Bonus Restrictions Ignore Cause of Crisis

Damian Reece Daily Telegraph (UK) September 5, 2009

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By Damian Reece Published: 8:18PM BST 04 Sep 2009

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The desire for retribution against banks and their highly paid workers is understandable, but should run no deeper than the desire for retribution against all those who failed in their duties, allowing the financial system to seize up – including regulators, central bankers and politicians.

However, the Chancellor, having established the limits of the state in relation to commerce, contradicts himself with proposals to regulate bankers' bonuses. If these proposals are to be the centrepiece to the G20's response to the financial crisis then we are no closer to finding a lasting solution than we were a year ago.

The proposals are undemocratic in singling out one group in society. Banks are different, it's true. As we've seen, when they collapse they endanger the entire economy. That's why they're supposed to be tightly regulated, although they weren't. But the banking crisis, in essence a crisis of confidence, was caused by over lending and over borrowing, encouraged by cheap money and financial engineering that eventually blew up.

Bonuses played a tangential part in this process and those payments being earned now, causing so much offence, are certainly being made on investment banking activities that are unrelated to the sort of toxic liabilities built up in the boom.

If the G20 is going to make any progress in reforming finance to make it a less risky system, it should be addressing the far more complex problems surrounding the exotic species of shadow banking that was allowed to evolve in the credit markets. Bonuses were involved with this form of finance, but it developed as much to satisfy the West's insatiable desire for credit as any sort of arcane money-making scheme.

I have more sympathy with the argument that lenders enjoying state support should not be paying multi-million pound bonuses to people who's jobs exist thanks only to the guarantee provided by the Bank of England as lender of last resort. Fine, don't offer them that luxury. Apply that guarantee only to simple retail savings banks. Wholesale or investment banks should stand alone, with their own creditors and shareholders who would know full well the risks being undertaken by these institutions.

With clearly defined limits to state sponsored guarantees, banks could still operate on both the retail and wholesale sides.

And nothing would focus the minds of investment bank shareholders and creditors more than knowing there was no lender of last resort if things went wrong.

Finally, you would get the sort of engagement between banks and their sponsors which has been lacking so badly in this entire episode. Bonuses would still be paid, but the risks that they reward would have to be disclosed, explained and justified.

Comments: 2

Focussing on the shortcomings of the "regulators, central bankers and politicians" rather than the appalling actions of the investment banking industry is rather like blaming the police rather than the criminals for the level of crime. The core concern about the level of bonuses is that they become too much of a good thing, and instead of encouraging excellence, simply encourages the grabbing of all the sweets in the shop as fast as possible, with no concern for the consequences, or even doing a job well.

"Alistair Darling was right to say yesterday that it's not the job of governments to decide which commercial activities are of value to society. But if that's true, then neither is it the job of governments to decide how the people who are carrying out those activities are paid." Yes. That's why employment stuff is so carefully regulated one way or another. However, the UK government can and surely does better inform and therefore help all workers to situate themselves at work happily as part of the wider community of equal stakeholders. In my view Bankers are in a prime position to set us all an excellent example by carefully considering ways to transform what they may normally do as simple "workers" ie "workers" rather than "investment bankers" or "retail bankers". Practical measures include a decent "raising a concern policy" which should help find the time and space to do something different which respects all stakeholders including "sovereign" citizens/customers and anyone else who may be interested, concerned or otherwise left on the scrap heap, more equally. This may involve becoming prepared to associate openly and critically with some of the more radical speculative research - even thinking the unthinkable. For example; unzipping early retirement pensions from �what we normally do� may be a most appropriate transformation on which to speculate- especially if we want to avoid the same sort of speculation re; some work based transformational equivalent of an ASBO, in my view.

Bonus Restrictions Ignore Cause of Crisis

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