Save Our Bonuses!

With the British economy in a worse depression than the 1930s , bank lending to businesses severely depressed, and unemployment still high, a sane finance minister’s main concern might be resuscitating growth.

Prime Minister David Cameron And Chancellor George Osborne Ahead Of A Critical Week At The Leveson Inquiry

George Osborne’s main concern, however, are the poor suffering bankers:

Chancellor George Osborne flies to Brussels later determined to water down the European Parliament’s proposals to curb bankers’ bonuses.

But EU finance minsters in the Economic and Financial Affairs Council (Ecofin) are expected to approve last week’s proposals.

They include limiting bonuses to 100% of a banker’s annual salary, or to 200% if shareholders approve.

The City of London fears the rules will drive away talent and restrict growth.

Mayor of London Boris Johnson has dismissed the idea as “self-defeating”. London is the EU’s largest financial centre.

On Monday, a spokesman for Prime Minister David Cameron said: “We continue to have real concerns on the proposals. We are in discussions with other member states.”

But Mr Osborne’s bargaining power may be weakened further by Switzerland’s recent decision to cap bonuses paid to bankers and give shareholders binding powers over executive pay.

Now, I couldn’t care less about bonuses or pay in a free industry where success and failure are determined meritocratically. It is none of my business. If a successful business wants to pay its employees bonuses, then that is that business’s prerogative. If it wants to pay such huge bonuses that it puts itself out of business, then that is that business’s prerogative.

But the British financial sector is the diametrical opposite of a successful industry. It is a forlorn bowlegged blithering misshapen mess. The banks were bailed out by the taxpayer. They do not exist on the merits of their own behaviour. Two of the biggest are still owned by the taxpayer.  So I — as a taxpayer and as a British citizen — have an inherent personal interest in the behaviour of these banks and their employees.

In an ideal world, I would have let the banks go to the wall. The fact that the financial system is still on life support almost five years after the crisis began tells a great story. It’s not just that I don’t believe in bailing out failed and fragile corporations (although I do believe that this is immoral cronyism). The excessive interconnectivity built up over years prior to the crisis means that the pre-existing financial structure is extremely fragile. Sooner or later, without dismantling the fragilities (something that patently has not happened, as the global financial system today is as big and corrupt and interconnective as ever), the system will break again. (Obviously in a no-bank-bailout world, other action would have been required. Once the financial system had been allowed to fail, depositors would have to be bailed out, and a new financial system would have to be seeded and capitalised.)

But we do not live in an ideal world. We have inherited a broken system where the bankers (and not solely the ones whose banks are owned by the taxpayer — all banks benefit from the implicit liquidity guarantees of central banks) are living on taxpayer largesse. That gives the taxpayer the right to dictate terms to the banking sector.

Unfortunately, this measure (like many such measures dreamed up arbitrarily by bureaucrats) is rather pointless as it can be so very easily gamed by inflating salaries. And it will do nothing to address financial sustainability, as it does not address the problem that led to the 2008 liquidity panic — excessive balance sheet interconnectivity (much less the broader problems of moral hazard, ponzification, and the current weakened lending conditions).

But, if it is a step toward a Glass-Steagall-style separation of retail and investment banking — a solution which would actually address a real problem, and one advocated in the Vickers report — then perhaps that is a good thing. Certainly, it is not worth picking a fight over. The only priority Osborne should have right now is creating conditions in which the private sector can grow sustainably. Unlimiting the bonuses of the High Priests of High Finance has nothing whatever to do with that.

23 thoughts on “Save Our Bonuses!

  1. I am waiting for a return to Mark to Market Accounting, then we will see the truth. It will cause the collapse of the markets and will be repealed. Mark to Market Accounting caused the instability that broke the fragility, causing Lehman’s collapse and the GFC.

    How can you pay bonuses out of profits that are not true and fair. From what I remember of quaint common law, you can’t pay a dividend from carry forward losses, so shareholders should get their dividend before any bonuses are paid out of fictitious profits.

    Rinse, Wash, Repeat.

    • Mark-to-market is actually quite dangerous because it concentrates fragility. If the market crashes, that immediately impacts everyone’s (or at least a greater majority of) mark-to-market balance sheets. Better to mark-to-market over a 5-year rolling average, perhaps (5-year averages should also be the headline profit figure — annualised accounting seems to have a loot-and-pillage effect) although I am not really an expert in accountancy.

      • Whilst it can and does cause feedback loops, it is preferable to report positions based on actual market prices, when there is an active liquid market. Where it is illiquid, perhaps the rules need to temper the fragility causing feedback loop.

        For example banks argue that the real estate market is unusually depressed therefore they will release stock in small doses to keep the market up. I say they should offload at the price they get in a forced sale. They are not in the business of real estate speculation. How can they understand the true price?

  2. Pingback: Save Our Bonuses! | My Blog

    • Yes, that famous Tory Gordon Brown bailed out the banks…..

      “But, if it is a step toward a Glass-Steagall-style separation of retail and investment banking — a solution which would actually address a real problem, ”
      The problem with that Aziz is that the UK never had a Glass-Steagall style separation, and had far fewer bank failures than the US over the time frame between implementation and repeal of said act.

      UK banks that failed were NOT investment banks. Northern Rock was a retail bank. It failed when its mortgage book blew up. RBS failed when its overseas loan book went bad, retail operations. HBOS failed when its depositors withdrew their funds and it couldnt borrow from any other bank, retail operations again.

      Barclays Bank would have been in the same position, its retail losses enough to topple the company, but its investment arm was profitable enough to save the whole.

      • Yes, that famous Tory Gordon Brown bailed out the banks…..

        In 2010 I might have liked to think that George Osborne might not have done that.Now (post-Carney) I am fairly certain that he would have done exactly the same.

        UK banks that failed were NOT investment banks. Northern Rock was a retail bank. It failed when its mortgage book blew up. RBS failed when its overseas loan book went bad.

        They all got involved in heavy speculatory shadow finance operations… In other words, retail banks acting like hedge funds.

  3. People seem to want to go back to a time when the banking system was at a much less dys-functional state instead of moving forward to something that is actually sustainable.

    We are talking about a system where people either loan-out the same money over and over again [in its highest form], or just prints their own cash [in its worst].

    If this was 18th/19th century America and we were debating slavery, would you folks be saying, let’s make sure the slaves are treated better, or instead, talk about slavery’s abolition?


    We need to get back to a real economy where people do real things, like make stuff, instead a service economy [slave/serf] where the majority is reduced to serving the needs of minority who use their vast intelligence and resources to divert as many income streams as is possible into their pockets.

    People need to save and save and save. People need to act like adults and buy what they need, not like children who only buy what they desire.

    Bankers need to be shown the proverbial door. These a parasites that produce nothing but heartache for the vast majority of people on this planet.

    • “We need to get back to a real economy where people do real things, like make stuff, ”

      China “makes” iPods at $3 each.
      Apple designs iPods at $80 each

      The UK earns more than China does per iPod

      • China “makes” iPods at $3 each.
        Apple designs iPods at $80 each

        The UK earns more than China does per iPod

        But China controls the means of production….

        • “China makes I-pods at $3.00 each………………………….UK earns more than China does per I-pod”

          I went through the BOM on several current Apple products… UK makes nothing… About 60,000 employees world wide…75% of Apple employees work in US… 60% of Apple employees work in retail Stores and the products are “designed” in the US. What little Corporate tax they pay in your neighborhood is paid to Ireland.. Apple business model keeps manufacturing costs at about 50% of retail… China now averages about $5.45 assembly costs per unit. The Chinese economy is a big winner….

          I did notice that Apple increased their ownership of US Treasury and Agency securities. From: $24,184 million (2011) To: $39,628 million (2012) US-K-10 filing.

      • Globalism will [can] not work until living standards are somewhat equivalent throughout the world. Manufacturing in the third world and selling in the first is another scam brought to us by the wonderful men and women who care for naught but themselves.

        As was the case the last time this was attempted [19th century], the result was not so wonderful.

  4. We live in a world where the banksters and politicians confidently make insane deals on the basis of It’s OK, because when SHTF inevitably occurs, YBGIBG (You’ll be gone and I’ll be gone). We should consider retrospective mechanisms for Banking. I still can’t believe GB sold half our gold. Bet a Banker talked him into some nice ‘more profitable derivatives, and we’ll take that barbarous relic off your hands!
    In the dark art of corporate takeovers, Bankers provide the lubricant for crazy deals that destroy the companies by loading the new entity with debt. The Bankers and CEO’s are long gone when it all goes pear shaped. In a Bank which crashes with £7billion of debt, how can the bonuses for that year be ring-fenced on the grounds the employees did a good job? In a merger when the deal implodes four years later contrary to the promises of the deal makers, why not have a claw -back option? Impermanence is right. They have become parasitical, intertwined through the entire world economy. It’s not just Goldman Sachs which is the giant vampire squid. Banks are now privatising profit and socialising debt. It will end badly for many of us if things don’t change.

    • It has already ended badly, as the [100 year] crisis is [essentially] over. What’s left is picking up the pieces and starting over. You’ll never get a dime back from the thieves, but [hopefully] what has been learned is the dangers of banking, lessons that you should have been seared into the human psyche for thousands of years ago.

      Bankers offer what people want even more than sex, drugs, tv, money, or power; they want something for nothing, the ultimate human fantasy. It is this illusion that makes even the strongest among us go weak in the knees, always trying to figure out new and more creative ways to really get something for nothing [stealing from others].

      It is stealing from others that has been given so many different names over the ages, the most common contemporary version being, “investing.” Just allow the brilliant financial gurus to take your money, and through the magic of mathematical algorithms, grand theoretical formulas, and an eye of newt, we will return to you [and yours] MORE money, that is, we will allow your money to become employed in some third world country where some poor slob will hand over a portion of his/her labor value so you can live a better life and your masters can re-fuel their private jets and other non-sense.

      Eventually, the majority of adults are going to have to act as such or else continue to be treated like the four-year-old’s that governments and financiers assume we are, as they take us and our decedents to the cleaner once again.

  5. El Zombo

    The UK makes/constructs/manufactures no part of the iPod

    The UK *earns* a tidy sum from license fees on a UK designed part (sound processor, designed by Rockwell Sounds I believe) which are manufactured in SE Asia and assembled in China. Or it did anyway, there might be a new supplier now.

    Well, it was a few years ago they were earning $3 a pop for iPods, so $5.35 isnt that hard to believe, wage inflation is a bitch.
    The point remains, Apple banks 15x that for designing it.
    And assembly, which is all China does, is much easier to move around than design is.

    But do they?
    Define “production”.
    I could replicate the Chinese part in my living room.
    Order iPod parts from Japan, Taiwan, Korea ect, solder parts together.
    I couldnt set up a microprocessor fabrication plant in my living room, nor could I manufacture touch screen displays.
    I really really couldnt design either of them.

    • “UK earns a tidy sum..”

      I agree the license fee for UK based technology should be put into the equation but I doubt it is anywhere close to $3.00 per unit and the next sound processor might well be designed somewhere else including someones garage. Manufacturing requires a sizable investment in equipment and people to apply the technology growing the respective economies on a dynamic level making the current trend is to manufacture parts in SE Asia likely to continue. China’s resource being a large and motivated work force has created a dynamic effect with investments in infrastructure designed to enhance a growth in manufacturing/fabrication not just assembly. That is why I say the Chinese are the big winner.

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