COLUMN-Brown jumps on bank bonus bandwagon

September 4, 2009

BRITAIN-JOBS/   By Paul Taylor
   PARIS, Sept 3 (Reuters) – By jumping on the Franco-German bandwagon to curb bankers’ bonuses, British Prime Minister Gordon Brown is playing a political game.
   Many regulators don’t believe that regulating pay will make the financial system more stable. Rather, as Adair Turner, the chairman of Britain’s FSA has observed, the problem lies in the excessive profitability of banks — a function of regulatory arbitrage and inadequate competition.
   Nonetheless, Brown’s decision to co-sign a letter with French President Nicolas Sarkozy and German Chancellor Angela Merkel will cause some political waves. It calls for the European Union to push for this month’s Pittsburgh G20 summit to adopt binding rules on variable pay for major banks.
   The text stops short of more radical steps advocated by Sarkozy, such as a cap on the overall level of bonuses, which have no chance of winning U.S. agreement.
   Brown has joined ranks with his European colleagues arguably not because he believes that pay regulation would be effective, but because he feels it is politically expedient to promote it for several reasons.
   One, by associating himself with their call for pay restraint, he gets away from the idea that the Brits just say “No” to every restraint on finance to protect the City. Second, a show of solidarity with the French and Germans may help the British to find a quid pro quo in the watering-down of proposed EU regulations on hedge funds.
   And last but not least, it may play well to a domestic UK audience, where there is public anger over the perceived social injustice of the return of the bumper bonus culture while taxpayers will be paying for bailing out the banks for many years to come.
   By signing a document calling for binding international restrictions on bonuses, Brown may hope he can lay to rest the Labour party’s reputation under Tony Blair’s leadership for sucking up to the super rich — most memorably encapsulated in Peter Mandelson’s line that the party was “intensely relaxed about people getting filthy rich as long as they pay their taxes”.
   The document is pretty short on detail. While it says variable pay should be fixed in an appropriate ratio to fixed salaries and reflect the bank’s performance, it neither sets a specific ratio nor indicates what measure of performance it has in mind.
   Some of the measures it suggests, such as requiring stock options granted as remuneration to be sold only after a specific period, are already in place at many institutions.
   None of these measures will necessarily prevent another financial meltdown. But Brown, Sarkozy and Merkel are right to calculate that some sort of restraint on bankers’ pay is politically necessary if voters are to accept the tax rises and public spending cuts that will be the long-term consequence of the crisis.
   The Europeans do make more serious proposals for crisis-prevention steps by calling for banks that engage in financially destabilising trading activities to be forced to increase their capital cushion. They also demand tougher supervision of financial institutions deemed too big and systemically important to fail, including plans to dismantle them if necessary.
   Of course, were politicians to put the horse before the cart, they would be focusing less on bankers’ pay and more on curbing banks’ “socially useless” financial activity by a mixture of prudential regulation and competition policy.
   That would require them to take on the banking lobby head on, put at risk the “competitive advantage” of financial centres such as London, Paris and Frankfurt, and break up the financial behemoths in which, in some cases, they have reluctantly become big investors.
   Now that would take real political courage.
For previous columns, Reuters customers can click on [COL/PT] (Editing by Martin Langfield) ((; +331 49495187; Reuters Messaging: Keywords: COLUMN BANKS/ 
Friday, 04 September 2009 07:50:04RTRS [nN03116748] {C}ENDS

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