David Prosser: Let's milk the squid, not murder it

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The Independent Online

Outlook The great vampire squid, as Goldman Sachs was notoriously dubbed at the height of the backlash against bankers this summer, is back with a vengeance, wrapping itself around the face of humanity to the tune of £5.35bn in pay and bonuses for the past three months alone. What a naughty vampire squid.

Still, before you reach for the squid repellent, consider this: the bonuses the investment bank will pay this year will be completely compliant with the deal agreed at the Pittsburgh G20 summit by leading nations. Goldman's payments to staff will breach none of the rules on bonuses that the G20 is now implementing, however strongly the hysterical ranting yesterday about the return of the bonus culture might imply that bankers are ripping up the deal we thought we had.

That's because there is nothing in the G20 agreement that puts a cap on the size of bonuses. Assuming Goldman meets the terms of the deal – these include no guaranteed bonuses, possibility of clawback, deferral of portions of the awards and so on – it can pay its staff as much as it likes.

Quite right too. The financial crisis of the past two years was not caused by bankers receiving telephone number-sized bonuses. If the reward culture had anything to do with the collapse, it was the way in which bonuses incentivised the sort of short-term risk-taking that eventually resulted in systemic oblivion. If our politicians are to be believed, the G20 agreement has done away with that sort of rewards system.

For many people, City bonuses will always be distasteful. Some feel more strongly right now – if you lost your job when Woolworths disappeared at the beginning of the year, an early victim of the recession and credit crunch, the news that the average Goldman employee has racked up a £350,000 pay and bonus package already this year is likely to rankle to say the least. You wouldn't be human if you didn't feel angry.

Anger and rationality are not, however, happy bedfellows. The best hope for the growing ranks of the unemployed here and around the world is an economic recovery that creates new jobs. The biggest threat to that recovery in the UK is the state of the public finances, so any additional revenue floating into the Treasury coffers is desperately needed. Last year, a poor one for profits, Goldman Sachs paid £1.1bn in corporation tax. This year, that payment will be significantly higher, and a further £1bn or so should be generated in this country by Goldman staff's income tax bills.

To put that another way, those people who complain that Goldman and the rest only got through the bad times thanks to taxpayer support should be comforted by the fact that the favour is now being repaid. Not just in the form of extra tax revenue, by the way. Goldman's actual repayment of the support it received in the US earned the American taxpayer an annualised return of 23.1 per cent. Other banks repaying state support, including those that have been bailed out in the UK are also doing so at a premium.

Is all this to say that the Goldman bonuses – and it will not be the only bank paying staff handsomely this year – are beyond reproach? Well, not entirely. If the bank is making the sort of money it is right now, staff should share in the spoils (though actually, their portion of the pot this quarter is lower than ever before), but we might still question the source of those profits. And in this case, Goldman has benefited from a marketplace, particularly in the fixed-income sector, where competition has diminished just as demand from clients – especially governments engaged in unprecedented bond issues – has soared. Shooting fish in a barrel, you might say.

That, however, is an argument for some sort of brake on Goldman's profits, rather than the bonuses (though the latter would of course follow). One way to achieve such a goal would be the Tobin tax that is advocated by, among others, the Financial Services Authority's Lord Turner, in which a levy on all financial transactions in every global market would raise billions of additional revenue from the banking sector. Bring it on.

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