There is at the moment a hugely irrational anti-banker mood in this country. Every day I see angry letters in the papers and angry blogs calling for all sorts of dire penalties for bankers and financial traders. They are Public Enemy Number One, accused of gambling with “our” money and bringing the country to the verge of ruin. Government ministers such as Harriet Harman threaten all sorts of extra-legal manoeuvres to take Sir Fred Goodwin’s pension away.
But hang on there. Others were implicated – the government, for running massive fiscal deficits and messing up pensions by changing the tax regime (thus putting pension funds under pressure to obtain higher returns), the Bank of England for failing to take asset inflation into account in its conduct of monetary policy, the FSA and other regulators for poor regulation, the boards of financial institutions (and especially their overpaid non-executive directors who are meant to keep an eye on excessively risky behaviour) – and also us, the ordinary punters, for overstretching ourselves in the mortgage market, or seeking higher returns from our savings and ignoring the small print about asset prices going up and down. Yes, we’re all in it.
And there was nothing particularly irrational about the way bankers were paid – the “bonus culture”. There is a colossal literature on performance-related pay, of which bankers’ bonuses are an extreme manifestation. Economists, and committees of the great and good, have generally argued that linking pay to performance is desirable wherever possible, and particularly for top executives and traders where small changes in performance can be worth many millions of pounds.
People might accept this, but argue that allowing failed bankers to keep bonuses and pensions in the current climate is different. There are arguments, I guess, that where the state is supporting banks and financial institutions which would otherwise go bust, there may have been a case for trying to renegotiate rewards in return for keeping banks going. But people generally have a contractual right to compensation which was freely agreed in advance, and it is sophistry to suggest otherwise.
Politicians, journalists and angry phone-in callers all have 20-20 hindsight, and claim that the likes of Fred Goodwin took unnecessary risks – in his case, by pushing through the merger between RBS and ABN Amro (which, of course, could have been stopped by the competition authorities). He screwed up. Businesspeople do. Having done so, he negotiated the best leaving package he could. It is not only bankers who do this, incidentally; Chelsea FC’s annual report shows that they spent £23 million last year paying off two managers (Mourinho and Grant) and five assistant coaches – quite a big “reward for failure”, but one which has attracted little public comment..
Whatever the current situation, the government is surely wrong to be attempting to legislate for the future behaviour of firms and putting caps on bonuses, or conditions that they are paid in shares which have to be held for many years.
Top executives and traders face highly demanding jobs, and won’t take them in the UK unless they can get a return commensurate with their commitment. And they are also not going to negotiate one-way contracts which don’t reward them very well for success and yet still allow banks to sack them for poor results. They will go abroad or into private, unregulated funds where the government’s writ doesn’t run. We will end up with state-regulated bankers modelled on Dad’s Army’s Captain Mainwaring, but with less imagination.
I’m not happy seeing failed bankers walking away with large rewards. In their position I hope I would have the humility to return some of the pensions and pay-offs, or devote them to a good cause. But I really don’t like to see them bullied and harassed by politicians whose own record does not bear close scrutiny.