Margareta Pagano: The inconvenient truth about bankers

If the coalition is to find a way to waltz out of the bonus row, it needs somehow to execute a high kick clothed in a soft shoe
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The Independent Online

More than two years have passed since the financial crash and still the debate rages about bankers and their bonuses. Why has nothing been done? That's the question people are asking at their Christmas office parties (those lucky enough to have them), in the queues at Tesco (if they can get through the snow) or watching kettled students protesting against the latest rise in tuition fees.

So this latest threat by Nick Clegg to bankers that "something will be done" if they don't show restraint in this year's bonus negotiations will only confirm their worst suspicions: that nothing has been done despite promises by the Tories and the Lib Dems before the election.

The choreography behind the Deputy Prime Minister's threat, that the Government "can't stand idly by" and watch another big bonus handout, is as open to interpretation as one of Pamela Stephenson's slinkier tango moves in last night's Strictly Come Dancing. On the face of it, Clegg's public outburst in Friday's Financial Times looks like a cynical ploy to win back Lib Dem supporters cheesed off about tuition fees, and earn Brownie points in case the politicians don't get a deal with the bankers. Even that moody picture of him seemingly downcast looked staged. Or, he was desperate, got caught off guard and shot himself in the foot.

There's a third possible move, more of a nimble quickstep perhaps – that Vince Cable, the Business Secretary, masterminded Clegg's threat to put some deep blue water between himself and the ongoing negotiations, but also between the Lib Dems and the Tories. Until now Cable, whose own dancing skills we will see in this week's Strictly Christmas special, has been the one wielding the big baton. He's been the only senior politician who has threatened the bankers with a new bonus tax if they don't cut back on pay or increase lending, and has put pressure on Clegg to back him.

Whichever move it is, we will know more of the potential outcome this week when Cable and Chancellor George Osborne meet the banking chiefs at the Treasury to discuss what they plan to pay out in early 2011. The banks are said to have a bonus pot of around £7bn to share between their 315,000 workers – lower than previous years, as investment banking profits have shrunk. (In 2007, the last year of the boom, it was £11.6bn.)

While both David Cameron and Osborne are nervous that a new round of banker-bashing headlines will trigger more public outrage, they are also keen to stop beating up the bankers. They had promised before the election that "something" would be done about high pay. After all, this time last year, it was Osborne who was playing to the crowds when he urged his predecessor, Alistair Darling, to curb the bonuses being paid out, particularly to bankers at the state-owned Royal Bank of Scotland.

But the Tories are also acutely aware of how crucial the City is as a source of tax revenue. A report out last week showed that the Square Mile handed over £53.4bn to the Chancellor in 2009-2010, down on the year before by £8bn, but still 11.2 per cent of the UK's total tax take. They also fear for the City's reputation and, if this populist fury continues, that banks such as HSBC and Standard Chartered – maybe others – will follow through with their threats to move their headquarters overseas where tax is lower and the mood more welcoming.

It's a difficult line to tread: on the one hand, the Tories don't want to be seen standing up for their rich City friends, but nor do they dare anger the public even more. Until now, Cameron and Osborne had also hoped that the banking levy, the new EU rules and the 50 per cent top rate income tax would help dampen criticism. They had also hoped that a little arm-twisting would work with the bankers: that urging restraint would make the bankers see sense and reduce the payments.

But these latest talks between the banks to get a voluntary agreement – codenamed rather optimistically Project Merlin and led by the outgoing Barclays chief executive, John Varley – have stumbled, mainly because some banks are refusing to co-operate. Most bankers would love to pay their staff less, but they are petrified that if they don't pay the market rate, their best traders and bankers – assets with feet – will be poached by rivals overseas who'll pay more.

No one dares be the first mover. But the much bigger, still puzzling question is why bankers are paid so much in the first place. It's an inconvenient truth but those in the City, like Wall Street, really are the last outposts of Marxist control: the banks are one of the few businesses still run like partnerships or co-operatives where the workers come first, and shareholders last. Unlike other companies, banks have allowed the earnings of their top workers to be paid in bonuses often greater than the returns paid to shareholders.

So long as those shareholders, staff, clients and the board went along with this arrangement, then all was fine. But this cosy relationship was ruptured by the financial crash when the Government rescued RBS and HBOS – and indirectly helped the others, like Barclays and HSBC, through the Bank of England's liquidity support that kept the entire banking system afloat. And it's only now that the taxpayer has become one of the banks' biggest shareholders, that the counter-revolution is under way to change the high-pay culture; new rules from the EU and the Financial Services Authority will curtail some of the more excessive pay packages.

But so far there hasn't been enough change. We want the catharsis of seeing the bankers suffer along with the rest of us. That's why the coalition faces such a gamble. Will they let the bankers pay themselves million-pound bonuses again? Or will they slap bankers with another bonus tax and risk sending more overseas? What they need is a Blair-style "eye-catching initiative" to take the sting out of the upcoming negotiations – make peace with the bankers, but also get something in return, like their promise to lend more to small businesses.

The fundamental problem remains that high pay is a symptom of deeper structural issues within the banking industry. These are being investigated by the Independent Banking Commission which is due to report its findings – and which may well recommend radical reforms like breaking up the banks in some form – late next year. That's when the real dancing begins; this latest row is just a warm-up. No wonder Cable, who will be showing us his American Smooth routine this weekend, says he's also practising the quick, quick, quick...

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