There's more to bankers than bonuses

Tweet Bashing bankers is always good fun, and usually something which the victims richly deserve.  The EU proposals to cap their bonuses are hardly likely to prove anything other than popular with the majority of us.  The only surprising reaction to date has been the extent to which senior Conservative politicians have been willing to take the unpopular stance of opposing any cap on bonuses.

I can’t help feeling, though, that merely imposing a cap on bonuses is missing the point.  It’s not that I’m convinced by any of the arguments against a cap – far from it.  

The idea that they will take their banking elsewhere if they don’t get their own way sounds more like an argument in favour than an argument against.  And the suggestion that they are so uniquely talented and able that they need to be paid enormous rewards is surely a joke – these are the same people who thought that sub-prime loans were a jolly good idea, that credit default swaps were a good way out when it went wrong, and that gambling on derivatives with the money we put into our high street banks was perfectly acceptable.

No, none of that does anything to convince me.

Then we have the argument that the banks’ huge profits means that they pay a lot of tax, and we can’t afford to lose that money. That’s bringing us closer to my concern about whether a cap on bonuses is missing the point; because it’s not just the size of the bonuses which concerns me, it’s what they’re being paid for and how that profit is being made.  Capping bonuses doesn’t necessarily do anything to change that underlying activity.

Indeed; there’s a danger that the consequence might be quite the opposite.  If the total bonus available is less, does that mean that they’ll do less to earn it, or does it make them more determined than ever to earn the largest possible amount rather than settle for only half of what might be available?  Might it, in fact, incentivise them to take even more risks?

What few seem to be asking is where these massive profits on which we receive tax income actually come from.  Much of what the ‘investment’ bankers are doing bears as much relationship to the traditional meaning of ‘investment’ as does a fiver on the 3:30 at Newmarket.  It’s more to do with ‘taking a position’, to use their euphemism, on currency movements and ’trading’ in general.  It’s more like gambling than investment.  And if there’s one thing of which I’m certain when it comes to gambling it's that it doesn’t create any money; it merely recycles money.  Every profit is balanced by a loss somewhere else.

But, just like the lottery, the losses are usually spread in such a way as to be almost invisible.  Certainly, there’s an occasional ‘big loser’ to make up for the big winner; but generally speaking, as in most forms of gambling, there are a few big winners and a large number of small losers.  And the small losers from the banks’ casino approach to ‘investment’ are all of us.  That ‘profit’ is merely redistribution, from the many to the few.

It doesn’t even stop there though.  It’s clear that when they win, we lose; but it’s also become clear that when they get it wrong, they still win, and we still lose.  They’re gambling with our money, betting it against us, and doing it all with loaded dice.  And then they want us to be grateful that they give us some of our money back by paying as little tax as they can get away with on their profits and bonuses?  The amazing thing is that so many are falling for it.

The problem with banks isn’t that they’re paying bonuses; it’s what they’re paying them for.  And a cap on bonuses doesn’t even begin to scratch the surface of that issue.

Top salaries

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There have been two main arguments advanced by those who support the payment of massive bonuses to bankers.  The first is that such bonuses represent payment for results, and the second is that the banks are in competition with each other for their top management and therefore have to pay competitive packages.

Those arguments are, however, based on two assumptions.  Those assumptions are self-evidently true to those making them; but I’m not convinced that they stand up to more objective scrutiny.  The first assumption is that the actions of the individuals concerned make such a significant difference to the performance of the organisation as a whole that it is essential to retain them, and the second is that there is a vanishingly small pool of talented people who can undertake such roles.

The question about the extent to which the performance of an organisation is affected by the performance of an individual is far from straightforward.  It’s probably true that poor decisions by individuals can wreck an organisation – and the banking industry has seen the effects of that probably more than any other sector.  It’s far less obvious that the actions of top management can make an organisation succeed. 

That doesn’t stop them claiming the credit for success when it happens – but there’s often a huge amount of luck.  They just happen to be in the right place at the right time.  And if things go wrong, there’s usually someone else to blame.  So when things are going badly it’s down to the problems of the Eurozone; when they are going well it’s due to the brilliance of the top bankers.  (And it’s hard for politicians to criticise bankers for pulling this trick when they do it so often themselves.)

Competent management teams at banks will generally do better than incompetent ones, but I suspect that a huge proportion of the factors which affect overall success will always be outside their control.  If that’s true, then the pool of people who could manage a bank competently is much larger than we are led to believe.  And if that pool is much larger, then the need to compete by paying huge salaries is correspondingly reduced.

To look at things another way, do we really believe that we couldn’t find competent people to run our banks at salaries very much lower than those being paid currently?  After all, it’s not so very long ago that the banks were indeed run by people whose salaries, in both absolute and comparative terms, were very much lower than today.  And the banks were, I recall, rather more successful too.

Robbing Hood

Tweet I've never been a great fan of hedge funds. Buying things they don't want using other peoples' money and selling things they don't own in order to redistribute wealth from the many to the few has never struck me as being either a socially valuable activity, or a sound basis for an economy.

I've taken more interest since it became clear that these funds are donating large sums to the Tory party nationally, and that one of them is almost entirely funding the Tory campaign in this constituency.

Many people, myself included, have long harboured doubts that the people involved in some of the more complex financial instruments do not themselves fully understand the nature of those instruments, let alone the risks involved. If they were only working on the fringes of the financial system -- and if they were the only people taking those unquantified risks -- it might not matter. But it does matter -- firstly because their habit of shortselling directly contributed to the financial collapse, and secondly because it became clear that it was us, rather than them, who were taking the risks.

Wrecsam Plaid drew attention a few days ago to the massive payment being made to one hedge fund manager who admits that he made a great deal by short-selling the banks, including Bradford and Bingley. It seems that the people behind funds like this will completely escape the additional tax which is being imposed on bankers' bonuses.

Thee are two reasons for that. The first is, as Wrecsam Plaid points out, that they are not, in the strict sense of the word, 'bankers'. (Although some people may still consider them to be 'merchants'.) The second is that this company operates as a Limited Liability Partnership rather than as a limited company, as do a number of other hedge funds.

LLPs pay no corporation tax at all on their profits. Instead the profit made by the LLP (as opposed to the growth in the assets managed) is treated as the personal property of the partners, who can take it out of the partnership any time they want. And, whilst I don't know the details of the tax status of the particular company involved here, in most cases with companies like this the profits extracted are treated as coming from the purchase and sale of assets rather than as income - so they are subject to capital gains tax rather than income tax. This is an extremely beneficial arrangement - for those involved. It means, in effect, that they can pay themselves millions, but pay tax at a lower rate than the office cleaning staff.

Hedge funds do make some people wealthy, but they don't generate wealth, as some of them claim. The two things are quite different. They actually redistribute wealth - to themselves. They perform no useful function for the many, and the sooner they are closed down the better.

Just moving it around

Tweet Bonuses are a part of the remuneration package of a lot of people in a lot of jobs; it isn't just bankers that benefit. And in principle, rewarding those who achieve targets can help to improve the effectiveness of organisations. There are, however, legitimate questions to be asked about the size of bonuses, and the basis on which they are paid.

It's a mistake to lump all 'bankers' together as though they were all the same – they are not. But they're not all in line for big bonuses either. The bankers who do the more mundane day to day stuff which we all depend upon to manage our money are performing a useful function - but they're not the ones in line for the big payouts. No, it's the gamblers and speculators; the ones who take all the risks with other people's money - they're the ones lining up to claim their rewards.

What some of the people in the financial services sector seem to be unable to understand is that it isn't the mere fact that they want to pay themselves bonuses which raises hackles; it's a combination of the size of those bonuses and the relationship (or lack of) with their contribution to the success of the organisations for which they work.

There is a great deal of difference between making people wealthy, and creating wealth. There is no doubt that the gamblers and speculators achieve the first; some people (and not just the bankers themselves) have become very wealthy as a result of their activities. But it isn't because they have actually created any wealth; all they've done is to move it around a bit.

Like Robin Hood in reverse, they actually take a little from the many to give a lot to the few. In that sense, their activities have not only been socially useless; they have actually been detrimental to the interests of most of us. The fact that some of them have threatened to take their 'skills' elsewhere unless they are allowed to be paid that to which they think they are entitled shows only how far removed they are from reality. I'm tempted to say 'let them go'; my problem is that I wouldn't wish them on anyone else either.

Shooting the messenger

Tweet I suppose nobody knows, yet, what the whole truth is in the case of the story about Paul Moore. He claims to have been warning HBOS bosses that they were taking too much risk with their lending – and that he was sacked as a result.

It appears that he was then replaced by someone with, putting the best possible gloss on it, significantly less expertise and experience in the field of risk management. One can only presume that the replacement then gave his bosses the answer that they wanted to hear, rather than one which they did not want.

It's an astonishing example of shooting the messenger – and of the way in which the herd mentality took control at the top level of our banks. 'Everyone else was making these investments, so they must be OK, and we must do it too' – even when clear evidence to the contrary was presented to them.

Very few people have been sacked (or resigned) over this debacle – and there is increasing evidence that those heads which did roll are simply being re-employed by their former competitors or as 'consultants'. Those still in post want to receive their bonuses anyway – rewards for failure. Does anyone really believe that any lessons have been learned?

Bankers and Bonuses

Tweet About 25 years ago, I attended a briefing session about the then government's plans to privatise the organisation for which I worked, or rather on the opportunity to buy shares on special terms. The person doing the presentation had explained it all, including the role of the merchant bankers involved.

When it came to questions, a bluff plain-speaking engineer who originally hailed from London prefaced his remarks with the comment that he'd always thought that merchant, as an abbreviation for merchant banker, was cockney rhyming slang. He wasn't being complimentary, of course.

In those days, before the Tories had deregulated financial services, merchant banking was kept very much separate from retail banking, largely so that retail banking was not exposed to the higher level of risk which merchant bankers were able to take. It was a wise and sensible separation. Had it still been in place today, I suspect that the government could have allowed some of the risk-takers in the merchant banks to bring their businesses tumbling down - and the retail banks on the high street would have needed no consequential bail out.

One of the other differences between merchant banks and retail banks was that there was a culture of high levels of performance bonuses in the merchant sector, but this was uncommon, to say the least, in the retail sector. That's another distinction which has been blurred, and now it seems that the bankers (I suppose I'd better not call them merchants) who have done so much to destroy the banking system expect to receive their bonuses anyway.

Now, it may well be that there are a lot of people, at all levels, working in some divisions of the companies who actually have performed well, and their divisions have met their targets. But there can be no justification for paying large bonuses to the people who made the reckless gambles and lost.

It's interesting that the best justification that some have come up with for paying the bonuses is that these people are experts in their field, and are easily able to go and use their skills in other financial centres if they don't get the rewards they want here. Am I alone in wondering whether them taking their 'skill' and 'expertise' elsewhere might not be an entirely bad thing?