Mervyn King: 'Never has so much money been owed by so few to so many'

With City bonuses set to top £6bn this year, the Governor of the Bank of England echoes Churchill in devastating indictment of the banks

James Moore,Deputy Business Editor
Wednesday 21 October 2009 00:00 BST

The Governor of the Bank of England launched a stinging attack on the behaviour of the banking industry last night, just hours before a leading economic think-tank prepared to publish figures showing the total bonus payouts to City workers in January will soar to £6bn.

Mervyn King described the £1 trillion of support given to banks by the taxpayer as "breathtaking" and "unsustainable". He said: "To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform." Mr King argued that banks took huge risks because they knew they would be bailed out and because they were seen as "too big to fail". He called for sweeping reforms to the way they are supervised.

His words are poised to re-ignite the row over taxpayers' support for the sector and the way bankers are paid. The Centre for Economics and Business Research (CEBR) will add fuel to the fire with its figures, which show a rise of 50 per cent in bonuses this year compared to last year's combined payout of £4bn across the industry.

Last week Goldman Sachs, facing mounting political and public heat over its multibillion-dollar bonus pool, cut the proportion of revenues going into it and hired a consultancy specialising in philanthropy to consider a big charitable donation. But it still paid $5.4bn (£3.3bn) into the 2009 pool, taking it to $16.7bn for the year to date, after reporting third-quarter profits of $3.2bn.

Douglas McWilliams, chief executive of the CEBR, said a lack of competition was enabling banks to amass huge profits, a theme also taken up by Mr King, who was speaking last night to Scottish business organisations in Edinburgh.

Mr McWilliams said: "Banks' profits have risen very sharply this year, reflecting a lack of competition in the market. Any attempt to deal with bonuses is likely to be either unsuccessful or very damaging unless it addresses the issue of lack of competition."

News of the figures provoked outrage among politicians and union leaders amid increasing public anger at the behaviour of banks at a time when unemployment is rising and many people have lost their jobs and their homes.

The TUC general secretary Brendan Barber said: "Bankers' bonuses might be lower this year than the bumper year of 2007 but a £6bn bonus bonanza is still absurd when you consider the depth of the financial crisis their greed and recklessness plunged the world's economies into. It's only as a result of huge taxpayer bailouts that the financial sector has been kept going, yet the banks show no sign of curbing their behaviour."

Liberal Democrat Treasury spokesman Vince Cable said: "This big increase in bonuses does not in any way reflect the particular contribution made by bankers to the economy. These bonuses are coming from the fact that banks are earning money from substantial government borrowing and are able to earn bigger profits because there is less competition. What is particularly galling is that all their activities are in turn underwritten by the taxpayer."

He called on ministers to "stem public outrage" by ending what he called "anti-competitive practices". He added that bankers should be forced to pay "their fair share of tax".

The Tories' shadow Treasury minister Mark Hoban said a future Conservative government would consider using the tax system to crack down on excessive bonus payments: "The support from the taxpayer was there to prop up banks, not bankers' bank accounts. We hope the new international rules work. But, if we find the money that should be going into stronger bank balance sheets is being unreasonably diverted into bigger pay and bonuses, we reserve the right to take further action and that includes using the tax system."

Reaction from the City was more muted. Angela Knight, chief executive of the British Bankers' Association, has already called on people to "move on" from the bonus scandal. She also said that banks in the UK had agreed to measures to restrain pay after being called in to 11 Downing Street to meet the City minister, Paul Myners.

Ms Knight said: "These estimates are clearly led by the announcements of some US investment banks operating here; they do not reflect what is happening in the UK banking industry. In the UK, the banks have signed up to very significant constraints. There are no indications whatsoever from the UK's banks that they will be paying any bonuses this year under the new criteria."

David Buik, chief strategist at BGC Partners, the City money broker, also said that bonuses paid out this year would be subject to new constraints, including measures designed to link them to banks' long-term performance and to enable employers to "claw back" payments if traders subsequently performed badly.

"I understand the anger that is out there and accept that there have been bad practices in the past," he said. "But if you want to restore the banks to health and pay back the taxpayers' investment you have to employ the best people, and that costs money. This year's round of bonuses will be paid in an acceptable manner, whereas in the past, perhaps they were not."

Bonuses are back: Luxury brands see upturn

Luxury businesses are preparing themselves for a welcome major boost in sales as the City expects a 50 per cent rise in bonuses.

Peter Rollings, managing director of Marsh & Parsons estate agents, which markets high-end properties in London, said that "without a doubt" there would be an increase in house sales. He said: "This is great for us. Without a doubt [bankers' bonuses] are positively affecting our business. There are many more buyers in the market already. Last week we sold a house for 5 per cent higher than top of market in July 2007. The asking price was £3,500,000. This was met with three offers and in the end went for in excess of that price."

Simon Staples of the wine merchants Berry Bros said that his company normally saw a boost in sales on 12 January each year, when the fine Burgundy wines are released, and that he was already receiving inquiries about that.

"In the last three or four months there has been a huge surge in interest," he said. "Nowadays we announce news about wines via Twitter, and through this the equivalent Bordeaux day that coincides with summer bonuses has had a huge amount of interest already."

A spokesman for the yacht charter company Sunseeker said that business was picking up at the moment, following a good boat show in Southampton in September, and had not slowed since. And top restaurants will be hoping for a return to the expenses lunch or, at the very least, bonus celebrations bookings.

Xavier Rousset from the luxury Mayfair restaurant Texture said: "In the past few weeks the tasting menus have become very popular, and bankers usually tend to go for more expensive wines."

Ben Ferguson

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