International investment banking is complicated. A small number of people understand different parts of it. Competitive innovation and the ingenious application of computer power means that this knowledge is changing at an accelerating rate. Hence the growing rewards over recent decades obtained by the possessors of these specialised forms of knowledge. The morality of fairness is conversely simple. We thought bankers were being paid too much; now we know they are.
Last year, the curtain was torn away, and the masters of the universe were revealed as merely human operatives who had no idea what risks they were taking and hence had caused the world financial system to go pop. Never again, was the phrase of the moment.
Some politicians were more adroit at adopting the sentiment. Barack Obama imposed a $500,000 salary limit on banks bailed out by the American taxpayer. Gordon Brown, meanwhile, was impaled on the awkward case of his failure to stop Sir Fred Goodwin, chief executive of Royal Bank of Scotland, walking away from the wreckage with a pension worth £17m. As for bankers' pay in the future, Mr Brown mumbled about how hard it was for governments to interfere in global recruitment markets. Yet how many noticed when, in June, President Obama quietly dropped the half-million-dollar salary cap, while his officials mumbled about, well, how hard it was for governments to interfere in global recruitment markets?
So, yes, it is not simple to design a policy that allows banks to hire the people they need, while protecting the interests of taxpayers who have put up the money to allow them to continue to operate at all. But the evidence is growing that Mr Brown and Alistair Darling, the Chancellor, must try harder. As we report today, the feeble guidelines that they have brought in so far will do nothing to stop the banks, including those now owned by the taxpayer, paying bonuses nearly as high as those before the crash. Unless the rules are tightened, bankers will be unable to escape the suspicion that they are cashing in on the upward stroke of the first V of the W before it all goes bad again.
This is not a matter of trying to apply the simple concept of fairness only to publicly owned banks. As Mervyn King, the Governor of the Bank of England, pointed out in a speech in Edinburgh last week, all banks enjoy the implied public guarantee of being regarded as "too big to fail". With impeccable free-market reasoning, he said: "Encouraging banks to take risks that result in large dividend and remuneration payouts when things go well, and losses for taxpayers when they don't, distorts the allocation of resources and management of risk."
Not only that, but the policy of printing money – known in harder-to-understand and therefore more highly paid circles as "quantitative easing" – has boosted the stock market and in turn, bank bonuses. So the taxpayer is underwriting the bonuses of all bankers, and politicians on our behalf are fully entitled to set the strictest rules practicable that would apply elementary norms of fairness to all banks, whether notionally in the public or the private sectors.
The Government's weakness is exposed by our report today that Sir David Walker, appointed by the Chancellor to report on bonuses, is coming under pressure to insist on tough rules that apply to all banks – because any bank that responds to ministerial exhortation with unilateral restraint is bound to lose traders to banks that do not. The idea that the City of London would lose out from firm rules is unconvincing, but it is true that any individual bank that acts alone would suffer.
In any case, other European governments and the US administration are ready to join Mr Brown and Mr Darling in tougher action. So when Sir David next month recommends strict rules – stricter, we hope, than simply banning the payment of "guaranteed bonuses", which are a contradiction in terms – they should be implemented at once.
But this is still reactive stuff. There remain fundamental questions of banking regulation that are far from being solved. Should retail banking be separated from the kinds of higher casino capitalism that produced the current crisis? Probably. Should the concentration of power in fewer banks be referred to the Competition Commission? Definitely. But for all the technical complexity of these issues, banking bonuses are a simple issue of fairness.
As George Osborne so tellingly, yet so far unconvincingly, put it: "We're all in this together." A noble sentiment that the Government would be well advised to adopt.Reuse content