Jeremy Warner: Who are MPs to attack the City bonus culture?

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The Independent Online

Outlook We have to assume that MPs on the Commons Treasury Committee are relatively clean, for none of the present crop seems yet to have appeared in The Daily Telegraph's exposé of MPs' expenses. Even so, the timing of their latest report on the banking crisis, which fulminates against the City bonus culture, could scarcely be more unfortunate.

The MPs may make some legitimate points, but it rings somehow hollow for parliamentarians who have been milking the system for all it's worth to complain of "serious flaws and shortcomings" in the remuneration practices of City investment banks.

I don't want to defend City pay, parts of which plainly lost touch with reality during the boom, but in fact there is not a lot of evidence to suggest that remuneration structures caused the crisis or were in any way more than a minor bit player in the affair. Excessive pay was more a symptom of the bubble in financial services than a cause.

Even so, the committee blindly accepts "the widely held consensus" that remuneration did play a key role and lambasts the Financial Services Authority for failure to treat the issue more seriously.

In fact, the reality is quite different from the perception. The bulk of the cash bonus pool in most investment banks goes to middle and lower income employees, if only because the relatively small size of their individual bonuses is outweighed by their numbers, with the high rollers paid mainly in shares on a deferred basis.

Stock bonuses which may once have been worth millions would today command only a tiny fraction of their original value. In some cases, such as Lehman Brothers and Bear Stearns, they would be entirely worthless. Some City traders no doubt managed to escape with barrow loads of money before the balloon went up, but many didn't.

If excessive pay did indeed encourage bankers and traders into excessive risk and balance sheet expansion, many of them have now paid the price through their own pockets. The bonuses have proved as illusory as the profits. Indeed Lehman completely disproves the idea that paying people in stock with long deferral periods discourages excessive risk-taking. Lehman was full of such employees, yet it didn't stop them betting the farm on high risk activities. Irrational exuberance, not excessive pay as such, is the cause of most bubbles, even if the two often go hand in hand. Yet you are not going to stop the first by directly controlling the latter, as the MPs seem to want.

Countries that regulate pay in financial markets will only succeed in driving them offshore, where their wealth-creating powers cannot be captured and which, as we have discovered, offers no protection from the storm when things go wrong. The recession is worse in Germany and France, which have eschewed Anglo-Saxon financial markets, than in Britain.

The Turner Review, which the MPs accuse of downplaying the role caused by remuneration in the crisis and giving insufficiently high priority to fundamental reform, seems to have got the balance about right. Where banks breach established principles on pay or run excessive risks, they should be forced to put up more capital to compensate. Lord Turner's view is that where pay does cause excessive risk-taking, it can be dealt with through broader brush analysis of macro-prudential risk and actions to offset those risks.

Curiously, the select committee, having ranted and raved against the FSA, eventually comes round to Lord Turner's point of view and accepts that it wouldn't be such a good idea to have the FSA directly regulating banking pay. Even with the part-nationalised banks, the MPs accept that the value of the taxpayers' investment would be worsened if no bonuses are paid.

The FSA is not alone in getting it in the neck. The committee is as scathing of Lord Myners, the City minister who approved Sir Fred Goodwin's pension, non-executive directors, institutional shareholders, auditors, credit rating agencies and many more besides. Bizarrely, the only people to be exonerated are the media, and there are a few things I could tell MPs about them.

In any case, the committee's bark seems to be worse than its bite, for there are few recommendations of any lasting value here. What a peculiarly worthless exercise many of these select committee investigations turn out to be.