RBS bonus: Obscene or a nice piece of business?

One thing, I think, that is better, or at least more widely, understood in the Republic than in the UK is that the credit crunch is still screwing up almost every other well intentioned effort to get our economies moving again. This is because the banks still haven’t owned up to the extent of their bad debt, and they are barely lending anything to anyone.

So far, the pattern seems to be that they keep the good (ie, unimpaired) investment of taxpayer’s money whilst not surrendering the bad (more than £24bn in the case of the RBS). Stephen Donnelly, TD for Wicklow and East Carlow, writing in the Sunday Independent (H/T Bodger at Broadsheet.ie) at the weekend has an excellent article, coincidentally demonstrating the value of having knowledgeable independents in parliament:

…think of this: last year we gave four of our banks more than €7.5bn to address residential mortgages. AIB got €2.5bn of the €7.5bn. But its senior team admitted to us at a Finance Committee hearing that the total amount of mortgage debt it had written off was a mere €600,000. One 50th of one per cent of what we gave AIB. Bank of Ireland got €1.8bn of the €7.5bn. It told us it had forgone nothing, not one cent. [Emphasis added]

Yet it’s not clear from much of the reporting of Stephen Hestor’s £963,000 bonus, why he is being paid a bonus (of any sort) in the first place. Tom Bradby’s much plugged blog takes a simpler and more pragmatic view: if the bank can make the taxpayer money, why disincentivise a top rated man from getting on with the job?

Well, Sir Fred Goodman was one such ‘top talent’ who burnt £19 billion of good money and 9,000 jobs before jumping ship. Chris Dillow argues that this kind of expensive top talent is required precisely because the banks have made themselves too complex for any normal human being to manage without, at the very least, a PhD in financial modelling from LSE or Imperial:

Bank bosses have played a trick which countless ordinary workers do. The IT support guy who introduces lots of “security features” to his firm’s IT systems, or the secretary who has an incomprehensible filing system, make themselves indispensable by inconveniencing others.

In the old days of banking’s 3-5-4 model (borrow at 3%, lend at 5%, be on the golf course at 4 o’clock) bank bosses were well paid but not astronomically so. It’s management’s own introduction of complexity that has enabled their pay to soar. And whether this complexity is a social good or not is, to say the least, debateable.

It’s hard to escape the idea that at their core, the banks have not yet tumbled to the fact that they are living in an unsustainable bubble. Yet, one of the problems politicians have is that they, in many cases, were complicit in the problem. This may be one reason why the Tea Party in the US proves less of an unalloyed good for the Republican party than it may have seemed a year or so back.

Alan Greenspan speaking to ABC a couple of years ago noted that…

If the Fed as a regulator had tried to thwart what everyone perceived as a fairly broad consensus that the trend was in the right direction, homeownership was rising and that was an unmitigated good, then Congress would have clamped down on us. There’s a lot of amnesia that’s going on.

Nevertheless, the longer term historical patterns suggest that whatever the dangers of eliding the arms length relationship between RBS and the UK government, banker’s salaries are at an all time high in relation, not simply to the public sector, but more importantly to the private sector as well. Gillian Tett in the FT:

After the 1929 crash, for several years, financial pay remained high because pay in other parts of the economy fell and some bankers traded cannily during and after the crash. However, in the late 1930s the ratio slumped back towards parity and stayed there for the subsequent three decades; in the years following the second world war, American bankers were paid roughly the same as other professionals. But from the the late 1970s onwards, a new cycle turned: the total cost of financial intermediation jumped to 9 per cent in 2010 from 4 per cent in 1950. The ratio of financial sector pay to pay in the rest of the private sector hit 1.7 times in 2006 – in a delicious irony, the same level as in 1929.

None  of which addresses the real problem. How much debt have these mathematical geniuses burnt and when will they return to what banks have traditionally been able to do, i.e. find a sustainable means that allows them to borrow and lend to business and citizens at a profit?

Oh, yes. And is Mr Hestor actually doing a good job? Or is that too complicated for us to bother our poor little heads with?

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  • Writing in the LRB Hester/RBS-gate, Zizek has some interesting comments on why there’s a boom in bankers pay (and in boardrooms more generally, note real wages have decreased in the US since 1970s and in UK for about last 25 years).


    ‘If the old capitalism ideally involved an entrepreneur who invested (his own or borrowed) money into production that he organised and ran, and then reaped the profit from it, a new ideal type is emerging today: no longer the entrepreneur who owns his company, but the expert manager (or a managerial board presided over by a CEO) who runs a company owned by banks (also run by managers who don’t own the bank) or dispersed investors. In this new ideal type of capitalism, the old bourgeoisie, rendered non-functional, is refunctionalised as salaried management: the members of the new bourgeoisie get wages, and even if they own part of their company, earn stocks as part of their remuneration (‘bonuses’ for their ‘success’).

    This new bourgeoisie still appropriates surplus value, but in the (mystified) form of what has been called ‘surplus wage’: they are paid rather more than the proletarian ‘minimum wage’ (an often mythic point of reference whose only real example in today’s global economy is the wage of a sweatshop worker in China or Indonesia), and it is this distinction from common proletarians which determines their status. The bourgeoisie in the classic sense thus tends to disappear: capitalists reappear as a subset of salaried workers, as managers who are qualified to earn more by virtue of their competence (which is why pseudo-scientific ‘evaluation’ is crucial: it legitimises disparities). Far from being limited to managers, the category of workers earning a surplus wage extends to all sorts of experts, administrators, public servants, doctors, lawyers, journalists, intellectuals and artists. The surplus takes two forms: more money (for managers etc), but also less work and more free time (for – some – intellectuals, but also for state administrators etc).’

  • The more we deconstruct the nature of the banking sector, the more attractive the idea of interest-free (Islamic) banking becomes. Particularly in the case of mortgages – if you are in negative equity you still owe the full amount of your loan, and the only risk the bank takes is that of you defaulting on your repayments. An Islamic mortgage means that the bank part-owns your house and assumes part of the risk of the house falling in value. This is not as lucrative for the homeowner in good times, but is a lot safer when things go south. The killer feature though is that the increased share of risk to the banks would help to suppress asset-price bubbles.

  • DC

    It’s obscene – RBS should be bust and out of business because of all the losses it made at the time of the credit crunch. The guy is creaming off turbo bonuses from a bank that is running on fumes.

  • Zig70
  • DC

    Ponzi Bonds?

    The financial markets and its traders are just another form of bookies but for the moneyed intellects and academics.