Myners disagrees with Obama on pay
IT is almost funny how, in our topsy-turvy world, highly-paid bank workers are now being accused of exploiting the capitalist class in the form of bank shareholders. The latest to make that claim is Lord Myners, the City Minister, who described the present levels of bonuses as “a market failure”, by which he meant proof of the inability of shareholders to restrain those who work for them. It is quite clear that these kinds of problems do exist; but I’m afraid his lordship has got it wrong here, though he also made some good points in his speech at Mansion House last night.
Private shareholders are far from powerless: the largest institutional investors in HSBC, Barclays or Standard Chartered have plenty of influence and ultimately total control. If enough of them signed a joint letter demanding lower bonuses, the pressure would be so intense that boards would have to impose immediate cuts. No such letter has materialised because investors realise that the retained profits from investment banking are so large that, even after bonuses, it is worth continuing to attract top staff with high pay.
Myners is also wrong to claim banks are putting bonuses before capital: reserves are going up across the industry, while compensation as a share of revenues is falling back. Myners ought to check what ratio of revenues other industries pay out to their staff: he would be pleasantly surprised.
Barack Obama, unlike Gordon Brown, actually wants to slash the pay at the firms his government controls. It will an interesting experiment, though I don’t think it is the right answer as it will destroy – rather than try and nurture back to health – bailed-out banks. I fear that Citigroup and Bank of America Merrill Lynch could be condemned to terminal decline if the proposals outlined in our story on page 1 materialise.
The good news is that Myners explicitly disagrees with Obama. He said last night that while UK banks need to lead the way in reforming pay practices, there are tens of billions of pounds of taxpayer money tied up in these firms. If we are to get this money back for the taxpayer, the banks must be competitive. So UKFI will not try to turn its banks into a unique experiment on pay – the government secretly knows that it needs highly-paid traders to make vast profits, better to recoup the taxpayers’ investment in the firm.
But what the US example shows is that it is becoming increasingly clear that bail-outs and nationalisation always lead to the destruction, rather than the salvation, of investment banks (it is perhaps not as clear-cut with retail banks, though the big US players in question own both sorts of businesses). The kinds of activities investment firms engage in, and the rewards they confer their staff, are simply not compatible with membership of the public sector.
As I have long argued, we need to develop a proper legal framework to allow banks to go bust and be shut down in a controlled manner, completely wiping out shareholders and bondholders in the process. Taxpayers should never have to help a troubled firm again, in any industry. Don’t get me wrong: the government has the legal and moral right to control pay at the firms it has bailed out, such as RBS (it has neither for truly private businesses). But that still doesn’t make it a sensible thing to do.