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December 21, 2009 8:08 pm
The storm may be raging about them, but bankers have been locked in a contest to say something truly silly. A year that began with a threatened collapse of the international financial system thus draws to a close with a reminder of why governments cannot again trust the future of their economies to the self-styled titans of finance.
Until a few days ago Lloyd Blankfein of Goldman Sachs looked certain to take the prize. Mr Blankfein, readers will recall, declared that we must not be too hard on bankers because they were doing “God’s work”. Later he protested that his words were spoken in jest. Humorously or otherwise, Goldman executives in London have taken to calling him God’s Banker.
Now Stephen Hester, chief executive of Britain’s Royal Bank of Scotland, has mounted a late bid for the trophy. The politicians who rescued the financial services industry, Mr Hester remarked the other day, should now hand it all back to those who caused the mess.
To be fair, Mr Hester did not join Mr Blankfein in invoking a higher spiritual authority when he railed against the alleged “politicisation” by the authorities in Britain and the European Union of the running of RBS. But, if his message was a touch more down to earth, the underlying sentiment was similarly absurd.
How, after the events of the past year, can anyone believe that politics can or should be taken out of banking? To the contrary, recreating a financial services industry that serves an interest wider than the bankers requires more politics.
The immediate cause of the ire in the City of London is the Treasury’s imposition of a 50 per cent supertax on bonuses of more than £25,000 (a figure, incidentally. higher than the average annual wage in Britain). Behind the rebellion, though, lies a deeper complaint. Hard as it is to believe, bankers seem to think politicians are interfering too much with the free play of market forces.
Another way of putting this would be to say that now that governments have socialised all the losses, they should stand back to allow the banker to re-privatise the profits.
In the case of RBS, the retort is obvious. Rescued from bankruptcy, Mr Hester’s bank is largely state-owned. More than four-fifths of the shares are owned by taxpayers; and a couple of hundred billion pounds of RBS assets are insured by the Treasury. The politicians, in other words, are representatives of the principal shareholders. And Mr Hester thinks there is too much “politics” in the relationship?
Ah, some of my remaining banker friends reply, but what about the institutions in which the government does not have a stake? Barclays and the like have been making handsome profits again. Why can’t they share them out among staff?
It is at this point one realises how vast is the gulf between the City and the 80 per cent or so of British voters who applauded the bonus supertax. There are two reasons why banks are making profits: first, because they were all rescued by taxpayers (ie the rest of us) – directly in some cases, indirectly in others; and second because much of the liquidity pumped into the markets by central banks has gone straight into the profits of commercial banks. Neither of these has anything to do with those arguing that bonuses are simply a reward for talent or effort.
What Mr Hester disparages as “politicisation” was entirely involuntary. Governments did not want to ruin public finances by pouring hundreds of billions of pounds into bust banks. Having done so, they cannot be expected simply to stand back and applaud a return to the bad old ways. The boundary between politics and banking has permanently shifted. The bankers had better get used to it.
This is not a question of petty retribution or revenge, though given the pain the banks have inflicted on the rest of society it is as well to acknowledge the impulse. It seems obvious to all but the would-be beneficiaries that this year’s bonus pools should be used to strengthen the balance sheets of the banks for the good of the economy.
Moreover, this should be a precursor to a long-term cap on remuneration in the industry. One lesson of the financial crisis is that bankers are not worth what they have been paying themselves.
A supertax on this year’s bonuses addresses only the symptom. The underlying problem is structural: lack of competition allows a small number of players to extract high “rents” for what Lord Turner, the chairman of the Financial Service Authority, calls “socially useless” activity. We now know financial markets are not self-equilibrating. The next step is to acknowledge they are also uncompetitive.
The banks say the result of political interference is likely to be a smaller financial sector, with many of the “best and brightest” leaving London for less interfering regulators and friendlier tax regimes. They may be right. But would the British economy really be the loser if some in the industry decide to migrate to tax-efficient obscurity?
Britain has learnt during the past year that an over-mighty and under-regulated financial services sector carries its own heavy costs. As the Bank of England said the other day, a smaller industry may be the price worth paying for a stable economy. As for “interference”, the politicians, of course, have their own reputational troubles. But they are better trusted than the bankers.
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