British banks have just five working days to show they have "got it". On Saturday, they must submit to the regulator – the FSA – their planned bonus awards, widely estimated to total £6bn. Prince Andrew may have said in an interview that he regards this sum as "minute in the scheme of things", but, as the economy still falters and unemployment rises, it was clear last night that the banks will grant themselves their billions in an increasingly hostile atmosphere.
George Soros (below) became the latest high-profile figure from the world of finance to condemn the bankers, and call for watertight restrictions on their activities yesterday. He said: "Banks are actually getting hidden subsidies of enormous amounts because of their ability to borrow at effectively zero, and buy 10-year government bonds at 3.5 per cent. So those earnings are not the achievement of risk-takers. These are gifts, hidden gifts, from the Government, so I don't think those monies should be used to pay bonuses. So there's a resentment which I think is justified."
And, as increasing numbers wonder why the United States' decisive action to cap bonuses in firms taking public money has not been matched in Britain, there are now signs of a hardening of attitudes towards bankers inside the City. The Square Mile grandee Sir David Walker, The Independent on Sunday understands, is now expected to call for them to be banned from paying guaranteed bonuses in his forthcoming report on corporate governance. He is believed to have been impressed by the growing acceptance among big institutional investors, and even the banks themselves, that paying out huge salaries and bonuses may have exacerbated and contributed to the banking crisis. One source said: "Everyone knows the levels of bonuses are quite insane. None of the banks dare break ranks and stop paying such big bonuses because they are frightened traders will jump ship to another bank, or overseas. That's why many actually want to be told what to do."
Sir David, whose report is due on 26 November, has received a flurry of submissions from the industry, most of which have argued for bank boards to take a much tougher line on how pay is structured because, they argue, the big pay awards may have pushed traders – particularly in proprietary trading – to take bigger risks than they should. Remarkably, many of the complaints he received from the City, including those from non-executive directors on bank boards, were that they felt powerless to stop banks paying out such big bonuses. Last week, it was reported that Royal Bank of Scotland, which has received £20bn of public money and fired 15,000 staff since the start of the recession, aims to pay £4bn-£5bn in bonuses. Goldman Sachs, which has benefited from US government support, will pay its staff worldwide up to £14bn in bonuses, averaging around £400,000 for each of its 5,500 London staff.
And ministers have also been contacted privately by bank chairmen and directors asking for guidance on pay because of worries about public hostility over bonus levels. One banker said: "Many are terrified because they don't know what to do. Some want to cut bonuses, but they don't want to be the first to do it in case it drives staff either to rivals or overseas. But they also know that changes have to be made and want leadership from government."
These developments come at the end of a week in which Mervyn King, Governor of the Bank of England, attacked the way banks have exploited being seen as "too big to fail". He was critical of how high-risk trading was conducted by banks which knew they could rely on a publicly funded safety net. "The past two years," he said, "have shown how dangerous it is to let bankers play with fire."
His frustration was contrasted with the situation in the US, where regulators last week announced tough, immediate and non-negotiable action on bonuses. The Federal Reserve plans to regulate bonus payouts from banks forced under its control after they took cash handouts from the bailout programme. And America's "pay tsar" is looking to impose a cap of $500,000 on cash salaries received by executives at affected firms. Executives seeking more than $25,000 in special benefits, such as club memberships or company cars, will have to ask the government for permission.
In Britain, such decisive action has been talked about, but not taken, leaving the Government looking like customers impotently waving their arms while a counter clerk, smug behind the security glass, refuses to correct an error. Yesterday, Gordon Brown repeated what has so far seemed an empty recital of good intentions and so-far unheeded warnings. In his weekly podcast, he said: "We must bring financial markets into closer alignment with the values that everybody holds: hard work, responsibility, integrity and fairness."
The singers from this familiar hymn sheet – Mr Brown, the Chancellor, Alistair Darling, and Lord Myners, the Financial Services Secretary to the Treasury – are relying both on Sir David's report and the eventual enactment of policies agreed at the G20. The UK's big-five banks and 11 other foreign banks, such as Goldman, have already signed up to FSA and G20 pay-guideline principles, which could see bonuses clawed back in future years. According to Lord Turner, chairman of the FSA, the regulator has "a range of levers" to block "excessive bonus payments". But what these levers are is a mystery to many.
Public impatience with the unhurried progress of such reforms has been rising, and will not have lessened in the past few days with the disappointing news on the British economy. Far from showing a little growth, as the Treasury expected, it actually shrank, with all that this implies for public finances. The present record £175bn in net borrowing is likely to rise as tax receipts fall short of predictions, and estimated benefit payments increase. Overall, the country is now in the longest recession since records began in 1955.
What is significant about the signals being picked up by this newspaper is that this mood of anger at the bankers, and their disconnection from the world inhabited by the rest of the economy, is being echoed by the likes of Mervyn King and George Soros. In an interview with the Financial Times, Mr Soros said there was a need to regulate payments to employees, even if that meant banks found it hard to retain talented risk-takers. He said: "That would push the risk-takers who are good at taking risks out of Goldman Sachs into hedge funds, where they actually belong, because hedge funds take risks with their own capital, not with deposits and not with government guarantees."
Additional reporting by Greg Walton
Q&A: Why is the bloated bonus culture coming back?
Why are banks making such huge profits now?
Because markets are active again. Interest rates are at a historic low so banks borrow cheap and lend high. Governments have issued debt, companies have raised capital and got involved in deals again while currency markets have fluctuated. Banks love volatility – that's how they can charge their fat fees.
Why have the PM and the Chancellor failed to stop excessive bonuses?
Because they've been got at by big investment banks, which have persuaded them that tougher pay regulations will close down the City and force bankers – and their chunky tax receipts – overseas. Politicians are also waiting for plans such as the G20 guidelines to kick in. The Financial Services Authority's proposals, due in January, will force banks to put more money aside as capital, and cut profits paid out in bonuses.
What about the US?
The US pay tsar, Kenneth Feinberg, will order pay cuts at seven of the institutions that got bail-out cash. He wants big caps on the total pay of their top 25 executives and another 75 or so other high-earners.
Will this be effective?
Depends. Feinberg's new rules will depress salary levels if they go far enough. The biggest influence on pay will be if the new G20 rules on linking pay to tougher risk management are adopted.
Will bankers leave in droves if large bonuses are stopped?
And leave their four-storey comfort zones in Kensington and Chelsea? Some will be tempted to leave. So what?
How does the bonus system work?
Typically, top investment banking staff are paid a base salary of £80,000-£100,000 a year. Each banker operates his own profit and loss account that includes the cost of his salary, screens and overheads. This, together with a share of other corporate costs, is then deducted from the revenue, and he or she will be paid a proportion of the profit.
Should we split banks into retail and investment entities?
Yes. At the moment investment banks can use the capital of the retail side of the bank to leverage up their dealings. The Governor of the Bank of England, Mervyn King argued that unless we do split the "casino" activities of investment banks from the utility lending banks, we are heading for another crash.
Do bankers understand the wider impact of their excessive payments?
Some do, some don't and many don't care. Most think they should be paid as much as they can get away with.
Should a windfall tax be imposed on banks – or bankers?
No, not yet. Better to make sure all the latest initiatives from the FSA, G20 and in Sir David Walker's forthcoming report are put into force as swiftly as possible. If they are, then there will be tougher capital adequacy ratios, new limits on how boards pay staff and a possible ban on guaranteed bonuses.
Why are banks not lending?
Because they are terrified sheep. A decade ago they indulged in a frenzy of lending fuelled by cheap money. Today, they have masses of cheap money but they don't want to lend it because they are scared they won't get it back.
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