Sean O'Grady: Blaming bonuses will get us nowhere

Bankers are no more greedy than the rest of us, apart from a few Buddhist monks

Share
Related Topics

Let's calm down a bit about the bankers, shall we? Having fumed about these guys (and it is a hideously male world) making fortunes while the rest of the economy shudders, the time has come to apply some cool logic: "Quiet, calm deliberation disentangles every knot", as they say. And there are few more tangly knots than bankers' pay and bonuses.

First, the problem with these bonuses is not, as is often stated, their obscene size, but their structure, and the encouragement of risk-taking that it usually involves. Like Jonathan Ross and Robinho, you can take the view that bankers are overpaid for what they do, but that is beside the point. Punitive taxation can deal with such questions of fairness wherever they arise; there's no need to pick on bankers. In fact it doesn't matter, in this context, if someone in a financial institution receives a bonus of £100 or £10m a year.

What matters are what risks he has been running, whether he has been up to things that will destabilise his bank, wreak havoc on the wider economy and, in due course, cost taxpayers dear.

If someone is so insanely greedy that he will jeopardise a bank's future by lending vast sums to dodgy customers for the sake of a £100 bonus then it is, evidently, the design of that bonus that is all wrong, not the trivial amount, which would pass without comment even in the current climate. If, on the other hand, some banker gets £10m just for turning up and isn't allowed anywhere near any risk-taking activities, then that £10m may be poor value for money but it represents no threat to the financial system. The papers would crucify him, but we shouldn't really be bothered. Of course, the reality is that bonuses of £10m were sometimes paid to people who ran huge risks with the system, but the point stands.

Look at it this way. If you saved your bank £20m a year on its energy bill by negotiating a nice deal with the electricity company – with no hidden bombs waiting to go off in the contract – then no one should object, on commercial grounds, to your receiving a £10m bonus as a reward for success. If you made your bank £20m because you committed it to entering a market where profits are instant but with the risk of massive longer term losses a few years down the line, then your bonus ought to be significantly discounted.

This brings me to the second point: it is no good dishing out shares or share options as a way of getting bankers to behave themselves. Just look at what happened when HSBC and Barclays reported their bumper profits on Monday, largely as a result of the very investment banking activities that got us into this mess in the first place; the share prices of all the banks promptly jumped up.

Shareholders, you see, can be just as reckless as the craziest of bankers. When Northern Rock seemed to have reinvented banking a few years ago, the City loved it: the shares peaked at £12 each. Shareholders are not perturbed by the fact that a high-risk, high-reward strategy may fail spectacularly, say, in one year out of 20, or 50. They're happy to take that risk and the fat dividends – even if the economy can be damaged as a result and taxpayers have to pick up a crippling bill.

Which is more or less what went wrong at Northern Rock: the British taxpayer is even now having to inject further billions into the Rock as a consequence of disastrous decisions made years ago. As far as I'm aware, none of the past management at the Rock has had to pay back a penny of the bonuses they amassed for flogging all those 100 per cent and 125 per cent mortgages that are going sour now. It is, to put it politely, asymmetric.

The answer is to tax the banks, rather than the bankers: the bigger the bank and the more risks it runs, the larger the tax. If it runs a pay-and-bonus system that encourages excessive risk-taking, then that too should be taxed accordingly. The tax in this case is one where the bank is required to put more capital, or cash, aside, where it does nothing, earns little and costs the banks money. That way a bank is forced to self-insure itself against future troubles. It also makes those bigger risks less worthwhile.

We might also copy a rule from the world of Nigerian banking, of all places. Their legislation states there that the personal assets of the bank's bosses – the houses, the limo, the yacht – are forfeited if their bank fails. Job done.

Indeed, the solution could be even neater. If banks decide that they don't like this regime (internationally enforced) then they should have the option of at least partly opting out of it. They could do that by hiving off their boring retail banking businesses in the UK, say, allowing them to become self standing "utility banks", with state guarantees in return for their modest business ambitions and minimal risk of failure. The casino end of the business, if it were not too large, could be left almost to its own devices. Big, international investment banks would still need to be regulated, but taxpayers should not need to stand behind them to the extent that they have. And that is surely what is wrong, and what should really infuriate us. Bankers are no more "greedy" than the rest of us, apart from Buddhist monks. If you or I were offered a £25m bonus, we wouldn't hand it back. Nor would we say no to the taxpayer paying for a second home, as our MPs did. It is hypocritical to appeal to bankers' moral sense when it is no different to anyone else's. We need sensible, intelligent rules, instead.

None of this, I confess, is remotely original thinking. You will find it in the public utterances of the chairman of the Financial Services Authority, Lord Turner, and the Governor of the Bank of England, Mervyn King, among others. An obscure, but important, international body called the Financial Stability Board, comprising the worlds central bankers and bank regulators, has produced an excellent set of principles for banker's pay embodying these ideas.

You see, the quiet, calm deliberation has already been done. All that is needed now is for the G20 leaders, when they meet in Pittsburgh next month, to tell their regulators to "just do it". They could untangle this knotty problem in their first session: taking action is the easiest bit of the task.

s.ogrady@independent.co.uk

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Pharmaceutical Computer System Validation Specialist

£300 - £350 Per Day: Clearwater People Solutions Ltd: Pharmaceutical Computer ...

High Level Teaching Assistant (HTLA)

£70 - £90 per day: Randstad Education Birmingham: Higher Level Teaching Assist...

Teaching Assistant

£50 - £80 per day: Randstad Education Birmingham: Randstad Education is the UK...

Senior Java Developer - API's / Webservices - XML, XSLT

£400 - £450 Per Day: Clearwater People Solutions Ltd: Our client is currently ...

Day In a Page

Read Next
The longer David Sedaris had his Fitbit, the further afield his walks took him through the West Sussex countryside  

Autumn’s subtle charm is greatly enhanced by this Indian summer

Michael McCarthy
Ed Miliband and his deputy Harriet Harman at the Labour Party conference in Manchester  

Miliband has excellent ideas – he just needs to make himself more visible

Steve Richards
A roller-coaster tale from the 'voice of a generation'

Not That Kind of Girl:

A roller-coaster tale from 'voice of a generation' Lena Dunham
London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

London is not bedlam or a cradle of vice

In fact it, as much as anywhere, deserves independence
Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

Vivienne Westwood 'didn’t want' relationship with McLaren

Designer 'felt pressured' into going out with Sex Pistols manager
Jourdan Dunn: Model mother

Model mother

Jordan Dunn became one of the best-paid models in the world
Apple still coolest brand – despite U2 PR disaster

Apple still the coolest brand

Despite PR disaster of free U2 album
Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments