Stephen Hester, Sir Fred Goodwin’s successor as chief executive of the now-nationalised Royal Bank of Scotland, sheepishly admitted this week that even his mother and father saw his £10 million bonus package as too high.
But, in less widely reported testimony to the Treasury Select Committee he made a remark that pointed to savings thousands of times larger than his bonus. The business of RBS, he said, was now recovering so quickly that the Government would be able to reprivatise it (presumably at a large profit for the Treasury) several years ahead of schedule and the bank would make no recourse at all to the controversial government guarantees, whose potential cost to taxpayers was estimated by many experts at £200 billion or higher just six months ago.
With banks all over the world now apparently making money even faster than they were losing it last year, is it possible that bankers such as Mr Hester are, after all, financial geniuses whose talents fully justify their multimillion-pound rewards?
Instinctively we all realise, like Mr Hester’s Mum and Dad, that the answer is no, but pinning down the exact reasons why bankers’ bonuses are economically unjustified is surprisingly hard. Last year’s explanation that bankers make their fortunes at the expense of taxpayers no longer seems so convincing now that the public guarantees have mostly been repaid with interest and it looks like governments all over the world will make a modest profit on their financial interventions.
Another tempting explanation is that banks overcharge consumers because they enjoy monopolies, but this is hard to sustain after a decade in which banks offered mortgages below the Bank of England’s base rate. And numerous studies by anti-trust authorities show that competition in most banking markets was actually pretty intense, at least until the crisis of 2007-09.
In the hundreds of articles and lectures about the banking crisis from academics, politicians and regulators, a plausible analysis of why bankers are overpaid has never emerged. Yet understanding this issue is critical in designing sensible policies, not only on the pay and bonus controversies, but with regard to the stability of the financial system as a whole. So here goes my attempt.
Banks are different from other businesses in two crucial respects. The products banks sell are impossible to value accurately because they relate to unpredictable future events, most obviously whether borrowers will repay their debts. This also applies to several other businesses, most obviously insurance, but banks have another unique characteristic. A bank’s survival depends entirely on the confidence of its depositors, who can withdraw their money at any time — and if confidence in one major bank collapses, a chain reaction of financial failures can easily follow, with catastrophic results for the whole economy.
These unusual features of banks imply a series of controversial conclusions. The first is that all banks are potentially too important to fail. Even if bank failures may be acceptable in normal conditions, there will be times, perhaps only once every generation, when governments simply cannot allow any bank to fail.
The idea that the regulatory problems exposed by last year’s crisis could be solved simply by breaking up banks into smaller or simpler institutions so as to overcome the “too big to fail” syndrome is a delusion. The collapse of a bank such as Lehman, with no consumer deposits, might have done no great harm had it happened a few years earlier. But against the background of a broader financial crisis, Lehman’s failure was catastrophic and imposed costs on society hundreds of times greater than the modest (or zero) cost of providing temporary government guarantees.
Once it is accepted that all banks, regardless of size, can sometimes be too important to fail, a second conclusion follows: the taxpayer is a silent partner in every banking business, whether it is openly nationalised, such as RBS, or purely private, such as Goldman Sachs or HSBC. And that, in turn, means that taxpayer interests must be explicitly represented in the business decisions of the banks, alongside the interests of the private shareholders. But how is this to be achieved?
One approach is to give taxpayers a permanent share of all bank revenues, either through special taxes or by forcing banks to keep a substantial portion of their deposits in zero-interest government bonds. Another is to ensure that banks must be managed so as to minimise the risk of the implicit taxpayer guarantees ever being called.
This is where we come back to bankers’ bonuses. The surest way of protecting the interests of taxpayers as silent shareholders in the banks is to ensure that these companies make very big profits and then to force banks to retain these profits as a cushion against future losses. The objective of bank profitability has now been spectacularly achieved by government monetary policies, rather than the financial genius of talented bankers. The next question is how banks’ boards of directors can be made to keep profits within the business instead of paying them out as excessive salaries and bonuses.
To do this, governments must recognise that their interests, as silent partners, are aligned with bank shareholders and at odds with the interests of bank employees. In a bank, as in any private business, income has to be shared between shareholders and employees. The peculiarity of banking is that boards of directors, instead of protecting shareholders’ interests, have maximised employees’ earnings. Banks have been run as old-fashioned professional partnerships or workers’ co-operatives, in which the interests of the workers come first and outside providers of capital are treated as an afterthought.
Those readers old enough may recall a fad among economists in the 1960s to extol the virtues of Yugoslav workers’ co-operatives, which supposedly combined the virtues of free enterprise and social justice towards workers. This is what most banks have become. The problem with the co-operatives became apparent only after the break-up of Yugoslavia. Managers paid out all the revenues as wages and allowed their capital to disappear. Workers’ co-operatives, by their nature, tend to decapitalise and plunder the businesses they control.
The 1980s and 1990s brought the victory of capital over labour almost everywhere. Finance was the one ironic exception. In finance, the workers triumphed over the owners of capital. Governments, as silent shareholders in every banking business, must now overcome the City and Wall Street, the last bastions of Marxist workers’ control.
Order By:
Would you like to post a comment? Please register or log in
function blogURL(bUrls) { window.location=bUrls; } fieldset { float:left; width:165px; border:0px; margin:0px; padding:0px; } OUR COLUMNISTS
Columnists
Select David Aaronovitch Simon Barnes Camilla Cavendish Jeremy Clarkson Giles Coren Robert Crampton Daniel Finkelstein Michael Gove Anatole Kaletsky India Knight Dominic Lawson Leo Lewis Rod Liddle Magnus Linklater Ben MacIntyre Bronwen Maddox Minette Marrin Carol Midgley Caitlin Moran Richard Morrison Matthew Parris Michael Portillo Libby Purves William Rees-Mogg Melanie Reid Peter Riddell Hugo Rifkind Sathnam Sanghera Frank Skinner Graham Stewart Andrew Sullivan Rachel Sylvester Janice Turner Guest contributorsBlogs
Select Alpha Mummy Archive Blog David Aaronovitch Asia Exile Baby Barista Blockbuster Buzz Gerard Baker Charles Bremner Big Brother Mary Beard Comment Central Consumer Central Cricket Blog Eco Worrier Faith Central Fashion Formula One Ruth Gledhill Inside Iraq Ariel Leve India Knight Money Rafael Nadal News Blog William Rees-Mogg Rugby Sinofile Mick Smith Sports Commentary Irwin Stelzer Peter Stothard Surf Nation Technology Travel Urban dirt Video Wimbledon Anatole KaletskyAnatole Kaletsky writes for The Times Comment pages on Thursdays. One of the country's leading commentators on economics, he was formerly Economics Editor and is now Editor-at-large of The Times. He has won many awards for his financial and political journalism. Before joining The Times, he worked for 12 years on the Financial Times
Read more from Anatole Kaletsky Cartoon More cartoons Peter StothardThe Editor of the TLS writes on books, people and politics
A Don's LifeMary Beard of Cambridge and the TLS on culture ancient and modern
5 voices from the rubble: Haiti's blogs share their stories Comment Central MOST READ MOST COMMENTED MOST CURIOUS Most Read Skip Most Read Today The unluckiest country: Haiti suffers again... Rafael Benítez faces fight for... The 50 Biggest Movies of 2009 Google Earth helps find El Dorado MOST COMMENTED Skip Editor's Pick Today if(isArticle == "true" && articleHeadlines.length!=0){ for(var j=0; j=45){ headline = articleHeadlines[j].substring(0,44)+"..."; } document.write(""+headline +""); } }else{ fSubmitMostCommented('http://community.timesonline.co.uk/ver1.0/Direct/Process'); } MOST CURIOUS Skip Most Curious Today England rugby games to be shown in cinemas... Wild boar forage in bins as cold weather... Billionaires lead art world recovery with... Fighting talk from teenage matador who will... Focus Zone Need to Know:Industry sectors news at a glance. Interactive heatmap, video and podcast
Winter Sports:Get ready for the winter sports season, with our resort guides and snow reports
Mapping Business:We are backing British business, what is the confidence of the nation and what businesses are succeeding?
More reports:Enjoy further reading from Travel to Fashion, Business to Sport, discover more
Need to Know Winter Sports Mapping Business More reports Births, deaths, marriagesPlace your announcement
Business DirectorySearch for local businesses & services
Crossword ClubSign up today or try one of our free demo crosswords
Free CV ReviewSell yourself! Have your CV reviewed by experts
AnnouncementsSearch The Times Births, Marriages & Deaths
Online Sudoku with daily prizes Find a LawyerCut your legal costs
Classifieds Cars Jobs Property Travel Cars Skip Cars of the Week Ferrari F355 F11998 £47,955
Lamborghini Gallardo2004 £56,950 Essex
Apply for car finance?Check your free Experian credit report before applying
Great car insurance deals onlineCar Insurance
Search for more cars and bikes Jobs Skip Jobs of the Week Senior Prison ManagersFrom £44,589 HM PRISON SERVICE Nationwide
Assistant Director – North£60K - £70K Turning Point Yorkshire, North East, North West
EFFICIENT SECRETARY/PERSONAL ASSISTANTRomulus Construction Limited London
Chief Executive£60K+ plus performance rewards Bedfordshire / Greater London
Search more Jobs Properties Luxury development in the heart of Battersea.Moments from Battersea Park.
Double-fronted 4 bed, 4 reception house near Eltham Palace.For sale with Winkworth
Eager to get on the property ladder?Find out about shared ownership.
Looking for a Mortgage?See your free Experian credit report beforehand
Search for more properties Holidays Skip Travel of the Week An inspirational collection of villas, boutique hotels & apartments in stunning locations from the Greek Island SpecialistsRoyal Caribbean January Dubai Ultimate Sale
New Dubai & Emirates Cruises with extra free nights in the Traders Hotel Dubai on selected cruises from £799pp!
Great Travel InsuranceGet covered on your travels with a superb range of policies at great prices. Visit InsureandGo.com
Warm white sands, clear blue sea.Wintersun - inspiration for your winter holiday
Search for more holidays Place your advert nowSearch Ad Reference:
Read Full Article »