Dominating the UK press this week is the tale of two bankers, a banker’s bonus, and the end of honour. Whilst it is rather surprising that the contrasting tales of two bankers should dominate the news it does reveal interesting aspects of capitalist society and the rather shallow way it addresses the banking crisis.
One banker “a chivalrous type” has come riding in on his horse with full shining armour and has set about righting a horrendous wrong. Getting to grips with the disaster that is RBS, our hero – let us call him Stephen – has rather gallantly foregone his bonus of £1 million in share options which as the company builds back into the stratosphere of elite banking profits would have returned a very tidy dividend of many times that amount. Under great pressure he has turned down the bonus he was entitled to, in order to focus upon the excellent job he is doing. In such austere times, and with similar “public servants” (RBS is over 80% owned by the public) he has done the right thing and saved the government from the embarrassment of reporting the biggest ever bonus in the public sector, and in a loss making enterprise to boot.
On the other hand our tale has a nasty villain, a Knight of the realm no less, who has betrayed us all. In just a few short years our villain – let us call him Sir Shred – has taken RBS from being the biggest bank in Europe to its knees, a mere shadow of its former self. And the public purse has been called upon to bail out the company with £45 billion of taxpayer money (once the government gets around to extracting this from the public, bearing in mind the recession and dwindling tax revenues). Lest the news of our hero, Stephen, be tarnished by association with Sir Shred and lest the news of Stephen’s undoubted high but fair bonus dominate the airwaves, rather conveniently the “Forfeiture Committee” has come to the rescue and saved us from the embarrassment and shame that Sir Shred has cast upon these fair Isles. The only solution they could come to was to defrock Sir Shred of his “Sirness” and he will forever more be referred to simply as “Shred the Fred”. The shamed, but still free, and still very wealthy, former chief executive of RBS.
Amidst the hyperbole there is a serious flaw in the above argument. In fact it is completely wrong. Stephen Hester has failed dismally in his role and should be facing the sack rather than multi-millions in salary and bonus. He was brought in to put RBS back into profitability and to ensure that RBS is out of public ownership as soon as possible. This he has summarily failed to do, and in 2010, when the bank showed an improvement in its share price he pocketed £7.7 million in salary and bonus whilst still being short of the level at which the bank could go public again. Yet this year when RBS’s share price has contracted by over 40% his board and compensation committed have suggested the £1million bonus to add to his £1.2 million salary. Ample reward for failure in a year in which the most notable achievement of the bank was to shed several thousands of jobs. Hester’s predecessor Fred Goodwin earned his moniker “Fred the Shred” from such tactics of cutting staff numbers, and with an aggressive takeover policy grew the bank to the point where it could boast £1.9 trillion in assets (and £1.8 trillion in liabilities!) by late 2008, and the title of the world’s largest company. So why is the media lauding Hester for his tactics of shredding jobs, whilst ridiculing Goodwin’s shredding?
The answer of course lies in the failure of David Cameron to hold to his promise of restricting bonuses in the privatised banking world. Getting tough on the bonus culture goes well with the electorate but the reality of implementing it is far harder. The Tory party promised: “We have ensured that this year there will be no cash bonuses over £2,000 at taxpayer-owned banks” yet okaying bonuses in shares (instead of cash) is hardly in the spirit of their promise.
There are fundamental flaws in the bonus culture across capitalist society, not only does it unfairly reward excessive risk taking, it also provides compensation committees with a ready means to underpay those deserving of a higher base salary. The promise of complementary bonuses alongside low base salaries gives companies a means to effectively dismiss the staff they no longer wish to keep via paying no bonus whatsoever - a chance to force the employee out via underpayment of what was promised. Of course it gets messy when your Chief Executive mistakenly falls under these tactics from public pressure. Although I’m sure that Stephen Hester will be promised a make up bonus along the lines of what was provided in 2010!
Sir Fred Goodwin was Knighted for services to banking because he was unabashedly a success. Under his tutelage the bank acquired Natwest, Citizens Financial Group, and lastly and perhaps fatally, Abn Amro. With each successive acquisition the balance sheet grew and greater risks were adopted. Profits grew in turn during the good years and the high risk strategy paid off to an extent. But with the inevitable downturn in markets of 2007/08 the high cost, high risk strategy (RBS held risky CDS (insurance type) contracts worth more than the whole UK economy) turned sour. As has been highlighted Goodwin did nothing illegal, he was merely following the high risk/high reward strategy. Gordon Brown and Prince Charles feted him because of his verve, risk taking and pure capitalist success. Goodwin and his highly paid board and executives all bought into the high risk strategy and were highly rewarded. As did the government and opposition parties of the day.
Faced with hypocrisy on the scale of that highlighted above, today’s politicians have launched a new offensive to try and explain away the contradiction in rewarding and condemning risk taking. The new term is “responsible capitalism” which is very similar to the notion of responsible chicken coop sacking by foxes. If you are going to pay people excessive bonuses for excessive profits, we should not quibble at the results of such excessive risk taking when the risks go wrong, including the bringing down of the whole financial system. UK Chancellor George Osborne complained previously of “burdensome city regulation” and Labour maintained a regime of “light touch” self regulation. Effectively giving the banks a green light to do as they please. The hotch potch of casino, gambling, leveraged, mess we’ve been living through for the past few years is entirely predictable and indeed several hedge fund managers correctly bet on the system imploding.
Rather than point fingers at those that won and then lost at their game, surely it is time for the politicians to wake up and tackle the corruption at the heart of the financial system which allows a virtual complete lack of meaningful regulation. Which brings us back to the opening line “A convenient diversion” because I doubt the politicians have any intention of making any changes to this banker dominated system.
Jamal Harwood is a regular contributor to New Civilisation. He is a lecturer in Finance, and a member of the UK Executive Committee of Hizb ut-Tahrir Britain.