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Time to spank the bankers?

 The Big Issue in Scotland 28 May 2019

(Originally published: 09/2009) The G20 have promised to reform international banking, but can Britain, France and the US agree to clamp down on the infamous bonus bonanza? As preparations begin for the G20 summit in Pittsburgh, The Big Issue in Scotland’s Adam Forrest analyses the starkly contrasting positions taken up by a host of global leaders on the thorny issue of banker’s remuneration.  - Adam Forrest

The Big Issue in Scotland

Courtesy of the Big Issue in Scotland

GLASGOW, Scotland - Only six months ago disgraced RBS boss Fred "the Shred" Goodwin's windows got smashed, bolshy MPs called for knighthoods to be revoked, and The Sun dubbed Britain's financial bosses "Scumbag Millionaires". Since then, we've had money-grabbing footballers bound for Madrid and Manchester (the blue half), Jordan's post-Pete Andre shenanigans, and MPs' creative use of the expenses system - a more engaging gallery of pantomime villains for the tabloids to shake the national fist at.

Meanwhile, a new buzz acronym has escaped from the lips of the City's champagne receptions: BAB (Bonuses are Back). Bumper payouts and a new hiring frenzy have returned to the financial world, just twelve months after British banking was a few hours from shutting down the cash machines and the government was forced to plough taxpayers trillions into saving the sector.

One year on from the catalyst of Lehman Brothers collapse, cooler heads are also in evidence. As calm slowly returns to the markets, house prices tick upwards, and the global economy begins to steady itself, the politicians see an opening. They are, finally, getting around to curbs on bankers' bonuses.

Last week's meeting of G20 finance ministers in London saw the major powers pledge to force the big banks into transparency about their pay structures, and look at ways to ensure bonuses are paid over longer periods - with no upfront cash payments - to encourage long-term success rather than short-term risk-taking. The Financial Stability Board (FSB), the new global regulatory body set up by the G20 will also explore how to claw back money from publicly bailed-out banks when their gambles go wrong.

Everyone seems to agree that risk and pay need to be re-aligned along the same track. Gordon Brown has ramped up the anti-bonus rhetoric, calling the culture of win-or-lose rewards that helped create such devastating chanciness "offensive to the general public, whose taxpayers' money in different ways has helped many banks from collapsing."

Here's where the consensus disintegrates (and the City chiefs pop their champagne corks). Britain has teamed up with the US in stymieing French and German efforts to establish an international agreement to cap bankers' bonuses - a ceiling on the wild payouts that have reached £4billion in the UK alone so far this year. Chancellor Alistair Darling believes a formal cap to be "unworkable".

Not so, says the French finance minister Christine Lagarde, who has become the public face of the pay limit concept, appearing regularly on Newsnight and Channel 4 news to argue the moral case for reform. "Governments are responsible to the people, not to the City," says the right-of-centre leader. "The City cannot be above the rule. We cannot allow a return to business as usual. The public across Europe have been flabbergasted, horrified at the amount of compensation paid to traders in financial markets."

France and Germany may accuse the UK and US finance ministers of being too soft on pay, but are vulnerable to concerns about French and German banks holding enough capital. Tim Geithner - the US treasury secretary - issued a statement saying that the real priority should be for banks to secure more capital. He wants restrictions placed on how "leveraged" a particular bank can become: how much it lends as a multiple of its capital. Geithner knows US banks have lent somewhere between 10 and 13 times their core equity capital, whereas French and German banks' equivalent lending multiples are between 30 and 70.

Pay, suggests London and Washington, is near impossible to control. If banks are restricted to how much they can dish out in bonuses, they'll find other ways of offering reward - increased pensions (step forward Fred the Shred), or mega-wages for those contracted on a short-term basis. As the BBC's business boffin Robert Peston puts it: "Remuneration in finance is like a blancmange…If government and regulators squeeze one part, it will bubble up somewhere else."

Perhaps there is better way to reign in the sector's tendency toward excess. The idea of taxing big banks' ambition was suggested recently by none other than Adair Turner, head of the Financial Services Authority. He recommended a small levy on each financial transaction, which might guard against banks over-involvement in murky derivatives markets, and would create a fund to support developing nations; "a nice sensible revenue source for funding global public goods".

Questioning whether activities in the City were at all "socially useful", Lord Turner is risking the wrath of those who view the financial sector as untouchably vital to the British economy. "If you want to stop excessive pay in a swollen financial sector you have to reduce the size of that sector or apply special taxes to its pre-remuneration profit," he says. "Higher capital requirements against trading activities will be our most powerful tool to eliminate excessive activity and profits. And if increased capital requirements are insufficient I am happy to consider taxes on financial transactions."

Will Hutton, head of leftish economic think tank The Work Foundation, salutes Turner's bravery, and slams the position of Britain and the US on a bonus cap as "defending the indefensible". Hutton wants reform to go further still, and break up the oligopoly once and for all. "We are in a ridiculous situation where the banks have become too big to fail," he tells The Big Issue. "We shouldn't be scared to break them up and create smaller, more accountable lenders. We need more plurality in the system.

The Liberal Democrats have been among the staunchest supporters of splitting retail banks from their more speculative investment activities. The government has invested about £75bn in Royal Bank of Scotland and Lloyds, and the UK taxpayer is now the major shareholder in Lloyds Banking Group, which owns Halifax and Bank of Scotland, and RBS, which owns NatWest. Vince Cable believes we have a golden opportunity to split up ordinary commercial banking of business lending and mortgages and the casino-style banking of hedge funds and credit default swaps, before the behemoths are returned to private ownership.

"These two things should not co-exist in the same institution," says Cable, himself now something of a financial guru. "It is highly unstable. It means the British taxpayer is underwriting very dangerous high-risk activities, so for that reason alone they should be split up. In addition the European Commission has made the case that there is now far too little competition."

Many financial commentators argue in favour of a British 2009 version of the American Glass-Steagall Act of 1933, which upheld the strict separation of commercial and investment banking (until the slice of New Deal wisdom was dismantled in 1999). Gillian Tett, the FT journalist hailed for warning of the credit market's follies, agrees that "a more sober, traditional, prudent approach to banking…is frankly long overdue."

"I think there is a strong case for breaking up some of the largest banks," she tells The Big Issue. "I would like to separate the most speculative risk-taking parts of the banking system into investment banking partnerships, to introduce a better system of surveillance."

Very little of this will be on the agenda when G20 finance ministers meet up again at the end of the month. Bashing the bonuses might make us feel good for a while, but the banks will remain too mighty to mess with for the foreseeable future.

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