Opinion

Hugo Dixon

How to end the banker backlash

By Hugo Dixon
February 6, 2012

There was a whiff of the lynch mob in the UK last week. Stephen Hester, the current Royal Bank of Scotland boss, was bludgeoned by politicians and the media into foregoing his bonus even though he was brought in to clean up the largely state-owned bank. Two days later his predecessor, Fred Goodwin, was stripped of his knighthood. While Goodwin bore much of the responsibility for RBS’s near-bankruptcy, removing his title flouted normal procedures. Not only is such a dressing down traditionally reserved for criminals; the prime minister, David Cameron, prejudged the verdict of the committee which reviewed the knighthood. The week was capped off by the leader of the opposition, Ed Miliband, calling for a tax on bankers’ bonuses.

While the UK is currently the epicentre of the backlash against financiers, the phenomenon is widespread across the Western world. Francois Hollande, who is likely to be France’s next president, has said that his main adversary isn’t Nicolas Sarkozy but a faceless, nameless, opponent – the world of finance. And across the Atlantic, the only serious setback in Mitt Romney’s presidential campaign so far came when he revealed that in 2010 he had paid only 13.9 percent tax on his $21.7 million of income, most of which came from his time as a private equity baron.

There is certainly something ugly about the way politicians – who themselves bear some responsibility for the economic mess – have turned bankers into a scapegoats. But the public isn’t in the mood to show sympathy to bankers these days. The issue is not so much the amounts they are paid. In the same week that the banker backlash was gathering force in the UK, Facebook announced its initial public offering. Nobody batted an eyelid at the prospect of Mark Zuckerberg, the founder, being worth over $20 billion. The difference is that people think Zuckerberg deserves his billions but the bankers don’t deserve their millions.

The belief that bankers’ compensation is unfair operates at several levels. At its most basic there is the argument that, since bankers were the ones who got the world into its current mess, they shouldn’t still be coining it. This is simplistic. The mistakes made by banks were only one factor that fuelled the crisis – and many individual bankers were innocent of the mistakes.

There is, though, a more sophisticated critique: that the whole system has been rigged in financiers’ favour, allowing them to earn more than they merit. Few people complain when entrepreneurs make millions. They are seen to have come up with brilliant ideas, taken big risks or worked extremely hard. That’s how capitalism is supposed to work. But bankers have benefited from one-way bets that make a mockery of capitalism.

The system has been skewed in bankers’ favour in two main ways. First, individual traders were paid on short-term performance. That encouraged them to spin the roulette wheel. If their bets paid off, they did well; if not, their employers picked up the tab. Second, banks in general were highly leveraged. This magnified earnings and bonus pools during the good times; but when the crisis hit, many banks were bailed out.

Over the past four years, regulators have been trying to remove these one-way bets. Much has changed in the way individual bankers are paid. A bigger slice of their bonuses is paid in equity which they cannot sell for several years, tying compensation to institutions’ long-term performance. In some cases, bonuses can be clawed back. What’s more, banks have been required to cut their leverage. This, combined with the dire economic environment, has reduced earnings and so squeezed bonus pools.

But compensation hasn’t come down as rapidly as it should have. Just look at bonuses in the City of London as measured by the Centre for Economics and Business Research. These actually rose slightly in 2007/2008 to 11.6 billion pounds after the first shocks of the crisis. Although they fell to 5.3 billion pounds after Lehman Brothers went bust, they rose again the following year to 7.3 billion pounds as the benefits of the bailout started kicking in.

For the year just ended, City bonuses are forecast to be 4.2 billion pounds. Even so, compensation is still too high. One way of seeing this is to compare how well bankers do to how well their own shareholders fare. Last year, for example, Goldman Sachs cut its pay 21 percent. But earnings applicable to shareholders tumbled 67 percent and the bank’s return on equity was a measly 3.7 percent.

The public’s concern, however, should be for taxpayers rather than shareholders. Although steps have been taken to make the system safer, the changes are far from complete. Banks are being given several years to build up fatter capital buffers so that they are better able to withstand losses. Plans to enable regulators to pack banks off to the knackers’ yard rather than bail them out when they get into trouble are still on the drawing board. Meanwhile, the industry enjoys special treatment. Just think about the 500 billion euros that the European Central Bank lent to the industry in December at a measly interest rate of 1 percent. Entrepreneurs would die to be able to borrow money at such a rate.

The sad fact is that most banks are still too big to fail. Until that changes, the system will remain rigged in bankers’ favour – and they will be vulnerable to the kind of lynching suffered by Hester and Goodwin last week.

Comments
31 comments so far | RSS Comments RSS

If unknown, the farewell letter from Andrew Lahde is
a must know in such contexts. Lahde, fund manager, who
identified problems correctly before the last crash,
made a nice profit with short sales. He then closed his
fund. His farewell letter is funny, intentionally
provocative and a challenge.
http://dealbook.nytimes.com/2008/10/17/g ood-bye-from-a-hedge-fund-manager/

Posted by Joss | Report as abusive
 
 

Perhaps you over-estimate the public’s ability to analyse. The allure of Premiership football, after all, is the belief that “anybody” could do that job, which according to your thesis would make the salaries of Premiership footballers even more egregious than those of bankers. Yet nobody bats an eyelid at them.

Even the occasional fit of pique at Simon Cowell’s income doesn’t seem to last longer than the lifetime of a Christmas hit single.

The simplest explanation is surely the good old “us and them” view of the world? “I don’t know what bankers do, so they must be evil.”

Posted by IanKemmish | Report as abusive
 

I’m sure that being stripped of knighthood is a big deal in Great Britain, but as an American, when I read that headline, it appears to be a very soft punishment.

The American equivalent might be a modest fine levied by the SEC that is paid in all or in part by the corporation rather than by the banker.

If we really want to effect a change in the future behavior of other bankers, we need to up the ante considerably. We should strip vast amounts of wealth from those who to took ridiculous risks and/or those who broke laws in pursuit of ever greater piles of money. If laws were broken, a great deal of prison time has also been earned.

Dealing effectively with these reptilian bankers is not for the feint of heart and failure to do so virtually guarantees the occurrence of a future crisis that could have been avoided.

Posted by breezinthru | Report as abusive
 

Dumb as we may be collectively, even those who can’t articulate it still understand privatized profits and socialized risk when they see it. We understand that people who failed at their jobs miserably, instead of being fired and left penniless, saw only a minor hiccup in their compensation.

Posted by spall78 | Report as abusive
 

Everyone knows that the problem is usurious interest rates practiced by banks. Everything is done to hide the problem or drown the problem. As there is no more democracy in the world, lobbying is King.
(hiring columnist is a way)
when you live in society and community isn’t it to find solutions to greed the same way you do with crimes or traffic jam or the environment.

Posted by theslave | Report as abusive
 

“Fiendish Frankenstein monsters of financial engineering had been created, a lot of them at MIT, some of them by people like me….there’s no CEO who understands at all a derivative . All they know is that somebody tells them in their organization, ‘We’ve got a wonderful profit center’…I’m not sure that all of the fiendish stuff could have been picked up by centrist regulators, but you don’t have to be perfect in anything in economic life. If you spent 70 years in economics, you’ll understand that.” So said the Nobel laureate from whose textbooks nearly all the bankers learned Economics. His student, a professor at Harvard, disagreed. Is Harvard becoming the Takshashila University of the West? http://www.pbs.org/newshour/bb/business/ july-dec08/nobel_12-16.html

Posted by DrPatil | Report as abusive
 

I have no sympathy for “Fred the Shred” Goodwin. Why should I? From what I have read, that man is little more than a white-collar criminal who escaped justice by the mere dint of knowing how to dance a few millimetres to the right side of the legal red line in the sand that would have got him thrown into prison and stripped of his criminally ill-gotten-gains if he’d crossed it. He ran his bank into the ground for short-term personal gains through contractual bonuses, playing just the sort of one-way-bets that you have described, and now uses his “bonuses” for personal benefit only: to live the high life while his victims languish in near-poverty. He even resisted politicians’ pleas to placate public anger by giving some relatively small “donations” to “charity”.

> “Francois Hollande, who is likely to be France’s next president, has said that his main adversary isn’t Nicolas Sarkozy but a faceless, nameless, opponent – the world of finance.”

How convenient – a faceless, nameless, nebulous opponent who doesn’t answer back to the non-specific accusations made against them. This is just the sort of scapegoat we need…
How exactly is Monsieur Hollande going to improve the system?

Posted by matthewslyman | Report as abusive
 

The french had a great solution during the last ‘revolution’. It was called a guillotine. I’m willing to bet that if the mobs form and start decorating the bridges and lamp posts with bean-counters the money would start being spread around pretty damn fast. While not a proponent of mob justice you can’t say it wouldn’t be a tad bit fitting in the Justice department.

Posted by stambo2001 | Report as abusive
 

Americans have a very low opinion of bankers of all types and flavors for one simple reason — they deserve it.

While for wage earners, the IRS can tell you to the penny what they were paid in wages, interest, dividends and capital gains, the Federal Government cannot account for what happened to more than $1 trillion in public funds that it handed over to Wall Street bankers in a single year. They claim it is just “too complicated” to find out where the money went, let alone why it produced no observable beneficial effect outside of Wall Street. It looks like a fraud, smells like a fraud, quacks like a fraud. Probably is one.

If 5,000 top bankers were going to prison for a good many years instead of increasing the prices of seaside estates in the Hamptons, the public might feel better. And would definitely have a better reason to look favorably on both the banking industry and the Department of “Justice”.

Posted by txgadfly | Report as abusive
 

“Nobody batted an eyelid at the prospect of Mark Zuckerberg, the founder, being worth over $20 billion. The difference is that people think Zuckerberg deserves his billions but the bankers don’t deserve their millions.”

Whoa, this was such a throwaway line we think you put it in for the Google hits.

Your own Reuters colleagues did some of the earliest and most insightful eyelid batting at the value of Facebook and, without quite saying it, suggesting that it wasn’t quite what it was being cranked up to be.

While few in the mainstream seem to want to resonate much nuance about the 900-lb monkey on Zuckerberg’s back, we think many people who know FB’s background have a lot of discomfort with that. By most accounts, he ripped off the idea for Facebook from some Harvard classmates — Business Insider quotes his own IMs saying he “effed” them [our rendition for Reuters] — and it’s hard to get excited about him or American capitalism knowing FB generates revenues… advertising to people who while away time they could spend with families or friends — or working — instead. Bill Gates giveth productivity. Mark Zuckerberg taketh productivity away.

Re bankers? Lynch the you-know-what out of them with regulation. They’re antisocial psychopaths (http://www.WeWereWallStreet.com/Wall-St reet-Psychos.html) with 99 percentile GMAT scores. They’ll always find a way to make money, but no government should let them do it off taxpayers’ backs again this century.

Posted by WeWereWallSt | Report as abusive
 

Maybe Mr. Zuckerberg is worth $20B or maybe he isn’t.

If someone, someday invents a better time waster Facebook’s value will plunge. I cannot foresee the US (or any other) government bailing out Facebook, and therein lies the difference.

I don’t have to buy a GM car if I’m unhappy with the way GM was coddled by our government. I can buy a Ford. But I have to interact with the banking system.

I’m disturbed by the lack of the financial services industry’s accountability. I was never a fan of the bailouts but understood their necessity.

What disturbs me most is the continuance of the Federal Reserves ZIRP or Zero Interest Rate Policy. In order to recapitalize our banking system our government is, in my opinion, destroying the life savings of many older Americans. Sure, I can buy stocks or invest in the bond market. If I’m looking for a risk free return on my cash though I’m lucky to get 75 basis points in some online bank.

The message that I’m hearing from my government is loud and clear is “Take risk or get crushed”.

How can we teach our young children to save with such paltry, artificially suppressed interest rates. When I was young (in the sixties) a kid could get 5% on his money in simple bank savings account. My father taught me savings discipline by teaching me that “for every $100.00 you give them, they’ll give you $5.00″. That was an incentive, in today’s world that same kid might get 20 cents on $100.00 in a local bank.

My young son could care less about saving or about having a bank account.

But those bonuses still flow…..

Posted by Missinginaction | Report as abusive
 

More envy, hate and jealousy. No analysis or intelligence just steal from the successful to give to the lazy.

Another bunch of people that want the government to solve their problems.

Where is American self-reliance, independence, and determination? Does anybody work hard any more or just walk around with their hands out?

Censorship is evil.

Posted by ALLSOLUTIONS | Report as abusive
 

“having a bank account”
LOL I will certainly think about doing that!

Posted by DevinC | Report as abusive
 

People rightly begrudge banker bonuses, as they are little different than embezzlement. If shareholders are not getting more, and bailouts are required from tax payers, then not a single bonus is deserved. Furthermore, the amounts of earnings by banking management has no justification. A banker is no more valuable to society than any other accountant. These salaries and bonuses are excessive and should be greatly scaled back.
People do not begrudge the earnings of those who actually invent useful things, or like sports and entertainment figures, have unusual talents. But bankers take money through fraud and deceit, and gamble with money that does not belong to them, hurting all of society.
Legislators, ratings agencies, and many others were in on the frauds, and they all deserve more trouble and scorn than they have received so far. The public wants to see the crooks in jail, and so far, the rich have been allowed to steal without consequence.

Posted by aligatorhardt | Report as abusive
 

i sadly, haven’t seen or heard of any banker being lynched. all i’ve seen is the legalisation of fraud, theft, and deceit.

at this point corporations are a scrap of paper that gives individuals the ability to make huge sums of cash and take no responsibility for their actions, and like Caligula with his horse the supreme court has elevated the corruptoration to the status of human.

maybe mitt should voluntarily off shore himself like he did his money. being de knighted isn’t the same as taking the money back.

so here we are in the same position as an aging chinese dynasty, or the late roman empire, sinking into a quicksand fabricated by the greed of a very few.

Posted by mr.fish | Report as abusive
 

The above can be summarized into one sentence.

TBTF banks are a luxury we can no longer afford.

But what to do?

Some ideas:

Implement an American style trust-busting scheme.

Force them to spin-off assets after reaching a certain capitalization level.

Impose an onerous rate of deposit insurance in case they do go broke.

Force a few of the worst cases into bankruptcy to show governments and the people are not afraid and that we can start over.

Invent a new form of capitalism that is more equitable. This idea has real appeal but would be the hardest to conceive and implement.

Oh, and above all, don’t let politicians fiddle with the banking system for some short-sighted policy agenda.

What are your ideas to reform the financial and banking systems?

RMc.

Posted by rwmccoy | Report as abusive
 

You are assuming the rest of us want to end it. I am not so sure.

It is distasteful watching politicians bach bankers when they share their guilt, but banker are NOT scapegoats. They are guilty. Watching them and politicians go at it reminds me of a scene from Spartacus when the glasitorial slaves first revolted and put their former master to each others’ throats. Great fun.

The real way to end the banker bashing in the UK it to get one of our big multinational banks to up sticks and move. That would bring down wages, focus the minds of the bankers lef behind (who would not miraculously move to less oppressive jusrisdictions), and help to rebalance the economy away from finance. I don’t think anything but that will cause the public to pause for thought.

Posted by Dafydd | Report as abusive
 

I agree with @stambo2001. To appease the masses some heads must fly. How are we going to explain that what MF and Corzine did was not illegal? The FinSrv industry has legalized theft. Heads should fly.

Posted by tmc | Report as abusive
 

We wouldn’t happen to be talking about the same bankers… who make it easy for you to execute trades from the comfort of your home, protect your various deposit accounts, gave you a loan to purchase and reside in your home, loaned you money to drive a car you otherwise couldn’t afford, provide solutions to your various small business needs, who facilitate in making that paycheck available to you every week…would we?

Those dirty scoundrels…

Posted by jaham | Report as abusive
 

The comments here reflect just how ill-informed the public is concerning these issues. It is the government who needs reform more than the banks. What happened was very simple:

1) Government began manipulating housing market – house prices soar ever higher

2) Government allowed banks to take on more risk with their capital (GrammLeachBliley) – so banks buy securitized MBS as they are presumably safe and have a high yield

3) Government bails out banks following financial meltdown

4) Now, government is using this as an opportunity to vy for more regulatory power (since their regulations were obviously so effectiv ein the first place). These regulations are actually damaging the community banks more than the big boys, eventually driving a decline in community banks and corralling more desposits into the “too big to fail banks”.

The government set the rules, the banks (largely) played by them, economic implosion occurs, politicians and media use bankers as scapegoats – and their plan has worked quite well; there are very few that understand where the root of the problem lies and what needs to be done to fix it.

Posted by jaham | Report as abusive
 

How to end the banker backlash… well, if we put them in front of firing squads it would certainly go quicker. We’ll let their widows and orphans keep the insurance money, which pretty much leaves only their dogs to miss them. The dogs will recover pretty quickly if they’re well treated.

Posted by ARJTurgot2 | Report as abusive
 

Hugo, you just don’t get it!!

Posted by colt1210 | Report as abusive
 

Dear Prof. E. Corey,
Zuckerberg didn’t oversee, aid and abet the recession in the American economy.

Posted by ohillary | Report as abusive
 

return glass-steagall to its former power. build the wall (again) between banks and investment companies. limit the risk and leverage that banks can utilize. the shadow banking system would not have developed, banks would not have been able to buy derivatives, s&p wouldn’t have had as much incentive to give aaa ratings to subprime pool bonds, and we wouldn’t have shelled out a trillion tax dollars to cover their losses. unfortunately, the gop wants to return to an environment that fosters the greed we have already witnessed, practically forecasting another depression in the works if done.

Posted by jcfl | Report as abusive
 

The share of the finance industry in the real economy should historically not be more than 10-15% due to its supporting role in society (it doesn’t produce anything, it just facilitates). It has, however, grown like a cancer in the past 2 decades, the ‘business banks’ having attached themselves to a vital organ (normal banks) so they can’t be eradicated, need not answer to the very capitalistic principles they advocate, must be kept alive and can keep on feeding on their hosts .. with the profits not going to its shareholders but mainly to its staff (best examples? MS and GS). But, just like in a human body, something has to give .. and that ‘something’ has decided that enough is enough.

Posted by Robbedoes | Report as abusive
 

The problem is not the bankers, but (1) the underlying lack of banking regulations, which would prevent them from doing what is natural to anyone who has the ability to do it, plus (2) proper taxation rules to prevent them from retaining the massive amounts of income they generate from passive investment activities, which injure society more than they aid it.

Meanwhile, this “Roman Circus” serves no purpose, except to throw bread to the mob as a distraction.

PseudoTurtle
CPA/MBA

Posted by Gordon2352 | Report as abusive
 

It’s clear –

Facebook is a private company & they can do what they want with any profits. Who cares if the public have values fb so high?

RBS (Lloyds…etc) are state backed (i.e tax payer funded) so they employ what are effectively ‘civil servants’ and their salaries should reflect this. all this talk about ‘talent leaving RBS to go to JPM’. What about the BoE or the treasury?

Barclays (JPM…etc) received NO tax payer funds, so they (like facebook) can do what they want with profits & their own cash. This has nothing to do with the public. If the shareholders disagree they can withdraw their backing & Barclays will be forced to refuce salaries & bonuses.

That is the beauty of capitalism

Posted by RiskManager | Report as abusive
 

The anger is NOT directed towards entrepreneurs who ‘earn’ their riches, by hard work and innovation. The anger IS directed at the banks who caused this financial mess in the first place, then got off scot-free when bailed out by the government, only to secure massive and un-earned bonuses….

Regulators cannot regulate when handcuffed by the very government and politicians who make the rules….

Posted by edgyinchina | Report as abusive
 

What a wonderful little debt slave you are Hugo.
Here is the bottom line why people do not like bankers…
This is how it works in the US, Every dollar that exists has interest owed on it. So the government says Hey Fed we need 1 billion dollars. The Fed creates 1 billion dollars and takes a treasury note. The problem is that for 1 billion dollars we owe the fed 1 billion + interest. So where does the interest come from? Lets use a smaller number to make this easy…
100 dollars made by fed(all the money in the world)
we owe the Fed 101 dollars for that.
You cannot get that 1 dollar because it never existed so eventually you have to give them something of true value to pay the debt(like your house for example)

Posted by learntothink | Report as abusive
 

Hugo,

Respectively we’re hearing this story ad nauseam daily in the press. Let’s start covering and reporting specifically on European multi-national, medium-sized and small business export and revenue plans and get off the politics, the EU, commercial banks, sovereign bond markets and unhappy Europeans. These people don’t do anything!

Posted by Sieb | Report as abusive
 

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