Capping Bankers’ Pay

 

‘Once in the dear dead days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor. “Look, those are the bankers’ and brokers’ yachts. ‘Where are all the customers’ yachts?’ asked the naïve visitor.”‘

When governments are in a hole, they firstly look for a shovel and then for someone to use it on. The trendy cause du jour is the subject of capping bankers’ bonuses.

President Obama has proposed placing a $500,000 ceiling on the salaries of senior bankers of institutions that accept taxpayer funds.  UK Prime Minister, Gordon Brown, never shy of ignoring a convenient whipping boy when he sees one, has stated on the record that he will be ‘reviewing‘ the proposed $2.4bn bonus pool for employees of all-but-nationalised bank, RBS. Chancellor Alistair Darling has gone one step further and will be probing whether ‘the promise of big bonuses lured bankers into taking excessive risks’, though quickly adding that ‘no government should try to remove risk-taking from the system’.   Our own banks have also received massive state aid in the form of taxpayer-guaranteed funding and taxpayer-guaranteed deposits, but to date, there has been no word from the mighty Rudd-Swan axis of any plans to cap salaries at the Big 4 banks.

Are Obama and Brown right and Rudd wrong?    Is Rudd a shining beacon of free markets?  Or are they all wrong?

Firstly, the subject of bankers pay. 

Investment bankers are were paid a lot of money.   A good (30 year old) trader could easily take home $2mm simply for ‘hitting budget’.   Are they worth it?  Who knows or who cares. Provided compensation is funded by shareholders, there is nothing wrong or immoral about high pay. Christiano Ronaldo is paid about $300,000 a week by the shareholders of Manchester United.  Is he worth this?  Presumably so, otherwise the Glazier family wouldn’t pay. Is it wrong that he receives this amount?  Who are we to judge.

However, when a banker’s bonus is funded by the taxpayer, the issue becomes a lot more complicated.

The obvious side-effect of capping salaries, is that the best graduates will seek alternate careers. So what, say most.  Wouldn’t it be better if the smartest minds diverted their attention to finding cures for cancer rather than how to securitise the royalties from the David Bowie back catalogue. 

The other pernicious side-effect is that the government would effectively become involved in setting company strategy – a very regressive step.

But taxpayers have the right to know how their money is being spent and have the right to feel outraged over the appalling scenes at Merrill Lynch, where the now sacked CEO, John Thain, fast-tracked their bonus payouts prior to the Bank of America takeover and prior to the full extent of the 4th quarter $15bn losses became public knowledge.  The Merrill bonus pool amounted to $4bn, roughly equivalent to the 2006 bonus pool- the second best year ever for Wall Street.    A bonus is the minimum payment required to keep a banker at his desk. No more,  no less. If a banker is unhappy with his 2008 bonus, where exactly can he go?

The only surprise is the lack of strings placed on the massive taxpayer support for Australia’s Big 4 banks. I suspect the banks managed to pull the wool over the eyes of a very incompetent and inexperienced Rudd government. Never underestimate the extent to which bankers will outsmart government, especially dumb governments.

8 thoughts on “Capping Bankers’ Pay

  1. Morgan Stanley and Goldman’s have said they want to repay the preferred stock early however it necessitates government approval to to do so.

  2. The discussion on pay, especially for those getting bailouts, is worth having. However, too little focus has been paid to the “pay” that companies in the finance sector get in return for the sector’s job of assisting the economy.

    “The Economist” reported recently that while in the 1980s (hardly a time of moderation), in the US, the financial sector profits were 10% of corporate profits, but for fy 2006/07, this was 40%.

    10% /might/ be a reasonable reward for the utility of the finance sector to the wider economy, but 40% is simply bleeding the wider economy dry, skewing activity well away from production or services more intimately connected with “real” needs (like plumbing or cleaning).

    On top of this, the “innovative” instruments recently developed are largely unmoderated by regulation, are strongly pro-cyclical, a significant pro-cyclical contributor to the bubble, and the pain when that bubble bursts.

    If the financial sector as a whole was “paid” more moderately, although I don’t know how this could be done, then financial executive salaries would be moderated automatically.

  3. According to this story, the government’s guarantee has so far generated $420 million in fees and the risk of it costing any money is negligible.

    http://www.businessspectator.com.au/bs.nsf/Article/Foreign-bank-furphy-$pd20090209-P3TJ9?OpenDocument&src=sph

    So there might be a difference between the situation in the UK and US compared to here.

    Not that I’m disputing the extent to which bankers can outsmart governments. They’ve been outsmarting shareholders for ages, so politicians and bureaucrats are easy.

  4. Outrageous executive pay permitted by company boards shows the limits of representative democracy.

  5. I can understand Governments concerned about banks ripping off taxpayer funded bailouts. But all of this could have been avoided by applying a simple principle:

    Don’t bail them out!

  6. Why stop at banks. The car industry is basically an on-going bailout decades old. TCF companies too. Should cap salaries in those industries? That would sure help Holden prosper.

  7. Those who create Bowie Bonds can also create some innovative finance for medical research. It’s great to have a lot of researchers, but they also need funding and capital raising to fund their employment and costs.

  8. As an aside, that guarantee is proving to be a profitable exercise for the federal government. It has cost the government nothing to provide guarantees that underwrite the stability and strength of the financial system.

    It is a guarantee that will almost certainly never be called upon. In the meantime, the government has collected an estimated $420 million in fees for allowing institutions to use its sovereign rating.

    lol. i don’t like it how they say it costs nothing because they haven’t got unlucky yet.

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