David Prosser: Darling faces an impossible choice at RBS

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The Independent Online

Outlook Be careful what you wish for. Since the moment the taxpayer began spending money on bailing out our banks, Alistair Darling has faced calls to be more interventionist on bankers' bonuses. Finally, he has now secured the right to clear – or veto – the bonuses paid for 2009 by Royal Bank of Scotland, as part of the price for the bank's participation in the asset protection scheme.

So what will the Chancellor do now he has that power? Well, the choices look pretty uncomfortable. He could veto any payment at all of bonuses by the RBS board, which would undoubtedly play well with many voters, but would be devastating to the bank. Its board would have little option but to step down, plunging RBS – which by then will be 85 per cent owned by the taxpayer – into yet another crisis.

Alternatively, he could give RBS's bonus payments his blessing, which would leave the bank free to carry on with business as usual. But whatever the rights and wrongs of that course of action, the political damage would be enormous.

It's difficult to see a middle way that is an acceptable compromise. RBS has not yet worked out how much the 2009 bonus pool should be worth, but the bank has had a better year than in 2008, when it paid close to £1bn to staff at its investment division alone. Even if RBS wants to pay just half of last year's bonus pot – and the likelihood is that it is planning to pay considerably more – can you imagine the headlines if Mr Darling is seen to be signing off a rewards package worth £500m to public enemy number one?

Did I mention that the decision has to be made in February, which is, at most, only three months before the general election? The Chancellor is hardly going to want to be cast as being on the side of fat cat bankers just as he and his colleagues ask for a fourth term. In that context, he is going to find it difficult to agree to bonuses of £1.50, let alone £1.5bn.

None of this is conducive to making sensible decisions about how RBS battles its way back to profitability, the only way in which the bank will eventually be able to repay the support given to it by taxpayers. If Mr Darling feels he must intervene on the question of how RBS should pay its staff, what about some political interference in the equally vexatious question of its lending policies? Will the Chancellor soon be saying yay or nay on your sub-prime mortgage application?

No wonder the Association of British Insurers will today issue an "amber top" warning to shareholders who must vote on the deal to take RBS into the asset protection scheme. While the bank needs the taxpayer to insure its toxic assets, the price it is being asked to pay for this cover – never mind the £25bn premium – is remarkably high.