Less than a year after the global economy derailed, the big-bonus gravy train is not only back on the rails but steaming along, says Spear’s Economics Editor Stephen Hill
THE LEADER IN our last issue, ‘Higher Tax, Lower Morals’, raised the issue of morality in our economic society, a difficult issue that is now at the forefront of the debate about the way forward. When Goldman Sachs announced its record second-quarter earnings of $3.4 billion and forecast a bonus pot for 2009 of over $20 billion, all hell broke loose, and rightly so.
This was the firm that only nine months ago was converted overnight into a so-called deposit-taking bank, just so
that it could qualify for a place in the queue at the Fed’s lending window for a $10 billion bail-out by the US taxpayer, who also paid them $12.9 billion cash for the useless CDSs they had taken out with the insolvent AIG. Such largesse was not intended to trigger massive bonuses quicker than a knee-jerk reaction, raising all the fears of Wall Street II, a serial disaster movie coming again in the future to a trading screen near you.
Then Hank Paulson, formerly chairman of Goldman and who as Secretary of the Treasury was the architect of the $700 billion TARP bail-out fund that bailed out Goldman et al, was put under the cosh on Capitol Hill by a seething congresswoman from Ohio complaining about her constituents losing their homes and jobs. Paulson was forced into this statement: ‘The people paying the price didn’t create the problem, but if the banks had failed they would have had a bigger problem.’
Is that it, Hank? Business, bonuses and bail-outs as usual for the bankers, while the rest of us are required to pay the price? That assessment is in the Helmsley category of nonsense, as in ‘Taxes are for little people’. It’s also an encapsulation of the real moral dilemma facing capitalism, which the government and Wall Street must deal with effectively for the future.
On this side of the Pond, three days later, The Sunday Times carried a story of the Damascene conversion of St Paul, as in Lord Myners, Minister for the City, who had amassed an estimated £30 million fortune from fund management at Barclays Capital. He was reported to complain of ‘the troubling absence of clear moral purpose’ in the City, which he found very troubling, as people often do who have made loads-a-dosh before their conscience kicks in.
His take on the current generation of post-Christian practitioners in the One Square Mile: ‘I have met more Masters of the Universe than I would like to, people who were grossly over-rewarded.’ This from the man who missed spotting the £16.9 million pension payoff of Sir ‘Shredded’ Fred, the man who blew up the Royal Bank of Scotland, the world’s fifth-largest bank.
THE NEXT DAY, this time in The Daily Telegraph, the workmanlike economist Roger Bootle asked: ‘Do bankers deserve what they get?’ Well, in the case of Sir Fred the Shred, we all know the answer, but Bootle’s answer for the rest was salutary: ‘The suggestion that they do is so ridiculous as to be risible.’ Quite. Bootle is on the side of the angels, those who toil for their rewards and lay on a service to society, which by implication many so-called bankers do not.
Bootle rightly asserts that there is no market as such for top bankers and executives rewards, just social factors and political pressures, beginning with the remuneration committees that have an interest in seeing the highest possible rewards so that their own pay is elevated as well — the gravy-train syndrome, no less, enhanced by specialist pay consultants who set out spurious yardsticks of success to justify their own unproductive fees.
As Bootle puts it, the bankers are well rewarded on the back of profits in good times, but their pay does not reflect the losses in the bad times. And the shareholders, or large institutions, do not exercise their responsibilities to make them make reserves for bad times during the good times.
In fact, the institutions that manage the people’s savings are so apathetic that bank executives treat the bank as their own and consider payment of dividends as hush-money to these supine shareholders, to keep them at bay, or at least away. No wonder half the pre-pay profits of the bulge-bracket banks (that’s the ones that aren’t bust) go on staff compensation.
Goldman’s earnings results and the forecasts of bumper bonuses were not what the rest of us wanted to hear about right now. We wanted the economics of contrition, that Goldman was reserving half these profits as a special reserve to be held in the company so that the next crisis caused by the Masters of the Universe could be paid
for out of their own grotesque earnings and not out of our taxpayer pockets.
WE WANTED TO see the banks turn on the cash spigots for homeowners and small businesses first, before the bankers helped themselves to yet more bonuses. Don’t forget, Goldman is now at its own request a deposit-taking and lending bank! Most of us hope Goldman comes to regret its crass behaviour, in the form of higher corporate taxes and mandated reserve retentions, thus lessening the bonus pool for very good reasons.
Every household in the UK has put up £3,000 for bank bail-outs and it will be a similar amount in the US, and as far as we taxpayers are concerned all that money should be repaid, with interest. Then taxed reserves equivalent to the aid they received plus a percentage cushion should be set aside in banks’ balance sheets in addition to their regulated capital, before any so-called banker from a bailed-out institution like Goldman gets a penny in bonus.
As Hank said, we were not responsible for the problem and we don’t buy into the argument that it could have been worse, as we did not create the problem in the first place, so it’s nothing to do with us in the moral sense.
Illustration by Elena Proskurova