It promises to be an explosive bonus season. Two years on from the credit crunch, the big British banks are getting ready to award the multi-billion-pound pay-outs to their City staff that traditionally accompany the start of a new year. The bankers could be in line for up to £7bn.
Whether that is true or not, the total payout is likely to be a huge number. Equity markets are up. So are the bond markets. Deals are flowing again. The banks have been making plenty of money and they won’t see any reason why they shouldn’t reward themselves handsomely. But how on earth will they spin all this?
According to reports at the start of this week, the banks are trying to come up with a public relations strategy to deal with what they quite rightly fear will be a fierce public backlash against another round of huge bonuses. The British Bankers Association was said to be brokering behind-the-scenes talk to bring the total payout in bonuses down to a more palatable number – £4bn perhaps, rather than the estimated £7bn.
At the same time, they’re discussing pooled charitable initiatives to go alongside the inevitably provocative announcement on the bonus pool. So if you have a children’s centre somewhere that needs a new playing field, or a small cuddly animal that needs saving from extinction, this is a good time to mail off a begging letter to Royal Bank of Scotland or Barclays. They’ll probably get a cheque off to you faster than you can say ‘greedy banker’. The trouble is, it’s not going to work. The banks can’t spin their way out of this.
The reason that people are angry about bonuses is not because they think the amounts involved are too large. Nor is it because they think that bankers are immoral, or greedy, or that the banks don’t put enough back into society. It is because big payouts are a scam. What the banks should be doing instead is fixing their business model so that their bonuses are more justly earned.
Even some senior bankers are starting to admit there is something not quite right about the way they pay themselves. “You can put on a large trade, and if it works, you make out like a bandit, and if it doesn’t, you might get fired, but you’re not paying back,” argued Morgan Stanley’s CEO James Gorman at a conference earlier this month. “So you have asymmetric risk, you either come out zero, or you come out positive. That’s imbalance.” Quite.
The banks are fundamentally under-written by the taxpayer. They get to speculate with huge sums of other people’s money. When that goes well, they take a big share of the profits for themselves. When it goes badly, they pass the bill onto shareholders. When it goes really badly, and shareholders can’t afford to pick up the tab, it gets passed onto the taxpayer.
The result? Taxpayers on very modest incomes are forced to subsidise bankers on far larger ones. It’s a rotten deal. Spinning the amounts involved isn’t going to persuade anyone that it is fair. Neither is donating some money to charity, no matter how many noughts you put on the end of the cheque. What the banks should do instead is change the deal.
First they should split themselves up into their retail and investment divisions. If a retail bank goes bust, the consequences for the economy are too severe for the government to allow it to happen. But it is the investment banking units that take the big risks. If they were hived off into their own companies, then bonuses would no longer in effect be earned on money that was underwritten by the taxpayer.
Next, the investment banking divisions should turn themselves back into partnerships – as most of the old merchant banks were 20 or 30 years ago. For a contrast, just take a look at the hedge funds and the private-equity houses. Despite all the warnings that they were making the system less stable, they didn’t blow up during the credit crunch. That wasn’t just a matter of luck. It was because they operate either as partnerships – or else as something very close to that. The staff have their own money tied up in the firm and their long-term wealth is bound up with its future. So instead of taking short-term bets with other people’s money, they are taking long-term bets with their own. That instantly creates a very different attitude – and a far healthier balance between risk and reward.
It also changes the public debate. Notice that although private equity and hedge-fund managers pay themselves just as well as bankers – and often far better – they haven’t been on the receiving end of nearly so much public anger. People can see that while the earnings of the hedge fund and private-equity managers may well be obscene, and quite possibly unjustified, they are not unfair. They are taking risks with their own money, and that of private investors who have chosen to back them. When it goes well, they make out like bandits, as James Gorman would put it. When it goes badly, the fund closes, and they all have to look for new jobs.
That is a perfectly reasonable deal – and one that people can understand. But huge bonuses at the state-backed banks looks like public robbery. And no amount of spin is going to cover that up.