Bankers ’round the world howled when the UK imposed a one-time 50% bonus supertax. The levy was meant as a shot across the bow, to warn the firms that were posting generous earnings in large measure thanks to government assistance (particularly super low interest rates) to act sensibly. The officialdom’s message was that financial firms needed to give higher priority to building up their equity bases, which in turn meant paying out less to staff
But the mistake was in assuming that the banksters would do anything other than act predictably. Capital markets firms over the last decade have engaged in large-scale looting: run their businesses with less and less in the way of buffers for losses, while simultaneously taking more risks (which should dictate even larger reserves), knowing that that was the course of maximum income for staff, no matter what it meant for the enterprise.
A Financial Times survey determined that the banks are thumbing their noses at the British authorities, which means they have decided (in effect) to pay out even more in earnings, and retain even less in equity. The FT editorial today spelled out the implications:
The UK government’s tax on bankers’ bonuses was supposed to claw back some of the financial sector’s gains accrued thanks to taxpayer largesse during the crisis. The measure was flawed: it did not target fixed compensation in any way. But it was expected that this measure would encourage banks to refrain from handing out super-generous bonuses this year….
So rather than raising £550m, as the Treasury predicted, banks expect the levy to bring in between £4bn and £6bn. If only other government errors could yield such handsome returns.
The tax windfall highlights a chronic problem in banking. Shareholders, not bonus recipients, are expected to bear the cost of paying it, so turning the tax on bankers’ pay into a levy on bank equity. This would be evidence that big City institutions put management ahead of shareholders.
The problem is that the normally savvy FT offers a very unrealistic solution:
Bank investors need to assert much tighter control of their possessions….The size of bonuses, however, is a matter that should be left to shareholders. After all, once the rescue measures are withdrawn, it will be investors’ money that the bankers are taking home.
Yves here. This is simply impossible in publicly-held companies. We have a system with INHERENTLY DEFECTIVE corporate governance. Amusingly, Amar Bhide wrote an article in 1994 in the Harvard Business Review, that the very measures that promoted liquidity in the stock markets came at the expense of effective oversight. No one wanted to hear it then because it went against our mythology of the virtues of public shareholding.
Corporate executives have erected the equivalent of fortresses against outside influence: no shareholder say on corporate pay, corporate budgets or capital expenditures, routine fundraisings. They implement staggered boards. So how hard is it to exert influence? How much impact has activist shareholder Calpers had, which unlike most shareholders, has large positions, deep pockets, and staying power? Perilously little, if any.
Unlike America, which seems to have no historical memory, the Brits do recall what proper regulation looked like, and recall that sound regulations and fair play helped make England a leading financial center. So they are not prepared to let this banker intransigence go unnoticed. The FSA had announced initial details of a new pay code last August. One of its provisions was to require anyone in the adminisphere earning more than £500,000 a year to take 60% of it on a three year deferred basis, preferably in stock.
Apparently, some bankers were coming up with ways to evade those requirements through clever job reclassifications. The FSA got wind of it and tightened its rules. While the changes have yet to be announced, the Independent reports that all UK employees earning £1 million and up will be covered.
Bankers are threatening to decamp, but the fact is no other city in Europe has the office space (particularly the big open dealing rooms) that London has, and there are network effects to being in a financial hub. And bankers angrily planning their exodus have found, for instance, that slots in the premier local private schools abroad are scarce. That does not mean that individuals and operations won’t leave, but it would not be as fast or as broad-scale as the chest-beating would leave you to believe.
The New York Times gives (predictably) an unduly sympathetic reading of the banksters’ side of this staredown in “U.S. Bankers Are Fed Up With British Regulations“:
Their taxes are on the rise, they have become political piñatas and now, just as one of the richer bonus seasons in recent years gets under way, they are being told by regulators how to pay — or not to pay, to be precise — their employees.
Yves here. How many material omissions are there in that short statement? There would be NO earnings, NO bonuses, NO firms at all were it not for massive government handouts. Even in normal circumstances, banks run state charted franchises and are subject to oversight and regulation. That’s fundamental to this business. Want less regulation? Go write software and see how easy it is to get rich quickly. All those lovely barriers to entry (and regulations account for some of them) and concentrated capital flows (most assuredly the result of industry-friendly policies) produce large, concentrated capital flows. Bankers fish in a stream that is richly stocked as a result of government action. And the big profits this year are the direct result of the industry rescue programs, and comparatively little with the supposed “talent” of the incumbents.
But no, we get more
drivel industry PR from the Times:
But, coming as it does after a wildly unpopular move by the British government to impose a 50 percent tax on banker bonuses, this new intervention is being considered by some as a final straw of sorts.
Yves here. Wildly unpopular with whom? The bankers, of course. Did the Times bother polling a broader, more representative audience? And this “final straw” talk perpetuates the banker world-view, that they are entitled to deal with the government as an equal party. Earth to base: the government can put you out of business in a nanosecond if it wants to by revoking licenses, or it may find it necessary to do things that inconvenience you more than a tad (Jim Rogers would remind his students that the US has a history of imposing capital controls).
A post at FireDogLake takes aim at what passes for banker logic:
Here’s the policy chairman of the City of London:
“You can only push people so far.”
And the Lord of JPMorgan, Jamie Dimon….made a phone call to Britain’s Chancellor of the Exchequer complaining about the 50% tax. While everyone reports that the call was civil if not quite friendly, there was a subtext:
…There is a limit to what banks will accept as the price of doing business in Europe’s premier financial center. …the City of London was losing a bit of its luster.
Of course, what really loses its luster is the cardboard box some folks live in when they lose their homes to these criminals. The food pantry generic labels when your kids want Skippy — that’s some luster lost. Or waiting for your mailman to deliver the unemployment check, and he doesn’t — so you can’t actually make the trip to visit family for the holidays: lustrous? Not so much.
As the bankers are wont to say: there is a limit!
You know what else loses its luster? Answering the phone when the fifth bill collector calls that day, knowing there’s no money to pay any of them. Scraping change out of your kids’ piggybanks to pay the light bill.
Hoping no one gets sick this winter, since your health care ran out and the free clinic closed. That’s some luster gone from everyday living.
You can only push people so far…
Join them sometime, rich banker fatcats, if you dare. You haven’t any concept of what it’s like to actually be “pushed.” Your multi-million-dollar, many-home, luxury yacht, multiple Mercedes, Gucci-shod, mistress-bedecked cosseted lifestyle hasn’t even been dented — yet. But keep up your silly mewling, bankster pirates, and you may very well find out how bad it really is at the bottom. The least you can do before we arrive with the torches and pitchforks is pay your fucking taxes to fix the economy you destroyed and repair the lives ruined in your wake.
Yves here. So far, in the US, all we have had is empty gestures to appease the masses, and shocking tolerance of banker intransigence (it is breathtaking that Obama allowed bank CEOs to reject his summons to meet with him.
Cheney Bush would not have tolerated it, and neither would Rubin Clinton). Obama is looking more and more like the Manchurian Candidate with every passing day.