Leading article: What the banks deserve is not just rage, but reform

Political leaders need to meet the structural challenges head on

Share
Related Topics

Bonuses are back with a vengeance at the world's most notorious investment bank. Goldman Sachs yesterday revealed that it will pay $16bn in compensation to staff for their efforts in 2009. There was a weak attempt from the Wall Street giant to fend off public anger over the announcement, with Goldman claiming that it is paying staff the smallest proportion of its revenues in bonuses for many years. Few were impressed – and rightly so.

These revenues are not to any meaningful sense the result of the brilliance by Goldman's staff over the past year. Goldman has been able to borrow exceptionally cheaply from the Federal Reserve in 2009. Its cost of funding has been driven down by the US government's guarantee of its debt. And fiscal and monetary stimulus from states around the world has driven up asset prices across the board. It does not take a genius to make money in such benign financial circumstances.

As the most politically well-connected of the Wall Street banks, it is easy to demonise Goldman, the "vampire squid" of media legend. But this really misses the point. Goldman is no better or worse behaved than any other large investment bank; it is simply more successful. Consider remuneration. Other large US banks have also announced vast bonus payments for 2009. Citigroup is paying its staff huge amounts even though the bank itself actually registered a loss in the year. We wait to see whether our own giant banks – Barclays, HSBC and the Royal Bank of Scotland – follow. The likelihood is that they will. And the explanation is that investment banks have a malfunctioning remuneration system. Firms tend to be run in the interests of employees and executives, rather than shareholders.

But remuneration is far from the only scandal. The majority of the revenues of investment banks in the past year have come from trading, not lending to the real economy or other economically beneficial activities. Indeed, business loans are being squeezed as banks attempt to contract their balance sheets, undermining the recovery. And then there is the unreformed nature of the sector, stuffed with institutions which have the comfort of knowing that they will be rescued if they stumble because they are "too big to fail".

The public and politicians are entitled to rage against the myopic greed of the bonus culture, the fact that the banks have been bailed out but have not bailed out the rest of the economy, the fact that that they are returning to their reckless ways with a de facto government guarantee if their bets go wrong. But rage is not enough. And unless harnessed in the cause of serious structural reform it can be positively harmful.

What is needed is a concerted push by political leaders to break up the handful of large banks which dominate the sector. There needs to be a separation of the functions of investment and retail banking to prevent bankers using the funds of ordinary depositors to back their risky bets. And the way needs to be cleared for new entrants to the sector, to bring down the economic rents which banks are happily extracting from the global economy.

The White House's bank levy (to recoup losses from the bailout) and Alistair Darling's bonus tax here, while both have their merits, do not address these structural challenges head on. President Obama's proposals yesterday to ban deposit-taking banks from engaging in proprietary trading represent perhaps the first serious attempt to drive reform in the necessary direction. The plan needs to be followed up with all the zeal that bankers display in pursuit of their bonuses.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

HR Analyst - Banking - Bristol - £350-£400

£350 - £400 per day: Orgtel: HR Analyst - Banking - Bristol - £350 - £400 per ...

Assistant Marketing & PR Manager

£16 - £17 per hour: Ashdown Group: Marketing & PR Assistant - Kentish Town are...

Project Manager (App development, SAP, interfacing)

£50000 - £60000 Per Annum + excellent company benefits: Clearwater People Solu...

Systems Developer Technical Lead

£65000 - £70000 Per Annum: Clearwater People Solutions Ltd: Our client based i...

Day In a Page

A selection of 'Pro-Choice' badges are displayed on the coat of a demonstrator during a march from the Garden of Remembrance to the Dail (Irish Parliament) in Dublin, Ireland  

Ireland's refusal to provide a safe abortion to a suicidal rape victim is a national shame

Peadar O‘Grady
Ferguson: In the heartlands of America, a descent into madness

A descent into madness in America's heartlands

David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

BBC faces corruption allegation over its Sir Cliff police raid coverage

Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home
Lauded therapist Harley Mille still in limbo as battle to stay in Britain drags on

Lauded therapist still in limbo as battle to stay in Britain drags on

Australian Harley Miller is as frustrated by court delays as she is with the idiosyncrasies of immigration law
Lewis Fry Richardson's weather forecasts changed the world. But could his predictions of war do the same?

Lewis Fry Richardson's weather forecasts changed the world...

But could his predictions of war do the same?
Kate Bush asks fans not to take photos at her London gigs: 'I want to have contact with the audience, not iPhones'

'I want to have contact with the audience, not iPhones'

Kate Bush asks fans not to take photos at her London gigs
Under-35s have rated gardening in their top five favourite leisure activities, but why?

Young at hort

Under-35s have rated gardening in their top five favourite leisure activities. But why are so many people are swapping sweaty clubs for leafy shrubs?
Tim Vine, winner of the Funniest Joke of the Fringe award: 'making a quip as funny as possible is an art'

Beyond a joke

Tim Vine, winner of the Funniest Joke of the Fringe award, has nigh-on 200 in his act. So how are they conceived?
The late Peter O'Toole shines in 'Katherine of Alexandria' despite illness

The late Peter O'Toole shines in 'Katherine of Alexandria' despite illness

Sadly though, the Lawrence of Arabia star is not around to lend his own critique
Wicken Fen in Cambridgeshire: The joy of camping in a wetland nature reserve and sleeping under the stars

A wild night out

Wicken Fen in Cambridgeshire offers a rare chance to camp in a wetland nature reserve
Comic Sans for Cancer exhibition: It’s the font that’s openly ridiculed for its jaunty style, but figures of fun have their fans

Comic Sans for Cancer exhibition

It’s the font that’s openly ridiculed for its jaunty style, but figures of fun have their fans
Besiktas vs Arsenal: Five things we learnt from the Champions League first-leg tie

Besiktas vs Arsenal

Five things we learnt from the Champions League first-leg tie
Rory McIlroy a smash hit on the US talk show circuit

Rory McIlroy a smash hit on the US talk show circuit

As the Northern Irishman prepares for the Barclays, he finds time to appear on TV in the States, where he’s now such a global superstar that he needs no introduction
Boy racer Max Verstappen stays relaxed over step up to Formula One

Boy racer Max Verstappen stays relaxed over step up to F1

The 16-year-old will become the sport’s youngest-ever driver when he makes his debut for Toro Rosso next season
Fear brings the enemies of Isis together at last

Fear brings the enemies of Isis together at last

But belated attempts to unite will be to no avail if the Sunni caliphate remains strong in Syria, says Patrick Cockburn
Charlie Gilmour: 'I wondered if I would end up killing myself in jail'

Charlie Gilmour: 'I wondered if I'd end up killing myself in jail'

Following last week's report on prison suicides, the former inmate asks how much progress we have made in the 50 years since the abolition of capital punishment