Between the Devil and the Deep Blue Bonus Season

Bonus season, the time of year when us mere mortals wish we had paid more attention in maths class and had become bankers instead of following our less financially rewarding path.

Every annum this causes controversy and this year it was kick-started by Royal Bank of Scotland (RBS) announcing chief executive Stephen Hester would receive an additional £1 million.

With RBS being 82 percent state-owned this resulted in an even stronger backlash from the banks shareholders, better known as the general public.

However, this will only be the tip of the proverbial iceberg as every other financial institution, including fellow state owned bank Lloyds TSB, reveals its bonuses.

The problem is there are two arguments here, one for the state owned banks, such as RBS, and another for the others who were not bailed out by the tax payer. Let us start with the state owned banks.

Despite both the Labour administration, who bailed out RBS and Lloyds in the first place, and the current ConDem government saying the tax payer will not play an active role as a shareholder, is there not a moral responsibility?

Mr Hester, as has been noted several times in recent days, is the worst paid bank chief executive in the country and yet was still entitled to receive nearly £1 million as a bonus.

Agree with the bailout or not, the tax payers of the UK are not just the majority shareholder in RBS, but given the option would be in total control, in an absolutely unbeatable position at an annual general meeting.

So while numerous RBS share holders are unemployed, unable to find work and struggling to make ends meet, the top dogs get more in a single year’s bonus than many will earn in a lifetime.

There have been many on the radical left who believe the RBS board should be paid in line with civil servant salaries.

Now while this may seem like a popular idea it is of cause ridiculous to suggest a bank executive should be paid £28,000 a year.

Not only would nobody be interested in taking the job, but the bank would struggle commercially, shares would become worthless and the public would never get their money back when the shares were eventually sold.

It is in the public interest to ensure RBS and Lloyds become successful again, assuming George Osborne does not take leave of his fiscally responsible mind and sell the shares at a loss.

What many would like to know is who in their right mind at RBS thought this was a good idea. It is about time the bailed out banks realised they are state owned and acted in a responsible way to their shareholders as they would normally do.

Instead, how about this for an alternative bonus plan for RBS. All the money to be paid out this year to all employees is not given to the employees, but to the government and is used to pay off the deficit.

Admittedly a couple of million quid is not going to make a huge difference, but is probably enough to buy a significant proportion of Greece at current market value.

At this point a round of applause is required for Mr Hester. He did the ethically and morally right thing by turning down the bonus, an action requiring a lot of guts from a man with the least enviable job in the financial services sector.

Now for the more difficult question of banker’s bonuses in general.

Although it looks as if the government is going to introduce legislation on the banks, many want to know why it has taken so long.

Let us begin with a little house keeping and some home truths. The recession was NOT caused by the budget deficit as the Tory’s would have people believed.

The UK owing so much money did not help and removed the safety net, but the initial problem was caused by the banks. Secondly, this government became electable as it had abandoned its conservative roots and became a caring party for the people.

Following the financial crash the people were livid with the financial services sector and wanted reform, but every government around the world has refused to tackle the problem.

Occupy Wall Street, Occupy London and others have been protesting for several months and battled court orders from various organisations for calling attention to something the people want.

This is understandably difficult. The banking sector is privately run and political parties of every stripe do not like interfering in the private sector, not to mention most political parties get themselves elected by cosying up to money bags in the city.

The fact governments do not like interfering in the private sector is in fact a reason why state owned banks like RBS are given such a loose reign when it comes to salary acquisition and bonuses.

It is also important to remember before the credit crunch the reason people complained about banker’s bonuses was motivated by envy, because everybody else was lucky if the boss gave them a bottle of cheap vino at Christmas.

The point here is despite a majority of the global population wanting regulation on bank practices and bonuses, the people are not being listened to.

Why should we be experiencing unprecedented public service and public sector jobs cuts, not to mention rising unemployment, repossessions and rising inflation, when the culprits for this have not been punished?

Not one banker has been put on trial for causing the financial crash, not one employee of a ratings agency has been called to account about the grading sub prime mortgages as safe and not one regulator has been punished for letting this situation get out of hand.

In fact the closest we have come to it is the rather British punishment of stripping the formally Sir Fred ‘The Shred’ Goodwin of is knighthood, embarrassing for him, but an action with little or no consequence.

Even this has been criticised for being a hysterical reaction aimed at a man who was only a tiny fraction of the problem.

Curbing bonuses, and excessive risk taking, requires a global solution. One country cannot make a difference here. If the UK turned around tomorrow and said no more bonuses and the splitting of commercial and investment banking operations, by Friday all financial institutions will have left the country.

It is time for premiers of every country to stop messing about and wasting the people time and actually punish these people for what the rest of us are enduring.

This is a hard decision, but almost every elected leader uses the phrase ‘will not duck the difficult decisions’, or something similar, at some point during a campaign.

To paraphrase the great Theodore Roosevelt nothing worth doing is ever easy, or, if you prefer you philosophy closer to home, as Irishman George Bernhard Shaw said ‘Nothing is worth doing unless the consequences may be serious’.

Should not all leaders take from these to legendary figures and realise fixing banking practices and bonuses is not going to be a walk in the park, but is something worth doing and worth doing well.

Perhaps they should take note of the rest of Teddy Roosevelt’s quotation. ‘I have never in my life envied a human being who led an easy life. I have envied a great many people who led difficult lives and led them well’.

Voters want action on the issues of the day, not laissez-faire.

Bankers Refusal

Welcome to 2011. A new year, a new start, but the same old problems. Financial regulation and bankers bonuses will be high on the agenda this year across the world as governments of all stripes try to put the recession behind them.

Bankers have been the evil face of the recession, with billions in taxpayer’s money being funnelled into failing organisations across the world, but it has proved difficult for any government to make headway in regulating both the actions taken and the bonuses given by financial institutions.

Why is this? Most, if not all, people agree the actions of the bankers involved in sub-prime mortgages and high-risk investment strategies were, at the very least, a catalyst for the problems now being seen world wide. So how come no government has been able, as yet, to heavily crack down on them.

Take the UK as an example. Currently the new coalition government is rolling out its austerity measures with the hope of eliminating the deficit in five years. This has included slashing the budget of almost every government department, a hike in university tuition fees and an increase in VAT to 20%.

Essentially what has happened is the ordinary people have to pay off national debt, put up with public service cuts and pay more for everyday goods because of a problem caused by the banks.

It is true large budget deficits are not good for any economy. They reduce business confidence, discourage foreign investment and can lead to unemployment and high inflation.

Financial services are also vital to the economy. The countries most affected by the credit crunch all have, or maybe had, large financial sectors, generating huge quantities of money, tax revenues and investment.

The question continually arising here is why the banks continually refused to take responsibility for what they caused and accept the part they should play in helping countries out of their current predicaments.

This time last year The Royal Bank of Scotland, which received a huge bailout from the government, defended its bonus strategy saying it had to attract and keep top bankers. Many people, myself included, criticised them for this arguing its current predicament showed they had no banking talent to keep.

On 11 January this year the new head of Barclays Bob Diamond said it was time for the public to stop blaming the banks and bankers and allow them to get on with their job as they see fit.

Their economic importance aside, this is just arrogance of the highest nature. A lack of regulation allowed the banks to cripple themselves, and every global economy, because of unnecessary risk taking, and the bonuses they are still receiving are several times the national average income.

Let us face facts, bankers are not badly off, and while people are all in favour of annual bonuses being paid to those who have earned them through hard work, it is ridiculous to have them written into a contract.

The Oxford English Dictionary defines a bonus as a sum of money added to wages for good performance or an unexpected extra benefit. How come etymologists understand more about how benefits should be paid than bankers?

So far this has been a bit abstract and a repetition of what most of the general public feels about bankers currently, so lets have a bit of perspective.

Public transport ticket prices in London have risen 8% on 2010 prices. Although this might not sound like much a monthly tavelcard for all zones in London cost around £170. Per month they now cost £13.60 more, £163 more annually. A 2.5% increase in VAT to 20% is a regressive tax as it cost low income earners more in percentage terms than high income earners. University fees will now be doubled to slash the government budget for higher education, but this means children from lower income families will be put off entering higher education due to the debt levels they will incur.

At the same time bankers still have bonuses written into contracts, many of which would allow them to buy and run a luxury car, write off any price increase and send their child to university without even having to break into their basic salary.

This issue has always had the second thread of regulation. The political right will tell you increased regulation is bad for business, while the left tells you less regulation means organisations will not act responsibly. As with most things spilt along ideological grounds, both are wrong.

No business will act responsibly unless they are forced to. Privet companies, as utility companies have shown us, act only to make a profit. However, if you hem in companies to act a certain way it takes any fluidity out of the market and punishes innovation.

Again we must look back at the causes. Excessive risk taking, with the sole aim of making a larger profit, caused a crisis which crippled almost every economy in the world.

For bank now read power station. If a power station had burnt down or exploded because the company was trying to make power faster to make more profit would the operators still be running the company. Of cause not, they would be serving prison sentences for criminal negligence and the inspection procedures at all power station would have been ramped up.

What if an international delivery company had lost several thousand packages? This would not have led to criminal prosecution, but would certainly have led to a revamp of the process and additional supervision.

Governments have issues with attacking banks. They are generally very powerful organisations which have high stakes in national debt, generate huge tax revenues and encourage investment in the country.

One of the major fears has always been banks leaving the country if increased regulations were implied or bonuses were taxed leaving the country in an even worse state.

However there are ways of dealing with both the regulatory issues and bonus culture without damaging the banks.

With bonuses there should not be a tax, plain and simple. The bankers will receive their bonuses in shares in the bank. This would mean their bonus value is directly linked to the performance of the bank. This has been thrown around before, but has never been implemented or properly discussed and no reasons have been given as to why this would not work.

In terms of regulation many people would argue it is time for the bankers to get off their high horse, admit they were to blame and to stop acting like petulant children.

No other industry in the world would expect to cause a global crisis and not get punished, and the banks have not been punished. Yes, we understand the burdens of regulation, but a lack of regulation allowed this to happen so surely it is the only option.

Problems do arise though. As already mentioned banks can move abroad to countries with lesser regulation causing a sudden plunge in tax revenues and investment, not a good thing for countries limping out of recession.

What needs to happen is a global deal on how to regulate the banks. This was a global crisis and as such requires a global solution, not 50 different ones varying from country to country.

The nuances of any deal are more difficult to explain, but independent auditing of records, stronger penalties for those who take excessive risk and an end to sub-prime lending are obvious places to start.

It is time the banks realise they work not just for themselves, but for the people, understand if it was not for intervention many of them would no longer exist and accept their greed caused the problems everyone is now facing, including unemployment, rising prices and public spending cuts.

Cyrano de Bergerac said “The insufferable arrogance of human beings to think that nature was made solely for their benefit, as if it was conceivable that the sun had been set afire merely to ripen men's apples and head their cabbages.” We appreciate the role the banks play, but nobody likes to pay for other peoples mistakes, and it was the banks mistakes.

To have the arrogance to turn around afterwards and claim you should be left alone with no punishment is an insult to the millions of people who now struggle to find work, cannot pay the mortgage and find it impossible to get a loan from a bank bailed out by their money

What the public feel now is not malice, but utter disappointment and frustration at the lack of action taken and the problems they must now face all because the banks want to get back to making obscene profits.

Nobody else in the world would be able to get away with doing what the bankers have done or as Napoleon put it “Never ascribe to malice that which can adequately be explained by incompetence”.

By the way, this is not a new issue. Chief Justice of the US Supreme Court Earl Warren once said “I hate banks. They do nothing positive for anybody except take care of themselves. They're first in with their fees and first out when there's trouble.”