The theater is starting to get interesting. Here in the US we have banker pay theater masquerading as the real thing. Kenneth Feinberg, the so-called pay-czar, struggles to collect a few scalps at the handful of TARP institutions under his domain, with the ever-intransigent AIG making headlines. This of course is meant to distract attention from the fact that everyone else (meaning the big capital markets players who were bailed out and most certainly will be bailed out again when they next get themselves in trouble) is raking it in hand over fist, and bonuses this year are set to reach the 2007 record.
In the UK, by contrast, a very serious proposal to rein in banker pay is about to be put forward. If this were the US, one would assume that this is mere showmanship, a nice bit of grandstanding for something certain to be diluted into irrelevance.
I welcome comments from UK-based readers, I have zero insight into their politics. But based on their history, there is reason to think this effort might be for real. And if so, it will show how craven US politicians are, particularly given that the banking sector is a bigger part of GDP in Britain than in the US.
As Niall Ferguson showed in his book The Cash Nexus, the reason the UK was able to succeed militarily against the much larger (GDP-wise) France was that it was a more credible borrower. It had professional (salaried) tax collectors and the tax bureaucracy was pretty clean. By contrast, France had widely-hated tax “farmers” who amounted to state-licensed buccaneers. Tax compliance was good in England, terrible in France. So England was able to borrow to finance military expenditures at a much more favorable rate. Similarly, at least until the nuttiness of the last generation, England also understood the value of being an international banking center, and again, operating under a system of rules is important to credibility. Even in the Bank of England’s worst moments in the crisis (the flailing about with Northern Rock, for instance), you can detect the sense of deep institutional memory in the remarks of Mervyn King.
In the US, by contrast, until very recently, finance had just about zero to with our dominant economic role. The US is a bloody big economy, and (was) a manufacturing superpower. It was only in the 1990s that the US as a matter of policy began trying to secure commitment around the world to opening their financial markets, which would allow the fleet of foot US
buccaneers investment banks become ascendant. For instance, in the Asian crisis, the US rejected an Asian-led solution, and the draconian measures imposed by the IMF were seen in some of the “recipient” countries, particularly South Korea, as a concerted program to remake the economy along US lines.
So the US does not have the value of sound banking as part of its collective memory; even worse, Wall Street seems to have no institutional memory whatsoever (as someone who has worked in and around the industry for 30 years, I am simply gobsmacked at the high level of ignorance among current incumbents of pretty recent train wrecks in the industry).
So informed comments from UK based or UK knowledgeable readers are particularly encouraged. From the Telegraph:
Bankers who are paid “unjustifiable” multi-million-pound bonuses face having their contracts ripped up and their banks fined, under new legislation to be unveiled this week…
The bill will give the Financial Services Authority (FSA) the power to cancel bankers’ contracts to prevent them receiving payments that it believes would cause instability in the financial system.
The FSA could stop bankers receiving bonuses that it believes are too high, or cancel remuneration packages that it thinks reward undue risk-taking.
In another planned law, customers will get new powers to join forces and take banks to court over “rip-off” charges.
They will be able to mount US-style “class actions” to force banks to pay damages more quickly – potentially to hundreds of thousands of customers at the same time…
In an interview with The Sunday Telegraph, Alistair Darling, the Chancellor, said that the culture of banking had to change and that bankers had to see themselves as “fellow citizens” who had been bailed out by the taxpayer…
“Bonuses have been a symptom of the excessive behaviour of some banks over the last few years and even over the last few months,” said Mr Darling…
“I’ve always been clear that I’m not against people being rewarded for hard work. What has gone wrong is where people were paid to take excessive risk and they were rewarded to do things that ultimately brought the banking system crashing down.”
The new rules will come into force next year…
The rules will apply to all British banks …. It will also apply to the British operations of global investment banks such as Goldman Sachs and JP Morgan. Remuneration packages will have to be renegotiated if the FSA believes they breach the regulator’s pay code, which will demand that a higher percentage of remuneration is paid in stock and that compensation is deferred for a longer period.
Mr Darling said the FSA’s powers would not be retrospective and would apply only to all new contracts. That means it will have no effect on this year’s bonus round…
The Chancellor dismissed fears that the laws would make Britain a less attractive place in which to invest, and could threaten London in particular as a global finance centre.
“Our starting point is we want London to remain as the world’s foremost financial centre,” he said. “We want this to be a good environment where firms from all over the world come and do business. But part of that is to make sure that there is a tough supervisory and regulatory regime.”