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Philip Augar
Published: January 11 2011 16:42 | Last updated: January 11 2011 16:42
The UK government's current embarrassment over banking bonuses illustrates three uncomfortable truths. First, the global response to the banking crisis of 2007-09 was flawed in many crucial respects. Second, the financial services industry is American-led and the rest of the world has little option but to salute the US flag. Third, British politicians either misunderstood the industry they were trying to reform or, if they did understand, chose to exaggerate their influence in order to appease a bloodthirsty electorate during the 2010 election campaign.
High bonus payments are a symptom of a problem, not its cause. The banking settlement was deficient because it did little to address the asymmetries in the universal banking business model. This model causes investment banks to jeopardise global financial stability in bad times whilst allowing bankers to cream off film star compensation in the good times. The global reforms have done a bit to improve financial stability but almost nothing to constrain the profitability that produces the bonuses. That profitability arises from a business model that gives banks in general and investment banks in particular the best possible view of global economies and markets. They are able to use this information advantage to load the dice and generate super-profits. This is where the bonuses come from and this is why the banking lobby worked so hard and so successfully to defend the model.
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