The UK government's approach to the financial crisis has been riven with contradictions from the outset. After bailing out several of the biggest institutions, the government made it clear that it wanted a return to "normal" lending activities -- but at the same time stressed that it wanted banks to reduce their risk profiles and rebuild their balance sheets. It has talked incessantly about getting tough with the bankers, but is now terrified of the possibility that the EU, in the person of its new French economic commissioner, might actually do so.
Now the government is tying itself in knots over bonuses at one of the bailed-out (and currently 70% taxpayer-owned) banks, RBS. Reportedly, the Treasury has warned RBS not to increase bonus payments significantly beyond last year's level. In response, the RBS board has, also reportedly, threatened to quit en masse if the government (or the bank's largest shareholder and biggest creditor, as we might also call it) intervenes in its payout plans. The board supposedly believes that it needs to pay "competitive" bonuses in order to prevent a haemorrhage of staff to its competitors.
Vince Cable, a man whose powers of reasoning seem to have shrunk as the financial crisis has dragged on, wants the government to call the directors' bluff. It doesn't seem to occur to Vince that in the still-febrile atmosphere of global financial markets, investors might not react well to seeing one of the UK's biggest banks left leaderless. Still less does it occur to him that the directors might be right about the risks posed by a mass exodus.
Leaving Vince Cable aside, there are two possible arguments to be made in favour of the government muscling in on RBS's bonus policy: the populist argument, and the valid argument. Let's take them in order.
The populist argument is simple: RBS and several other UK banks are only still alive because the taxpayer put huge amounts of money into them just over a year ago. Until all that money is paid back, the bankers have no right to any bonuses at all. With the economy still on its back and unemployment rising, it's perfectly understandable that a lot of people feel this way. The problem is that it's a shortsighted approach. The more money RBS et al make, the sooner they can be sold back to the private sector, getting the taxpayers their money back (and with luck a bit extra for their trouble). If the directors are right to fear an exodus of big producers, curbing this year's bonus payouts would be against taxpayers' real interests, hard though it might be to convince them of that. There are enough signs of bankers moving from firm to firm in clusters (what the City refers to as "desk moves", i.e. your whole trading desk ups and leaves for a competitor) to suggest that this is a real risk at RBS.
Then there's the valid argument, which is based on the way the banks have returned to profit this year. Despite the government's lavish injection of funds and continuous jawboning, loans are hard to get, especially for small business. This is not entirely the fault of the banks. The departure of the Reyjavik cowboys and others left a gap in the market, but the UK banks have been very slow indeed to step into the breach. This year's profits have mainly come from "carry". Banks' funding costs have fallen sharply (checked your savings account lately??) and it's literally a no-brainer to invest in low risk assets and watch the money roll in month by month. You don't need traders with PhDs and copulas and algorithms to figure that out -- Jedward could probably manage it. This makes it awfully hard to see the banks' record trading profits as any kind of justification for big bonuses.
The government seems dimly aware of this. The City minister, Lord Myners, said today that banks should recognise that this year's return to profit owed more to the very benign trading conditions resulting from government policy than to any inherent genius within the banks themselves. The problem the government has now is that it appears to be making a scapegoat of RBS. It should have made it much clearer to all the banks (even those like HSBC and Barclays that were never directly bailed out)that a return to the old bonus free-for-all should wait for another year or two.
Woody Allen once commented that something like 90% of the key to success in show business was just showing up. The banks seem to be using more or less the same logic in setting this year's bonuses. It's not surprising that the government feels the need to step in, but it's a shame that they're not making their case more coherently.
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