Dominic Lawson: Bonuses are a political issue, not a moral one

Bash the bankers, but don't pretend that rewards are a matter of virtue, not profit

Tuesday 10 February 2009 01:00

It is bonus time for the members of the House of Commons Treasury Select Committee. I am not referring to any money they may be receiving through the increasingly discredited parliamentary allowances system. No, this is the big one: today they have as their captive witnesses some of the former chairmen and chief executives of the banks which have cost taxpayers billions.

Not only will the MPs have a privileged opportunity to ask the questions these men refused to address when invited by the media to put their case; the committee members can also pose as avenging angels on behalf of their constituents – all on live television, too! Doubtless, they will have been honing their expressions of outrage for hours in front of a mirror. However, it is unlikely they will come up with anything to match the parliamentary resolution tabled in the wake of the bursting of the South Sea bubble, which – at least according to that indefatigable financial witchfinder-general, Vince Cable – proposed that the bankers "be tied up in sacks filled with snakes and thrown into the River Thames". All those in favour?

Hard as it might be to believe, the current crop of delinquent bankers are figures of the utmost probity compared with earlier generations of failed financiers – and I don't just mean as compared with the charlatans of the early 18th century. The equivalent of today's most disgraced bankers during the events surrounding the Great Crash of 1929 was Albert H Wiggin, chairman and president of the board of the Chase Bank, then New York's mightiest. It emerged after the Crash that Wiggin had, while proclaiming the solidity of his bank, been secretly "shorting" that very bank's stock using shadowy private companies in his daughters' names. Then, after the shares duly collapsed, he collected the winnings – more than $4m, a vast sum in those days.

Despite discovering this, the Chase board, during the depths of the Depression in 1932, voted unanimously to give the now retired chairman a life salary of $100,000 per annum, over and above his pension – "in order to discharge in some measure the obligations of this bank to Mr Wiggin". You can find all this, and much more of the same, in JK Galbraith's The Great Crash 1929 – a book which reads with startling appositeness in 2009, 80 years after the events it chronicled.

The British bankers in the parliamentary dock today, however, have not behaved like the remarkable Albert H Wiggin. In fact, while having been paid very considerable sums making what turned out to have been vast strategic blunders, they also lost money by buying their own banks' stock in large quantities at prices up to 10 times the current level. In other words, they believed their own propaganda, right up to the very end. This does not require any sympathy on our part, but it also indicates they are not crooks.

Most of those up in front of the MPs today have already lost their jobs; those gentlemen will not be able to assist the committee in the most contentious issue of the moment: the bonuses which are about to be paid to bankers in respect of the (disastrous) year just ended. One of their number, however, is very much still in control – the Barclays chief executive John Varley.

Yesterday, Mr Varley made a pre-emptive strike by saying: "It is important to make the distinction between those banks which have made a profit and those which have not, when it comes to bonuses." This translated means: "We at Barclays have not needed to draw on the taxpayer for an emergency injection of equity, unlike RBS and HBOS, so we will pay whatever bonuses we damn well want to."

This is a perfectly reasonable distinction. In the past, all the banks were ultimately able to defend whatever they paid their employees by arguing that it was up to their owners, the shareholders, to object if they didn't like it, and nothing to do with the Government or politicians. Once the Government is the majority shareholder, the same argument applies in a way which the bankers will find less comfortable: the financiers concerned are working for the taxpayer and public sentiment (rage, disgust, contempt, you name it) is no longer irrelevant – quite the opposite, in fact.

President Obama has seized on this with a characteristic turn of political speed. Last week, he denounced as "shameful" the way in which US banking executives had paid themselves and their employees more than $18bn in bonuses alone, while in receipt of taxpayers' bailout funds of $700bn. The new President immediately declared an annual pay cap of $500,000 for "top executives" in such businesses.

The ripples this has sent across the Atlantic have broken as waves of fury over the Government's little boat. Gordon Brown and Alistair Darling face calls on all sides, including their own, to punish improvident British bankers in the same way. Their response has been profoundly irritating whichever side of the argument you take: they have set up "an inquiry" – perhaps the 498th such prevarication in Mr Brown's short period as Prime Minister.

As a matter of fact, there is much less to Mr Obama's initiative than meets the eye. First of all, it does absolutely nothing about the 2008 bonuses which have already been paid to those bailed-out bankers. It will apply only to banks which in future seek additional federal aid. Second, it permits such bankers to receive "additional compensation" in stock – although Mr Obama says they will not be able to cash in on such options until taxpayers have been reimbursed in full.

This, however, simply treats the bankers like private equity fund managers, who also get to cash in when they have paid off their investors. Moreover, it is precisely through the medium of stock options that Wall Street's bosses have made the vast majority of their fortunes hitherto: salaries have been a very small proportion of their remuneration.

Unfortunately for Mr Brown, however, he needs to stay chummy – or more correctly, try to become chummy – with Mr Obama; so he dare not point out that the President's banker-bashing is not the red meat it appears to be.

Nonetheless, across the chastened world of finance, bankers are finding ways to make their bonuses less obviously an affront to the public's sensibilities (and it is also not a bad thing for their balance sheets). The Swiss bank UBS and Morgan Stanley of the US have introduced the "malus" – this means they can claw back bonuses if the profits on which the payments were predicated fail to materialise. This recreates the way in which partnerships had worked in the old days before such organisations became public companies and were able to exploit the ignorance or laziness of non-executive directors.

This does not mean that the bankers have become any more virtuous; neither should we wish them to become moral paragons. Just as we wouldn't pay nurses millions, because we want them to be vocationally committed rather than motivated by avarice, so we wouldn't want those in charge of our money to lend it all to companies in the direst need.

By all means bash the foolish bankers, but let's not pretend that the rewards of the marketplace can be allocated in proportion to virtue rather than profit.

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