions on paper when their firms collapsed. I point this out not to elicit sympathy where none is merited, but just to show that an insistence that incentives are “long term” sounds reassuringly responsible, but misses the point. Indeed, the collapse of Northern Rock, Bradford & Bingley and, most recently, the Dunfermline building society demonstrates that terminally risky lending is by no means the exclusive province of “overpaid” City types.
It’s worth recalling now how very well thought of by government were the likes of Northern Rock and Bradford & Bingley. They were making mortgages available on a grand scale to many people who up till then would have found it difficult, if not impossible, to buy decent accommodation for their families, instead of renting in perpetuity. Who then would have argued that the transactions of such firms, as they sought to finance this innovative lending in the wholesale money markets, were “socially useless”?
The same is true of the entire US sub-prime market, which was at the centre of the mortgage securitisation business now described by the single damning word “toxic”. Successive US governments were so determined to widen home ownership that they encouraged state-backed lending entities such as the Federal National Mortgage Association (Fannie Mae) to underwrite trillions of dollars of home loans to the least well-off.
As the Reform think tank points out in A Dangerous Consensus, its pamphlet on the G20’s attempts to make banks more “socially useful”: “By 2003, 74% of all US securitisation transactions carried this implicit government guarantee. It was this volume which allowed the market to take off ... and carved out sub-prime securitisations.” In other words, the credit crunch was not simply the result of socially irresponsible bankers thinking about their bonuses; it was the consequence of governments encouraging the banks’ move into “socially useful” lending by acting as underwriter of last resort.
Will the G20 nations act to clip the bankers’ wings now that taxpayers have had to pick up the tab for this great experiment? Their finance ministers say they can act only collectively, because if one nation should introduce “tough new” provisions over bonuses, the highest-paid bankers would pitch their tents elsewhere. It raises an obvious question: if such greedy bankers are so socially useless, why should it be a problem if they depart to another country?
This was not a question that Alistair Darling could answer satisfactorily when it was put to him last week. The reason, of course, is that 50% of those wicked bonuses will go straight to the chancellor, in his role as collector of taxes; and while pay in the financial services industry amounts to just 4% of total national income, it has to help to fund the pay packet of the public sector, which is four times bigger. Now who said bankers’ bonuses were socially useless?
Posts
