Tuesday, 31 January 2012

Bailouts and bonuses

Yesterday's article from Toby Young:
RBS shares fell 2.5% this morning, partly on the back of Stephen Hester's decision to waive his bonus. As Alistair Heath pointed out on the Today programme this morning, investors are clearly worried that from now on RBS will be subject to frequent political meddling and will no longer be run as a commercial business. What this means is that, thanks in part to the populist posturing of Ed Miliband and Chuka Umunna, as well as their anti-capitalist cheerleaders in the media, the bank is now worth £330m less than it was at close of play on Friday evening. So the leaders of the Labour Party haven't saved the British taxpayer £1m; they've cost the taxpayer £329m. Nice one, guys.

Stop Press: Turns out I was wrong about this. In fact, the British taxpayer has lost £900m from this bonus fiasco.
It is an impossible situation. On the one hand, it can't be right for the executives of loss-making state-owned enterprises to take home massive bonuses (most loss-making private sector enterprises don't pay bonuses at all). On the other, the banks cannot hope to recover and return to profitability with constant meddling from politicians. The only solution is not to bail banks out in the first place.

Two aspects of this sorry saga are worth highlighting, however.

The first (as noted by DK and others), is the staggering hypocrisy and shameless opportunism of the Labour party. It was Gordon Brown who bailed out the banks, with the enthusiastic support of the current leaders of the Labour Party. More than that, they seemingly agreed a contract that provides for the very bonus they're now denouncing.

The second item of note was captured beautifully in a tweet from @RyanCPS:
Anyone else wish our political leaders gave Hester's bonus-style scrutiny to every £1 million of state spending?

Daniel Hannan also covered the story of Hester's bonus:
Hester has done precisely what the Government brought him in to do, salvaging what he could from a wrecked bank and preparing it for privatization. The fall in the share price of RBS is hardly his fault: all bank shares have lost value, partly because of the eurozone crisis and partly because of the Government's own regulations. If anything, Hester's bonus is less generous than he might have expected on the basis of his contract and results. Yes, it's a larger sum than I'd have offered had I been the minister who agreed his contract; but, again, that's hardly his fault.

In any case, the bonus is the one part of his package that is performance-related, being payable in stock. If RBS shares rise, he gains, if they fall, he loses. I can't for the life of me understand why critics should have seized on this aspect of his remuneration, rather than the £1.2 million basic salary which he will receive regardless of whether the company prospers. The anti-bonus media campaigns have had the perverse effect of pushing banks into paying higher salaries – surely more objectionable than rewarding employees in proportion to their success.
All fair points.

I'll grant that many executive compensation schemes, especially in the financial sector, have used definitions of 'success' that don't align well with the long-term interests of the shareholders, but that's nobody's business but the shareholders (or at least it would be, if the government could resist their bailout urges).

However, Hannan goes on to write something that strikes me as subtly but significantly wrong:
You might feel a legitimate resentment against RBS pay packages, even if they are not directly financed by taxpayers, but be relaxed about those in private banks. If so, I agree with you; but you and I are in the minority. Barclays' Bob Diamond was recently being criticised in almost exactly the same language as is Stephen Hester today. The fact that Barclays declined a bail-out, paid a premium to recapitalize privately and then outperformed the banks that had taken government cash, was lost in the general cry of 'why does anyone need that much?'
There are very few genuinely private banks, and Barclays is certainly not among them. All the major commercial banks suckle at the teat of the central bank. Even when they're not being explicitly bailed out, they're being heavily subsidised. That's not free enterprise, it's monetary socialism.

And though Barclays declined a bailout, they almost certainly benefited from the bailout of RBS, just as Goldman Sachs benefited from the bailout of AIG. It's impossible to say how things would have played out if all of the bad banks were allowed to go bust, but there would have been more justice.

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