The Government’ s Faustian Bargain with the Banks.
14 Jan 2010
JR Max Wheel
The press is littered with comment on banker’s pay. Stephen Hester’s defence at the Commons Select Committee reveals just how distorted the logic has now become.
Bailing out the banks was clearly required to avoid the loss of depositor funds and a corresponding economic implosion. What was missing was the quid pro quo.
The argument started with Northern Rock where after its nationalization the focus was in protecting taxpayer’s money. This has now spectacularly misfired when extended to the other quasi state owned banks. Hester rightly points out that the Government is now the prisoner of the market.
If the market chooses to reward bankers at ludicrous levels, then in order to preserve quality staff RBS has no choice but to pay the going rate. This follows from the expectation that the taxpayer will (ultimately) be repaid the funds used to bail out the banks as with Northern Rock. This however is to compare apples and pears, RBS and Lloyd’s Banking Group were not nationalized despite enormous sums being provided in emergency capital and asset and liquidity support systems.
Hester argues that his level of remuneration (approx £9.6m over 3 years) would be recognised even by his parents as being excessive. It is, but crucially not so in the parallel universe that is the global banking merry-go-round. Governments on both sides of the Atlantic missed a major opportunity to re-align remuneration with reality in their near panic to stop the banks’ collapse. Nothing material has been extracted in return from the banks in return, who also continue to sit on over-valued assets, having done little to tackle the toxic debts traded so widely. This is inexcusable. Take a look at the growing row over complex mortgages (option ARM- or option adjustable rate mortgages designed ostensibly to cope with borrowers with highly variable incomes) in the US. The state of the US housing market is still so volatile that it is a time bomb under the now heavily concentrated banking system and which could easily be transmitted to the UK and other markets.
It used to be argued that the evolution of capitalism was the replacement of owners by professional managers. This has proved wide of the mark in the financial sector, the Government’s may technically own a majority stake but the real owners appear to be the over-rewarded bankers, whose political and economic clout is undeniable. This system must be broken up or the too big to fail danger will revisit us sooner than we think. It is in the nature of fractional reserve banking to provide via leverage huge returns on successful trades. These have little to do with individual skills in the most part and a great deal to do with the nature of our banking system. It is not enough to see whether a division has performed well or ahead of budget as Mr. Hester argues but a great deal to do with whether the banks will be permitted to try to grow their way out of trouble. In which case expect more bonuses, the blame for which can be firmly placed at the feeble reaction of Government and regulators to exert a serious grip when the system was on its knees.