Frolicking in the margins is the phrase invented by that wise old bird, the late Harold Lever, to describe the tendency of politicians, particularly on economic matters, to seize on the inessential and make hay with it. And that, I fear, is exactly what is happening with the current rumpus over bank bonuses.
They have become the lightning rod of fury over bankers' pay and their refusal to mend their ways even as the recession has taken hold. European finance ministers, urged on by President Sarkozy of France with our own dear Prime Minister limping belatedly behind, are set to make the issue a key point in their pre-Group of 20 deliberations in London tomorrow. And Lord Turner, head of the Financial Services Authority, has chosen them as the centrepiece of a blast against bankers and the City of London before his own institution is emasculated by an incoming Tory government.
The politics of it are not hard to read. One year after the collapse of Lehman Brothers threatened an implosion through the whole of the financial system and caused governments to rush to shore up their banks with huge dollops of public money, the anger against the bankers has not subsided. Indeed it has actually fermented as bonuses have returned to the market as big and as bold as ever.
For those, like Sarkozy and the German leader, Angela Merkel, who think that the whole sorry spectacle is the result of a mad-cap experiment in Anglo-Saxon free markets, bank rewards are the perfect embodiment of all that was wrong with what went before.
Remove the bonus culture and you end the gambling spirit of Casino City, goes the argument. Lord Turner goes one further, declaring that the finance industry as a whole has become too large. Curbing bonuses, he says, would reduce the attractions and even push bright young graduates to seek a career in manufacturing rather than such a "socially useless activity" as hi-tech finance.
But then that's the trouble with the argument on bonuses. They are being used not as a problem in themselves but as a stick with which to beat a whole industry. Bankers may well deserve everything that is coming to them. But pay and the means of delivering it is neither the cause of the problem nor the way to achieve broader aims.
You can certainly argue that the high quarterly and annual bonuses offered to executives and traders encouraged them to take short-term risks and thus accelerated the growth of riskier products. But, as Lord Turner himself accepts, the problem of exotic instruments and excessive risk among the institutions was a failure of supervision of activity not pay.
"If," he declares in the latest issue of Prospect, "10 years ago we had had a perfectly designed and globally enforced remuneration policy but with inadequate capital requirements on trading activity, the financial crisis would still have happened roughly as it did.
"And if we had done nothing different on remuneration but had had sensible capital and liquidity requirements and macro prudential policies, the crisis would either not have happened or would have been much less severe."
Quite. Bonuses are not unique to banking. They have long been a part of marketing (remember all the publicity to the first manager who earned a million on sales, several times the salary of his boss) and have steadily expanded even unto the furthermost reaches of the civil service and local government.
They have exploded in the financial sector partly because performance can so easily be set against defined and immediate profit and partly because profits themselves have risen so sharply in the City. In a world where money-flows have become global, the size of funds looking for returns has grown exponentially and the search for marginal improvement in return ever more competitive with low interest rates, the reward has moved from old-fashioned deposit taking and lending to wholesale banking, especially the origination and trading of financial instruments.
To traders, bonuses have become the measurement of success. To management they have become the reward for divisional or group performance. However obnoxious it may be to the public, they have returned to the scene because the conditions which brought them about – trading in instruments in the wholesale markets at a time of low interest rates – have also returned. Nothing has changed because nothing in the business has changed.
That doesn't make them any the more acceptable. There is something extremely distasteful about a system of reward for risks that pays up on the upside and demands no penalty when the bets go wrong because banks are protected from bankruptcy. But then I find it even more distasteful that management in the BBC and other public organisations earn large bonuses, when there is no accurate means of measuring success and thus reward. At least there is a system of clear and transparent calculation where money dealing is concerned.
The trouble with bonuses generally, and not just in the city, is that they have, to put it bluntly, become just a means for managements to reward themselves at the expense of their shareholders and their own bonusless staff. Most of the particular measures suggested to curb the practice in the city – paying them in annual instalments, giving them out in shares rather than cash, capping them altogether – would actually make this tendency worse.
Tax bonuses heavily by all means. But concentrating the fire on the City as if it were unique just won't work. As long as the profits are in trading, the institutions will find a way of rewarding themselves.
Nor will punitive action – for that is what it is – do much to change the behaviour or alter the size of the financial sector – or whatever it is that you think you want to do with the sector post the credit crunch, although for governments to decide what size and nature they want this area of activity to be begs a lot of questions.
No, if I were Gordon Brown, I would take the French President aside before the Pittsburgh meeting of the G20 later this month and say, in the nicest way possible, "My dear, Nico, it's time to be serious. So let's start talking capital requirement, liquidity and macro-economic policy and leave the fripperies to more frolicsome times."Reuse content