Should bankers' wages be cut?

 

             The country has been briefed against the bankers for many months. There is an almost universal view that the bankers behaved badly, are paid too much, and should by punished in some way. Most politicians forget we are all bankers now, as collectively we own the largest UK banking group, and have various other shareholdings in the sector. The people are the true capitalists now.

              I have argued before that we should immediately exempt most bankers from these allegations and remedies. Most bankers earn modest sums to act as counter clerks, loan executives, mortgage administrators, transaction handlers and the like. They were not responsible for the high level errors of judgement which led to the Credit Crunch, nor do  they   enjoy telephone number remuneration.

              The targets are the directors and senior executives of the large integrated banks and the investment banks. They do earn large base salaries, and are used to substantial bonuses. Once paid as cash year by year, following changes these are now more likely to be paid as shares with a lock in period.

               The prosecution case seeks to cut or limit these  pay levels. The points made include:

1. The pay turns out to be subsidised by the state – directly in the case of state owned banks, and indirectly where a private sector bank enjoys past or potential support from the public sector if it gets things wrong

2.The bankers rewards are inflammatory to others who earn much less

3. Some of these senior bankers have failed to be good role  models, abusing their positions of trust

4. The bonuses are based on taking excessive risks. If the risk works out the banker is rewarded. If the risk goes wrong someone else pays the bill

5. The bankers earn much more than many of the small businesses and homeowners they are lending to.

The case for the bankers is infrequently and feebly put. It probably includes:

1. Banking is an international business. If the UK imposes restrictions on rewards here that are not imposed elsewhere, the business will shift to other centres

2. Banks and bankers pay large  amounts of tax which is crucial to public service provision in the UK

3. Banks were encouraged to lend large sums to mortgage holders and businesses prior to 2007 by governments keen to promote wider ownership and economic growth through excess credit

4. Banks expanded lending so much in direct response to central banks which set low interest rates to facilitate it, and under the watching eyes of regulators who said the risks the banks were running were just fine

5.Banks need to offer large salaries to attract the best international talent, just as football teams do

6.Bankers are at risk, and some do lose their jobs when they fail to generate the revenue they promised

7. High earning bankers pay more than 50% of their money in tax, which can be used to reduce inequalities.

8. Surely the regulators and government are most to blame for the Credit Crunch. The Labour government put in an entirely new system of regulation of its own, and it failed disastrously. Banks as well as the rest of the country relied on the regulation.

            So should the Uk government do more to change the culture and regulate pay in the banks? My answer is both Yes and No.

           I cannot accept public subsidy for large salaries and bonuses. That is why I opposed nationalisation of RBS, and why I still oppose the current pattern of remuneration in that state owned bank. I would be happy for the top management to make large sums if and when they sell the bank back to the private sector at a profit for the UK taxpayers. I am not happy about people who are effectively civil servants in a state bank being paid so much more than other public servants.   As I favour split up and the sell off  differing businesses from within the RBS stable, talent can be retained and incentivised around achieving good selling prices for bits of the business. The talented executives would get their  reward as and when they have transferred assets and activities successfully to the private sector at a good price for taxpayer owners.

              I do not, on the other hand, favour more intervention on levels of pay in private sector banks not in receipt of state subsidy. It is true that all important banks can and should borrow from the lender of last resort, the Central Bank, in times  of trouble. That is not necessarily a subsidy. If it becomes in effect the offer of longer term subsidised capital to the private sector bank, then at that point there needs to be a negotiated conclusion on lower levels of remuneration in the troubled  bank whilst it gets itself back into free standing profitable shape.

             In future should there be another bout of poor regulation and banking excess they have promised to tackle it through a kind of managed adminsitration as I proposed for RBS. This means  there need  not be the same problem over remuneration and state subsidy anyway.

             The curious thing is that the last Labour government nationalised a bank or two, but endorsed high levels of remumeration and bonuses and signed off all the top executive contracts. The incoming Coalition government was advised they had to honour the contracts. That all makes it difficult for Labour to complain about excessive banking pay, as they underwrote and approved it in  several important cases.

 

 

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83 Comments

  1. Mike Stallard
    Posted August 20, 2011 at 6:47 am | Permalink

    In Peterborough we used to say in a case like this:
    “Are yer jealous or upset?”
    Banking, as even the people on Newsnight yesterday had to admit, is paying for all those jealous people who are going down to collect their disability hand-outs.
    Meanwhile a Conservative government has done NOTHING to unload the loss making banks which Labour nationalised.
    And in the background the greedy Germans are hovering……..

    • Andrew Smith
      Posted August 20, 2011 at 5:07 pm | Permalink

      How much do Newsnight presenters get paid and how much foreign earnings are they directly accountable for?

      How many BBC presenters get fired as soon as the ratings drop?

      How many BBC etc presenters use corporate vehicles to avoid the tax they so often talk about? Why does the BBC allow that and why does HMRC not look into them to find out if there is in truth a PAYE relationship, as I suspect.

      How many BBC executives set up private programme making companies in parallel with their paid job. Are there any partners where one is a commissioning BBC employee and the other owns the programme maker?

      How many BBC employees go self-employed and work exclusively for the BBC (from overseas locations) and earn hundreds per day doing what they used to do “on the job” and commissioned by their former colleagues (aka “old mates”).

      It really is about time the bankers and the City got off its knees and fought back; they must be able to afford the investigators to get them the dirt.

      • lifelogic
        Posted August 21, 2011 at 8:41 am | Permalink

        Indeed what is the true position – the BBC is always telling us that it is our BBC and “accountable” so could we know please?

  2. Julian
    Posted August 20, 2011 at 7:24 am | Permalink

    At the height of the credit crunch, banks were closing. Others were presumably tightening their belts and getting rid of staff. I do not understand why having a surplus of qualified staff didn’t depress salaries in the sector. It doesn’t seem to have done.

  3. Peter van Leeuwen
    Posted August 20, 2011 at 7:42 am | Permalink

    It’s not about Tory or Labour, Britain or the continent, our societies are based just a little too much on greed. As a start, any bonuses should be abolished. Bonuses should not be the motivator, neither for the banker nor for the butcher. High fixed salaries will still enable banks to attract top-talent, who then will base their actions on serving their clients, rather than being distracted by bonuses.

  4. lifelogic
    Posted August 20, 2011 at 8:14 am | Permalink

    You make all the sensible points as usual. The main one is I think is:

    4. The bonuses are based on taking excessive risks. If the risk works out the banker is rewarded. If the risk goes wrong someone else pays the bill.

    Someone bets half the banks money on something that is say 90% likely to happen. They probably win and get a big bonus. They do it again next year and again until finally they loose. But after say 7 years or so they have made a great deal and when they finally do loose then they only loose their job and probably get a pay off too.

    The bank picks up the tab.

    The rich reward system is totally wrong. The regulators and bank need to correct them. Employees need to be employees on normal salaries (or perhaps need to be self employed and gamble their own capital).

    • lifelogic
      Posted August 20, 2011 at 8:40 am | Permalink

      sorry “risk reward” not rich reward.

    • rose
      Posted August 20, 2011 at 10:22 am | Permalink

      Women take fewer risks and settle for smaller salaries. Perhaps there are just too many men at the top of the industry.

      • lifelogic
        Posted August 20, 2011 at 11:01 pm | Permalink

        Rather sexist of you.

        But then men and women are clearly different in so many ways – honed by evolution and as can clearly be demonstrated very simply just by asking a sample a few questions. Clearly abilities do over lap but on average there are huge differences which laws clearly will never change.

        It is always amusing to listen to Woman’s hour on radio 4 going on about how woman are clearly held back all over the place and are just the same as men if not discriminated against. Then in the same program going on about how much better they are a languages, empathy, multi-tasking …………

        In fact single women I understand earn rather more than the average man.

        Perhaps you are right in that they may take fewer risk but risk often can be very good – if the risk reward profile is on your side and is fully understood.

        • rose
          Posted August 21, 2011 at 11:52 am | Permalink

          Woman’s Hour’s obsessive “anti-sexism” drives me mad. I never find it amusing, and I have not yet absorbed the ill-defined words “racist” and “sexist” etc into my natural vocabulary. But I believe the Financial World is now studying the risk aversion of women. That is amusing. (I don’t know about the Nuclear industry.)

          • lifelogic
            Posted August 21, 2011 at 9:00 pm | Permalink

            I just think it is just loosely “defined” as a useful description by the lefties for someone they do not like or agree with and they wish to sideline – but have no logic arguments to use.

  5. Geoff not Hoon
    Posted August 20, 2011 at 8:40 am | Permalink

    Mr.Redwood, As usual I dont have the answer but what I feel is grotesquely wrong are those banks that substantially increased salaries so they could say ‘we have reduced bonus’s’. Some of the figures quoted a few months back, from memory in the FT, were obscene.

  6. Magnolia
    Posted August 20, 2011 at 9:02 am | Permalink

    I think that it is the government’s job to make it possible for banks to regulate themselves as well.
    Conservatives used to stand for strong institutions and professions as well as a free market.
    Labour seemed to want everyone to just let rip in order to feed it’s voters with cheap credit and handouts.
    The truth is that Labour only cared about the quantity of tax take rather than the quality of it!

  7. Nick
    Posted August 20, 2011 at 9:30 am | Permalink

    What about politicians?

    What about the debts that you’ve run up?

    How about this.

    No one pays for any of the debt, until politicians have paid it off. If they can’t they are made bankrupt, and we take all your pension money.

    That will fund the spending for about 6 seconds.

  8. Nick
    Posted August 20, 2011 at 9:31 am | Permalink

    I do not understand why having a surplus of qualified staff didn’t depress salaries in the sector. It doesn’t seem to have done.

    ===========

    That’s because the banks that went under were run by staff that weren’t qualified. They didn’t make money.

  9. Antisthenes
    Posted August 20, 2011 at 9:38 am | Permalink

    Yes banks and bankers made a hash of things but it is nothing to do with their pay or bonuses, at any other time everyone would be applauding bonuses as a means of distributing company profits to there workers. No the real problem was government policies that encouraged everyone to borrow too much and the banks to lend too much. Remember boom and bust had been abolished so sayeth the great prophet Brown (forgetting that wise prophets make their predictions after the event not before) so asset prices would never fall. In those circumstances what are the bankers supposed to do, well keep lending of course to all and sundry. However the bankers failings was to heed the advice of no boom and bust and not see through the pitfalls inherent in government polices and greed overcame caution. No the instigators of the great banking crisis (still to be resolved as the wrong actions were taken at the time) were governments and when it all came crashing down governments were lucky that bankers naked greed was more apparent than their naked stupidity so the scapegoat was found. So the masses whipped up into a frenzy by the real villains of the banking crises governments distracted attention away from themselves and banker bashing was founded. If large pay and bonuses for bankers is wrong then equally so it is for sports and film stars and the like. However bashing those other than bankers who create great wealth not only for themselves but for the economy as a whole would be howled down by the fans of football, X factor, Eastenders and Lady Gaga. Hypocrisy and double standards are the rule not the exception.

    • zorro
      Posted August 20, 2011 at 10:50 pm | Permalink

      I do not agree. The bankers were clever enough to understand that Brown’s boasting was not realistic. They were also clever enough to know that they could profit in the short time and also in the medium to long term by claiming that they were too big to fail. They had an implicit understanding that they would be bailed out. They totally out-manoeuvred the politicians.

      It is quite frankly obscene that the (current) civil servant CEO of RBS is earning such a huge salary. It typifies on a micro scale the outrageous nature of the way in which these banks were dealt with. As John advocated at the time, they should have been wound up and sold off to reinforce moral hazard and the nature of risk taking. Instead, they are a millstone around the neck of the collective taxpayer.

      zorro

  10. waramess
    Posted August 20, 2011 at 9:54 am | Permalink

    There can never be an excuse for Governments to interfere in the workings of the private sector other than to ensure free and fair competition. Of course this is far too much to expect from Governments who actually believe they run the economies of their countries’.

    Banking is a business that is so heavily controlled by governments that it bears little resemblance to the free market and so we reap what we sow, so to speak.

    You are right when you say that RBS and others should have been allowed to go into receivership but they were instead saved and now they dish out bonuses even when they make losses. There is no sense to any of this but further government involvment is not the answer.

    Why not now give the shares of these Nationalised banks to the electorate making it clear that they will in future receive no government support and will be allowed to go into liquidation in the event that they get into trouble?

    Why not pass an act of parliament to give retail depositors a prior charge over the assets of banks and let it be known that government support will no longer be given to a failing bank? Then we might start to see some interesting competition on interest rates at least.

    The answer to the issue of bonuses is not more government involvment but to get out of the way.

  11. Tedgo
    Posted August 20, 2011 at 10:00 am | Permalink

    I agree with your analysis, though I would NOT be happy “for the top management to make large sums if and when they sell the bank back to the private sector at a profit for the UK taxpayers”. They are not gambling their own capital, they are being paid to manage effectively. The taxpayer should get all the profit.

    I think this ongoing financial crisis does debunk the myth that you need to pay very high salaries and benefits to get the best people. If this is the best money can buy then god help us all. I am sure their are many people who could manage the banks better on a fraction of what is currently paid.

    • zorro
      Posted August 20, 2011 at 10:55 pm | Permalink

      Hear hear. It is the same on a lesser scale in the public sector…smoke and mirrors.

      zorro

    • Tedgo
      Posted August 21, 2011 at 9:29 am | Permalink

      I think their is a parallel case going on at the moment with the selection of the new chief for the Metropolitan Police. The current candidates seem to be all old school Hobson’s choice, some having their arms twisted to apply. The interview should be opened up to Chief Superintendents, their would dozens of candidates. Get some new thinking at the top.

  12. APL
    Posted August 20, 2011 at 10:12 am | Permalink

    JR: “Should bankers’ wages be cut?”

    If Parliament hadn’t nationalized the banks and socialised their failure, the problem of bankers bonuses would be unlikely to occur.

    Do we care what the CEO of Bear Sterns or Lehman’s is being paid now?

    Parliament has failed in it’s duty to control the executive’s spending in the name of the Crown. Parliament has failed in its primary role.

  13. StrongholdBarricades
    Posted August 20, 2011 at 10:20 am | Permalink

    Is this the debate starter that adds to the telegraph article telling us that banks can no longer afford to pay the high wage claims of the speculators who work for them?

    Their arguement would seem to be a supply and demand type scenario from baic economics, yours appears to be discriminatory to me. The market should pay what it can bear.

    I find this far too simplistic as the “new” companies that are proliferating can be set up as off shore agents, pay the rates, cut out the banks, and thus dent the exchequer the taxation.

    What will HM Treasury’s response be when general tax rates have to rise because more of the 1% who contribute 25% taxtake decide to use their money to legal avoid tax?

  14. David Price
    Posted August 20, 2011 at 10:26 am | Permalink

    If you must punish people then how can you just punish the bankers and not punish the politicians and civil servants who were also involved especially when losing a job is no where near enough compensation to those impacted by the bad decisions?

    Unfair inequalities in risk-effort-reward exist everywhere not just with banking, the issue is that mistakes in banking can mess up the economy for everyone while the rewards go to the very few.

    By all means ensure there are safeguards to reduce the chance and effects of bad decisions by splitting off the boring, lower risk-reward retail banking. But allow the investment and merchant bankers to be as buccaneering as they wish provided they take the risks in other economies and provide the benefit and full taxes to the UK.

  15. David John Wilson
    Posted August 20, 2011 at 10:43 am | Permalink

    There must be a strong case for looking at the way bonus and salaries are paid.
    For example cash bonuses should be limited to a maximum of 15% of salary and any further amount paid in shares which must be held for a minimum of five years but with income tax on the original value of the shares paid immediately.
    There must be some serious constraints placed on tax avoidance schemes such as payments in kind and abroad.

  16. JimF
    Posted August 20, 2011 at 10:44 am | Permalink

    “1. Banking is an international business. If the UK imposes restrictions on rewards here that are not imposed elsewhere, the business will shift to other centres”
    Pay them more against share price performance than the overseas competition, not large base salaries. The good ones will accept such a deal. We don’t need bankers with all mouth and no trousers.
    “2. Banks and bankers pay large amounts of tax which is crucial to public service provision in the UK”
    Which as you say is then recycled to their pay packets – thus irrelevant argument
    “3. Banks were encouraged to lend large sums to mortgage holders and businesses prior to 2007 by governments keen to promote wider ownership and economic growth through excess credit”
    Banks encourage me to borrow, but I don’t have to do it. But then I look at the risk to my money, not other people’s…
    “4. Banks expanded lending so much in direct response to central banks which set low interest rates to facilitate it, and under the watching eyes of regulators who said the risks the banks were running were just fine”
    So you are saying Bank directors should be paid large salaries for doing precisely what they are told by central banks and regulators, rather than using their own fine minds to create ideas of their own and genuine profit?
    ” 5.Banks need to offer large salaries to attract the best international talent, just as football teams do”
    I think we’ve already been there. Football teams aren’t too big to fail, and don’t have a taxpayer backstop.
    “6.Bankers are at risk, and some do lose their jobs when they fail to generate the revenue they promised”
    Nothing compared to the small business owners who borrow from them and lose both their jobs and assets when they fail. Most importantly, bankers’ own already earned money is not substantially at risk.
    “7. High earning bankers pay more than 50% of their money in tax, which can be used to reduce inequalities.”
    As above, recycled money in a system where they are backed by the state.
    “8. Surely the regulators and government are most to blame for the Credit Crunch. The Labour government put in an entirely new system of regulation of its own, and it failed disastrously. Banks as well as the rest of the country relied on the regulation.”
    Again, just because my business can borrow to the hilt, it doesn’t mean that it’s commercially safe or prudent for me to do that. You aren’t talking about the people in these banks who are being paid for cashing cheques on a till. They’re being paid to take risks, prudently, with other people’s money. If they are just following a track then blaming the direction of the track when they fail then they shouldn’t be paid so highly.

    The salient points seem to be
    1 Yes, pay bankers what you wish in a system which can fail, but not one which can’t. In such a system they are glorified Civil Servants
    2 If regulation and central bank direction give bankers only one option as a course to follow, then there is no decision making or creativity in the role, so why are banks paying so much for that?
    3 High pay cannot be jsutified in taxpayer funded organisations just because half of it goes back in tax. Otherwise you could justify paying any Public servant a high salary, as more tax will be paid back. that’s a bizarre argument.

    Really these banks have to be able to fail leaving depositors’ money guaranteed as a starting point. We can discuss the rest later.

  17. Iain
    Posted August 20, 2011 at 10:47 am | Permalink

    I don’t believe you can say that there is no obligation on non state owned banks, not when they are borrowing money from the British state at 1/2% and lending it to their customers at 5-6 or 7% . Any idiot can make money with a guranteed margin like that, you don’t need to be some over paid international tallent. Not surprisingly the most profitable profit centre for HSBC was the UK.

    • zorro
      Posted August 20, 2011 at 10:57 pm | Permalink

      more like 10 – 12% and far more on credit cards, and do not forget leverage/fractional reserve factor.

      zorro

    • davidb
      Posted August 21, 2011 at 6:06 am | Permalink

      They use fractional lending. That money they pay 1/”2% to borrow at gets lent a dozen times at 6%, so its more like 70% they get.

    • A different Simon
      Posted August 21, 2011 at 11:17 am | Permalink

      That is what concerns me , a suspicion that banks “profits” come from shafting British Citizens and not Exports .

      Even without taking the margin into account , by charging less interest than the rate of inflation the state is simply giving them money .

      Add to this that they have a monopoly in things like pensions provision (there is no not for profit state run alternative that the likes of Holland has) , there must be some doubt whether they could survive in an open market .

      Only the thickest of parasites drain their host hard enough to kill it .

  18. StevenL
    Posted August 20, 2011 at 11:42 am | Permalink

    “Some of these senior bankers have failed to be good role models, abusing their positions of trust”

    If they have dishonestly abused their position to defraud their shareholders then they should be investigated for section 4 Fraud Act 2006 offences.

  19. Acorn
    Posted August 20, 2011 at 12:01 pm | Permalink

    Your post is a bit like re-arranging the deck chairs on the Titanic. Will there be any banks left? We have had a failure of the post Nixon fiat monetary / financial system in the west. Occasioned by, the financial elite, chasing higher returns in a low interest environment; courtesy of a political elite who didn’t know what they were doing.

    The political elite then bailed out the financial elite saying, carry on guys we have got your backs. The banks said cheers Mr politician, but who has got your back? Never ending growth will swell our coffers, taxpayers will provide and never notice they are getting screwed, said the political elite.

    But the tax payers came to realise that they were getting poorer while the political elite and the financial elite did prosper much. And, the latter were rigging the game to their advantage. The lobbyists were designing new regulations to create exemptions and subsidies for the chosen few. At the current rate, they will have removed the word “fraud”, and its numerous synonyms, from the dictionary.

    If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it. ~Ronald Reagan. Western style democracy gets to be sclerotic by regulating itself to a standstill – growth flat-lines or declines. The US has embraced the UK / EU model with gusto. Regulation is the fastest growing business in all three. The following link is the Obama version. We have a dozen or so current MPs, headed by our host; who really have to GET VERY LOUD to save us. http://www.investors.com/NewsAndAnalysis/Article/581555/201108151901/Regulatory-Agencies-Staffing-Up.aspx

  20. Andrew
    Posted August 20, 2011 at 12:03 pm | Permalink

    John,

    Socialists fixate on reasons 2, 3 and 5. Sensible people fixate on 1 and 4.

    The rewards for the ‘superstars’ are a perverse set of incentives as they can never lose. One year’s pay sees them set for life and by the time the wheel turns and losses are exposed, they are secure and likely working elsewhere, without even a hint of being called to account. The country bails out the entire industry because the mistakes of the superstars are not accountable.

    Football is a similarly disastrous business model and is heading for a collapse. I am surprised you chose it. Chelsea and Man City (could be-ed) the future Barings/Icesave of football, pursuing an unsustainable business model that is dependent upon the whims of two individuals to sustain their losses (Abramovich and Sheikh Mansour). (Ed- this is perfectly stable all the time rich individuals are happy to back them with guarantees, suubsidies and loans – these clubs may well continue to be fully suported) Once their core business model becomes exposed to the market, they will collapse into administration and sink like a stone – see Leeds FC for an example of a major brand sinking like a stone due to financial excesses. The difference is that the country will not bail out the football clubs.

    Man Utd and the Hicks/Gillette Liverpool model were the RBS/Halifax/Northern Rock of football. Leveraging themselves to the hilt in the good times, paying vast wage bills that are only sustainable if they achieve the top four positions in the league and risking bankruptcy and a fire sale if they do not (if they lose financial support from rich people who believe they can make big money out of the top positions and brands, or who just like backing football-ed). Hicks/Gillette were forced to take losses on their investment and United’s owners look like they are going to sell their shares now just before (ed-possible harder times) (Alex Ferguson retires).

    The greedy players are like the greedy bankers. They will take all they can get as the administrators/regulators are in thrall to the owners and vast, apparently limitless sums of money washing around the system. They will not bring the party to a halt because everyone imagines that there will be no return to boom and bust in football – after all Sky money (growth) will keep it going, won’t it?

    The thing is, in order for smaller clubs (Northern Rock) to compete and keep superstars in their clubs, or even in this country (after all, superstars can just go overseas can’t they?), the clubs are paying wages they cannot afford (running an overleveraged model in the good times) that are crippling to the business model and risk administration if even a slight headwind appears. The difference is that the government did not bail out Leeds Football club when the model hit the buffers.

    If we genuinely have lost, as a country, say, 100 billion pounds as result of the banks, then all your return arguments 1-8 are null and void aren’t they, as all the money they gave us in tax has been paid back in spades and the same number of jobs they create have been lost in the real economy, because we can’t afford a sensible stimulus in this recession, such as building roads, bridges, railways and houses? We should be spending our vast, vast tax revenues on renewing our infrastructure during a recession, employing people in the real economy to do so. A renewal of our pathetic infrastructure would create a lasting effect on growth and therefore sustained employment in other areas. However, my understanding is that we can’t pursue a sensible stimulus strategy because the money is all going on welfare and bailing out banks (is it?)

    This is why the blog I have asked you do to (and you kindly agreed to try and find the time for) is so important. If we have irrevocably lost, say, 100 billion pounds, then all that tax income the banks dangle in front of us is not worth the risk. Better that we send the reckless banks that endanger our financial stability overseas and keep the slimmed down consumer banks with appropriate controls, contributing a smaller proportion of our tax and employment, but at substantially lower risk of forcing us to pay back all that tax in the future at a premium, when all the one way bets collapse.

    Football will collapse. All it will take is the withdrawals of the Sky money (boom years) or the withdrawal of sugar daddies.

    I am not sure we need or can afford to keep these banks in our economy. It depends how much money we irrevocably lose when it all goes wrong. I have an open/conflicted mind on this because extracting fact from opinion is impossible in the UK media market. There is basically only BBC-Labour-Guardian, Murdoch and the Economist if you want genuine analysis. The economist may be the only reliable on of those three axes, but I suspect they are dependent on the financial industry for their circulation and can’t freely tell the truth either.

    Reply: As my blog today indicates, the total losses from the overall Credit Crunch are large, and increase with every year that passes. We cannot yet say how much we will finally lose on the banks. Today we might conclude it was around £100 billion, but it could be much less in the longer run if the banks and the loan pools are well managed from here.

  21. Matt
    Posted August 20, 2011 at 12:09 pm | Permalink

    It’s an inconvenient point to start off from, but here we are.

    Those banks that have received no state subsidy, what is earned in bonus’s in a matter between the shareholders and the directors, nothing to do with government. One would hope, though, that the remuneration committee’s would impose medium, long term criterion that would trigger bonus payments. Taken as options, or cash and options. Not base bonus’s upon a good year in isolation.

    It would be helpful if the state declared, that, in the event of another banking crisis, and a bank facing insolvency, the state would seek a controlled administration.

    After all the state doesn’t intervene to save steelworkers jobs.

    As for the “state banks” … yes look to sell off any lucrative parts now, but too late to put into admin now.

    The bonus levels at the state banks – difficult – I wouldn’t reach for the Kleenex if they didn’t get any, but unless they keep the top talent then they may never prosper.
    Manchester United’s days in the premiership would be numbered if they capped wages at £50,000 a year.

    I suppose the thing to do is to be sure that the boards have the trust and backing of the government.

    JR’s recent comments about RBS purchase of decidedly risky Eurobonds is concerning, maybe the bankers feel little responsibility for any misjudgements. (Retail banking is flat – maybe they should be taking a few risks there)

    The city I think provides about the same proportion of GDP as manufacturing in the UK and as financial services can be easily moved to Frankfurt, Singapore it’s vital to keep the talent here.

    Just so long as the “state banks” are paying out to genuine talent – I’d love to find these highly performing funds that year on year provide mega returns, they seem to be evading me.

    • Denis Cooper
      Posted August 21, 2011 at 10:31 am | Permalink

      The problem is that in many cases the dominant shareholders in large companies such as banks are themselves large companies operating similar bonus schemes to reward senior management on the basis of short term performance.

  22. Samuel
    Posted August 20, 2011 at 12:15 pm | Permalink

    As is the norm in the economy, the government should decide what the wages and bonuses should be, IN THE STATE SECTOR. It’s none of the state’s business to be snooping around the private sector. It should only regulate the wages and bonuses of the bankers who work in a state “owned and dominated” bank. This has really got me in a huff now. Why should the government poke it’s nose around the economy excessively?!

  23. Elliot Kane
    Posted August 20, 2011 at 12:28 pm | Permalink

    “Surely the regulators and government are most to blame for the Credit Crunch” – worth copying for emphasis, as it’s the heart of the matter. Bankers get blamed most because politicians are better at buck passing than bankers are.

    For the rest, I’ll just agree with you, Mr Redwood.

  24. English Pensioner
    Posted August 20, 2011 at 12:33 pm | Permalink

    The big problem is how to prove whether it is necessary to pay such high salaries and bonuses to ensure the retention of the necessary talent. Companies appoint a remuneration committee for their board; they in turn carry out a survey of other companies of similar size and decide they need to pay a bit more in order to retain their board. The other companies then do exactly the same and it becomes a “you scratch my back and I’ll scratch yours” exercise.
    Presumably the same happens with the banks (and also NHS administrative posts, judging by today’s papers) – as a result no-one knows what these people are worth, or whether there are other people out there who could do the job equally well.
    The only solution that I can envisage, is to freeze the salaries of all these top level posts and see if people actually do start to leave. I suspect in many cases their deputies would be willing and capable of doing the job, after all no well run company should allow anyone to be indispensable.
    I think there is a strong case for calling the bluff of all these highly paid people from the bankers, NHS executives, County Council Chief Executives, etc. and having a pay freeze for say five years for all those earning over, say, £150k. I wonder how many would leave!

    • alan jutson
      Posted August 21, 2011 at 2:48 pm | Permalink

      E P

      Pay freeze for 5 years for those earning over £150,000, on the face of it sounds like a good idea, but then you have to beware of the add ons, bonus pension rights, and all of the other benefits.

      Like you, I do not think people will leave in droves either.

  25. MickC
    Posted August 20, 2011 at 12:34 pm | Permalink

    Unfortunately, the real problem is that the banks are insolvent and have been for some time now.

    But they are paying their “top” (?) staff large bonuses effectively the expense of the taxpayer. The banks should not have been propped up with taxpayers money but allowed to go down-someone would have bought the good bits and banking would have continued.

    It is, of course, no excuse that the regulator/regulations were wrong-that is the excuse of the MPs-what they did was theft a it has been with the banks.

    As far as I recall, running a company while it is insolvent is an offence with criminal liabilities. None of the bank directors have ever been charged.

    But naturally, it is only the little people who have to pay taxes and abide by the law.

    It will be interesting to see what happens when the second part of the banking disaster strikes in the near future-presumably states will print money to lend to the banks to pretend that they are viable. Hyperinflation here we come.#

    Reply: The banks are heavily regulated. The Regulator assures us the banks that are trading are both solvent and liquid.

    • zorro
      Posted August 20, 2011 at 11:08 pm | Permalink

      I wouldn’t put my house on that proposition….. Quis Custodiet Ipsos Custodes?

      zorro

    • Mark
      Posted August 20, 2011 at 11:28 pm | Permalink

      The regulator can do little else other than announce that the banks are solvent and hope that they will be able to trade their way to safety: to do otherwise would provoke a run and collapse the whole house of cards, whether the banks are solvent or not.

      The same has applied to the ratings agencies: the proposed new EU ratings agency is obviously designed to keep its head in the sand for longer than anyone else, which does not inspire confidence.

      Confidence might return if there were signs that banks were beginning to tackle some of the real problems in their loan books, rather than following a political agenda that seeks to avoid letting voters see the real pain they will inevitably face at some point. Kick the can down the road, and eventually you’ll miss your kick. Pretending that loans to highly indebted governments and on overpriced houses are not problem loans is hiding the reality of the need to cut government spending and accept that there will need to be repossessions and write-offs. The longer that continues, the less credible the regulator becomes.

    • Gary
      Posted August 21, 2011 at 11:39 am | Permalink

      “The regulators assure us the banks are solvent”

      Sounds like politburo speak. Open the banks books to the markets, make sure OTC derivative and all offshore positions are fully recorded, and then let the chips fall where they may.

    • MickC
      Posted August 21, 2011 at 1:21 pm | Permalink

      You and many thinking people know perfectly well that many of the banks are insolvent. It is quite simply a case of the kings new clothes.

      Once the cry goes up that the king is stark b****ck naked there is going to be an almighty crash. No state has the money to prop this up.

  26. Bazman
    Posted August 20, 2011 at 12:42 pm | Permalink

    The problem with cutting wages is that precedent is set allowing for the cutting of wages for other people. We have all worked with the idiots, often the supervisors who are just the bosses transmitter for telling you that he could get someone cheaper, that believe a pay cut for the other person is a pay rise for themselves. Despite this having no value at the checkout in the supermarket. Often people keep their rate of pay or salary from their colleges believing this will somehow increase their rate of pay, when often the reverse is true and the boss just uses this secret to keep down wages and get more work out of you telling you that his company is the only gig in town. Lets face it, if you found out that someone who earned more than you did less and more easy work, would you work harder? OK you would, but you are an idiot with job title being more important than salary. I am going to make you boss of a team with only you as the member of course there is no pay rise, but you can have more responsibility and one day I will make you a manager of the same team. The top beckons. Sorry I will have to make you redundant due to the recession and the price of cheese. Thanks for coming and don’t nick the kettle on the way out.

  27. A different Simon
    Posted August 20, 2011 at 1:00 pm | Permalink

    Bankers pay is a red herring so why bring it up John ?

    Just like MP”s expenses , fiddling while Rome burns .

    The bottom line is that banks are far too big ; not 2 , 4 or 5 times but a whole 10 times the size they were 20 years ago .

    What are you going to do to address the issue of “too big to fail” when they threaten to move overseas if you try and break them up ?

    Have they recovered to the point where it is now too late to call their bluff ?

    • APL
      Posted August 20, 2011 at 5:54 pm | Permalink

      A different Simon: “Have they recovered … ?”

      From the Automatic earth blog, stock price performance of selected banks over five years:

      Bank of America : – 86.68%
      Citigroup: -94.33%
      Barclays: – 76.85%
      RBS: -96.83%
      Société Générale: -83.57%
      Crédit Agricole: -81.39%
      UBS: -75.27%

      Compared with the performance of the broader stock index;

      Dow Jones: -3.97%
      S&P 500: -12.81%

      • APL
        Posted August 22, 2011 at 10:53 am | Permalink

        Over at the Mke Shedlock’s Global Economic
        Trend Analysis blog he has an interesting article about a particular German bank.

        Two years ago the German government poured €10bn into this particular bank and as of June 30th its market capitalization was €9.5bn. Since then Worldwide stock prices have fallen again.

        If the British governments banking investments are anything similar we will see no return on our bank bailouts.

        Now, who should be held responsible?

  28. Richard Long
    Posted August 20, 2011 at 1:38 pm | Permalink

    I would not mind but to argue that you have to pay fairly obscene bonuses to Bankers and others to keep them on board even when the banks lose billions just does not add up especially when they all benefited from so-called “Quantative Easing” or devaluation by publishing shedloads of money which is a major contributory factor to the economic mess we are in. Worse still the Bankers think they did a good job!!

  29. Denis Cooper
    Posted August 20, 2011 at 1:48 pm | Permalink

    “Once paid as cash year by year, following changes these are now more likely to be paid as shares with a lock in period.”

    Oh yes, a lock in period which could be as long as all of three years.

    That is a central problem which is not being addressed, the mismatch between the periods of three cycles:

    1. “Long Term Incentive Plans” for senior managers – typically, up to 3 years.

    2. Electoral cycle for MPs and governments – 4/5 years.

    3. Economic cycle – typically 10 years.

  30. Denis Cooper
    Posted August 20, 2011 at 1:53 pm | Permalink

    “… under the watching eyes of regulators who said the risks the banks were running were just fine.”

    Those would be the bunch of incompetents at the FSA, set up by Brown and given responsibility for the “prudential supervision” of banks at the behest of the EU.

  31. Denis Cooper
    Posted August 20, 2011 at 2:25 pm | Permalink

    Firstly the directors and senior executives of a listed company should be legally prohibited from owning any of its shares, or having any other financial interest in which is any way related to the market price of its shares.

    There should be no “Directors’ Dealings” section in investment magazines, because they should be completely barred from what will always amount to insider trading in the shares of the companies they are managing.

    Secondly there should be the possibility of directors and senior executives being given an incentive to concentrate on the really long term performance of their companies by the personal award of a new class of shares, Incentive Shares, which would have no capital value and would be non-transferable except on death, and which could not be used as collateral for loans, but which would each pay the same annual dividends as an ordinary share for a period that is much longer than the typical economic cycle – say twenty or thirty years.

    That is the only way that the interests of those running the company can be fully aligned with the interests of its long term shareholders, rather than with those of shorter term speculative investors.

    • StevenL
      Posted August 20, 2011 at 10:45 pm | Permalink

      What if the directors started the company? A little bit of insider trading, dodgy goings on at the racecourse etc are always going to happen. Even in nations where they butcher or kill thieves, you still get theft.

      I think the problem is too much unneccessary regulation and as a consequence a lack of basic enforcement of the Theft Act 1968 and the Fraud Act 2006.

      • Denis Cooper
        Posted August 21, 2011 at 10:21 am | Permalink

        The prohibition would only apply to listed companies, where shares in the company are traded on a stock market, so if those who started up a company were determined to retain any of their original shares they could keep it unlisted.

  32. alexmews
    Posted August 20, 2011 at 2:39 pm | Permalink

    Thx John. Good perspective.

    Your point 7 re taxation only applies of course if said high flyer is actually domiciled in UK for tax purposes. Many – including footballers – are not. So there is a legit argument to be had about paying an appropriate level of tax. Hence the non Dom flat fee of 30k or whatever it now is. I suspect a very few senior i-bankers pay 50% tax. You will note the very different debate today in USA led by Mr Buffett who seems happy to pay more tax personally arguing the super-rich tax cuts enjoyed over there are not right for the common good.

    I am not at all pro-tax. Quite the opposite. But your point implied these folks were paying their way; it is not at all clear that that is the case.

  33. John B
    Posted August 20, 2011 at 2:42 pm | Permalink

    And what should the politicians in the US, UK and Eurotopsyturvyland who got us into this mess have cut?

  34. Thomas Ec
    Posted August 20, 2011 at 3:51 pm | Permalink

    I’ve got to say it: your point about the innocence of bankers in the face of government regulations is really staggering. Surely bankers are meant to be responsible for their own companies?

    As a banker, you’d have to be a fool to believe credit crunches can’t happen. They have been a function of banking since Caesar. Since the second word war, they have happened regularly throughout the world, under all forms of government, and under a variety of regulatory regimes.

    Surely, if you are paid millions to run a bank, you should at least have some minimum competence at the task?

    Regulations are important, but can you tell me of a single other sector of business where if a managing director made bad decisions he’d be able to excuse it because they were made according to the law?

    • Mark
      Posted August 20, 2011 at 10:57 pm | Permalink

      Most of the quangocracy? That would include the FSA for example: thy did everything by the book they wrote themselves.

    • APL
      Posted August 22, 2011 at 11:23 am | Permalink

      Thomas Ec: “They [credit crunches] have been a function of banking since Caesar.”

      The recession together with the ability to harness individual ingenuity are the defining characteristic of Capitalism*.

      A recession has the effect of clearing out all the mis allocation of capital and resources. The ingenuity of the capitalist or entrepreneur makes sure that given time the economy will rebound.

      The civil service on the other hand never experiences the recession, and the misallocation of resources just goes on being multiplied over the years.

      Modern bankers are not Capitalists, they are Corporatist.

  35. sm
    Posted August 20, 2011 at 4:10 pm | Permalink

    Address the caused of the excesses or in this article the supernormal pay change the system. Why is it not competed away? High profits should allow this if the industry was restructured. (Also would not low pay afford a more competitive industrial advantage for shareholders?)

    Remove their ability to create money.Maximise competition. Reduce conflicts of interest- versus Chinese walls. Are the shareholders really in control?

    It will be interesting how the big stars make money, when they cant move the market by virtue of the size of trades (via leverage) when its backed only by capital for that specific purpose- Dodd Franks/Volcker Rule.

    Put the risk and reward in the same box please- labelled no bailout.

  36. Mark
    Posted August 20, 2011 at 4:58 pm | Permalink

    A well argued piece: some data may help with the conclusions.

    http://www.bankofengland.co.uk/publications/fsr/2010/fsrfull1012.pdf

    Chart 5.9 shows that UK banks are getting a subsidy worth £100bn p.a. – and that the largest banks are benefiting disproportionately in their share of the cake. Making money when offered that degree of subsidy is hardly taxing. We know that a large chunk of the reported profits of banks in the run up to the credit crunch really depended on rewards for inflating asset price bubbles, particularly in housing: that really isn’t clever stuff that deserves bonuses.

    Of course, the activities that earn money for a bank are highly varied and some of them do require real skills. Yet we have what in economics is known as a principal/agent problem. For example, a retail energy utility has little incentive to hire the best traders to negotiate the keenest supply costs on behalf of us the customers, because they simply announce a price increase instead. Likewise, the high marginal tax on North Sea production means that government is the main beneficiary of any smarter selling they may do. It tends to be the banks and trading houses where the sharpest minds congregate, taking a cut on the way through. With mortgages, the incentives for your mortgage broker and estate agent have been to push for the largest loan you can barely afford, not to haggle a lower house price. They’re working for the banker, not for you.

  37. Bazman
    Posted August 20, 2011 at 7:01 pm | Permalink

    Where do these wages and massive profits come from? As a form of tax on business, the taxpayers and their customers, who are often all three. The base rates have never been lower and the price of borrowing money has never been higher if they will lend to you that is. Much of this problem is of their own collective making. They did not want any regulation and screamed blue murder when any was tried to be imposed. Jealousy does not come into it. Only nitwits who themselves are jealous of their neighbours new car and TV believe this. Being ripped off, with the state complicit in this is the main problem. If the banks where broken up the managers would probably be only on a 100k a year at most and the rest of us could enjoy a safe cheap banking system run for the benefit of the individual and the country instead of an elite few and their chums. The work to disassemble them should begin right now with anyone against this to be sent to get their dream job in the Cayman islands or lose their seat. Doing nothing is still doing something and as a plan will not work. You often hear from companies that “we don’t respond to threats and “That is your decision” Same rules, as ever chaps. We’re calling your bluff because of the damage you have caused. Never happen.

    • zorro
      Posted August 20, 2011 at 11:22 pm | Permalink

      I agree. The time is right to call some bluffs.

      zorro

  38. wab
    Posted August 20, 2011 at 7:35 pm | Permalink

    The pro-banker case is weak.

    “2. Banks and bankers pay large amounts of tax which is crucial to public service provision in the UK.”

    Well everybody would love to earn extortionate salaries and so be eligible to pay large amounts of tax. Bankers are fortunate to earn so much for doing so little (except risking the collapse of the global economy).

    “3. Banks were encouraged to lend large sums to mortgage holders and businesses prior to 2007 by governments keen to promote wider ownership and economic growth through excess credit.”

    I think this is an exaggerated claim. I do not remember any government minister encouraging banks to make risky loans. (The lunatic right in America likes to make similar claims, i.e. that it is all the fault of the government for “forcing” banks to make loans to poor, black people.)

    “4. Banks expanded lending so much in direct response to central banks which set low interest rates to facilitate it, and under the watching eyes of regulators who said the risks the banks were running were just fine.”

    Again, the first part is an exaggerated claim. Interest rates were low mostly because the world was awash in cheap Chinese goods and cheap Chinese money. But it is true that regulators are also partly to blame for the banking problems. Bankers were very clever at hiding from the regulators (and themselves) the truly toxic nature of many of the cleverly packaged loans they dished out around the world. And there was too much leverage allowed.

    “5.Banks need to offer large salaries to attract the best international talent, just as football teams do.”

    Funnily enough, this argument is never used for teachers or whatever, just for people at the top. The “best international talent” managed to almost collapse the global economy. We could do with a bit less of that “talent”. The one thing they are talented at is making money for themselves.

    “6.Bankers are at risk, and some do lose their jobs when they fail to generate the revenue they promised.”

    They lose their jobs after having raked in huge bonuses, and with huge payoffs, even if they have failed.

    “7. High earning bankers pay more than 50% of their money in tax, which can be used to reduce inequalities.”

    This is the same as 2.

    “8. Surely the regulators and government are most to blame for the Credit Crunch.”

    No, it is mostly the bankers to blame. If a homeowner forgets to lock his front door and gets burgled, you might blame the homeowner a bit, but the main culprit is the criminal.

    • Bazman
      Posted August 20, 2011 at 10:35 pm | Permalink

      True and good work.

  39. NickM
    Posted August 20, 2011 at 8:31 pm | Permalink

    “Banks need to offer large salaries to attract the best international talent …”

    No, no, no, no.

    I have never worked in a business where at least some of the second tier haven’t hankered after the top job(s). There are plenty of keen talented people out there: it is a myth that there are not. It is a myth that the people in the very top jobs generate in order to raise their already ridiculous salaries/bonuses/status.

    • StevenL
      Posted August 20, 2011 at 10:34 pm | Permalink

      I get the impression that a lot of people who rise to the top are just good at networking and telling people what they want to hear. You hear it all the time that someone “knows a lot of people” or “is well connected” when you ask how the heck they got the job they have.

      • A different Simon
        Posted August 21, 2011 at 11:28 am | Permalink

        All “getting to the top” proves is that you are “good at getting to the top” .

        I’ve never heard anyone dispute that either .

  40. Conrad Jones (Cheam)
    Posted August 20, 2011 at 10:39 pm | Permalink

    I would not have a problem with a Talented Banker making 5 million pounds a year if his Bank risked Bankrupcy though his or her risky behaviour and they risked losing their Jobs if their Gamble didn’t pay off. But it always will pay off as Banking is the most heavily subsidised Business in the Country.

    Banks are the most heavily subsidised private Business – even prior to 2008; than any other. They have the Privelege of creating money – through the lending mechanism which uses Fracdtional Reserve Banking. No other Business – that I can think of; has such a privelege.

    Saying that Bankers contribute to society by paying large amounts of Tax – to address inequalities does not show a real understanding of the Problem.

    I know you are trying to be fair minded and are listing the arguments on both sides so this is addressed to those who believe Bankers contribute something. They create the inequalities in society by controlling the money supply and even legally counterfeiting money – money that only the Government should be able to create. except, when they create it – they charge us interest on it. They expand the money supply, draining wealth from the elderley who have worked a life time inorder to enjoy their retirement, and the Banks expect – unlike any other Business; through their powerful City of London Lobbying machine, to extract further wealth from the British People when excessive risks and bad loans, which forced House Prices up – needlessly; went bad, by expecting taxpayers to pay the losses that they chose to make because they knew that the Bank of England would come to the rescue.

    How many Bankers have actually gone to jail through after exposing the UK Financial Economy to near collapse. How many politicians – like Gordon Brown and Tony Blair; have been broght to book on their role in financial mismanagement and excessive loss of the UK Wealth to Foriegn and Home grown Banking Institutions.

    If it was ok for the Rover Car Plant and Port Talbot Steel Works to go bust without a Government Handout, why would we support a wholly unproductive – and wholly fraudulant Financial Sector – who have been protected and accompanied by the Politicians who we elect? The subidies to the Banking Sector greatly exceed the Tax Revenue that Bankers return – showing a Net Loss to the Economy. Honest Banking and Financial Transfers do exist and many people who work in the Banks do not understand how their Banks create money through the Fractional Reserve System. If the System was to change to 100% Reserve on Monday, they still would not notice the difference. The system is at fault, not necessarily the People who work within that system.

    • A different Simon
      Posted August 21, 2011 at 11:31 am | Permalink

      Well put .

  41. Conrad Jones (Cheam)
    Posted August 20, 2011 at 10:49 pm | Permalink

    One other key point – made by a previous commentor on this page, states that the Bigger Banks get the Bail Outs while the Smaller ones get bought out and amalgamated into the collective of the bigger Banks.

    This system seems to be designed to eliminate competition witihn the Banking Sector by only protecting the Big Banks. No wonder we have only five big Banks while smaller Banks struggle to survive. This is by design. This is evidence that we do n ot live in a free market capitalist society, we live in a Socialist Welfare State for big Banks with the general populous paying the Taxes to support the debt and the subsidies charged by the Banks. Why do Politicians continue to support such a system ?

  42. Conrad Jones (Cheam)
    Posted August 20, 2011 at 11:09 pm | Permalink

    I agree that we should not force private companies to cut the wages of their employees.

    I agree that tax payers should not continue paying the wages of these employees through their taxes and inflation.

    We should get Government out of Banks and allow Banks to decide for themselves if they wish to continue using Fractional Reserve Banking given the knowledge that a Bank Run will force them into Bankruptcy and all Directors will be marked as having played a role in it’s Bankruptcy. All Banks – at present; are technically insolvent; it is only the Financial Guarantee from the Government that protects them. The Government is complicit in Fraud and Deception on a massive scale.

    Don’t believe me?

    1. Why are interest rates on savings below inflation?
    2. Why are Bankrupt Banks – like RBS; still paying their top staff Bonuses despite suffering Losses?
    3. Why did Gordon Brown prasie the City of London despite knowing about the Liar Loans of Self Cert Mortgages which contributed to insolvency in the UK Housing Market?
    4. Why did the Bank of England increase the Government’s QE figure from £175 Billion to £200 Billion.
    5. Why did the financial genius Gordon Brown sell our Gold at a rock bottom price prior to the enormous gains that Gold is now making?
    6. Why do Bankers get Golden Handshakes even after sending their Banks into a tail spin of insolvency when they should be sacked without a retirement gift?
    7. Ex Politicians who walk straight into top jobs afte leaving office.

    “‘Corruption risk’ of ex-ministers walking straight into top jobs warns damning report”
    http://www.dailymail.co.uk/news/article-1387791/Corruption-risk-ex-ministers-walking-straight-private-sector-jobs.html

    • Gary
      Posted August 21, 2011 at 11:42 am | Permalink

      Self cert mortgages, or alt-a, or liar loans, are fraud. Fraud is a crime. Let the prosecuter get to work.

      Reply: Many self certified loans are just fine – there are many honest people who took them out correctly.

      • Gary
        Posted August 21, 2011 at 7:23 pm | Permalink

        Fine, but that does not explain why prosecutors are not going after those writers who did make fraudulent loans.

        Especially since :

        “FBI warns of
        mortgage fraud
        ‘epidemic'”
        September 17, 2004 | From Terry
        Frieden CNN Washington Bureau

        articles.cnn.com/2004-09-17/justice/mortgage.fraud_1_mortgage-fraud-mortgage-industry-s-l-crisis?_s=PM:LAW

  43. Conrad Jones (Cheam)
    Posted August 20, 2011 at 11:48 pm | Permalink

    “3. Banks were encouraged to lend large sums to mortgage holders and businesses prior to 2007 by governments keen to promote wider ownership and economic growth through excess credit”

    I think that you are correct with this one. Many people may not realise why.
    As our money supply is DEBT, we need people to borrow money in order to maintain and grow the money supply. With out this growth, the interest payments on previous loans cannot be found and so creates a shortage in the money supply. The Government is therefore, forced into supporting ways that encourage people to borrow money. The Best method is Mortgage Debt as large amounts of Credit Money are generated for a sinlge loan.

    Unfortunately – this relies on an ever increasing amount of debt being taken out year on year to support the previous years interest payments. It’s basically a Ponzi Scheme.

    So Mr Redwood, a very good point and crucial to why people – like Gordon Brown; pressed the QE Panic Button and handed over so much newly created money from the Bank of England to the Banks. We are hostages to a debt based money supply. If the Housing Market Crashes, so does our money supply.

    This probably also explains why a blind eye was turned to Self Cert Mortgages. Many people – who could not categorically prove their income; were allowed to state their income – without evidence. To get more money lent to them; they “exagerated” their income – encouraged by their mortgage provider.

    This helped the House Sellers, Estate Agents, Solicitors, The Banks and the Government as Growth in the Economy was a symptom of this private spending, paid for by debt.

    The Government could then point to the increase in House Prices as a successful result of their Financial Management of the Economy.

    Is the Bank of England about to drop interest rates to 0.25% followed by further QE in the Autumn? We will find out soon enough.

  44. Ken Chegwin
    Posted August 21, 2011 at 5:19 am | Permalink

    Ask yourselves who we owe all of this debt to and the nature of the scam will become clear.

    • StevenL
      Posted August 21, 2011 at 7:20 pm | Permalink

      We owe £200bn of it to ourselves, as it’s sitting at the Bank of England. A lot of the balance is owed to ourselves via our annuities and life insurance policies etc. Then there is a fair whack that we owe to foreigners, because we run big trade deficits.

  45. David Price
    Posted August 21, 2011 at 8:29 am | Permalink

    I suggest you are asking the wrong question. If the issue is relative pay levels then that was always a problem with the finance community even before the credit crunch, people who work in finance are probably motivated by acquiring money. How could you hope to control the level of wages anyway without a lot of negative consequences?

    Instead, I suggest you need to look at whether they are paying their full share of taxes, how you can enforce that and whether the banks are of real benefit to our economy or not. How much of the profit they generate at the expense of other parts of our economy and how much is foreign revenue.

    If banks are critical to an economy and there is a better way to run them the government does now have two it could restructure and redirect along more beneficial lines…

  46. Fred Bloggs
    Posted August 21, 2011 at 11:46 am | Permalink

    Part of the confusion about banking is caused by the various forms of banking and this is something which most people are confused or ignorant about. Here are the different beasts in the banking zoo:

    i) Commercial banks: These are the high-street banks (RBS, Natwest, Barclays,HSBC etc…) who take in customer deposits and lend these out within the framework of a modern fractional reserve banking system to borrowers to buy homes, invest in industry etc…. Most of the people at commercial banks are paid modestly except for the board members who can be paid excessively. Commercial banks are the banks responsible for most of the credit expansion seen over the past decade.

    ii) Investment banks: These are the non high-street banks such as Goldman, Merril Lynch (now BofA), Lehman (RIP), Lazards etc… who do (did) not have access to depositor funding as their business was not lending but market-making as a dealer (which involves taking risk), bonds and equity issuance on behalf of companies which is a fee business, and M&A advisory which is also a fee business. The people working for investment banks get paid a lot. However they did not cause the UK credit crisis because they were not the lenders to the property market which is at the result of the credit boom.

    In the US, the investment banks together with the US government agencies freddie mac and fannie mae bear reponsibility for much of the sub-prime debacle in which fraudulent mortgages were sold to investors packaged up in complex financial structures called CDOs. While CDOs do have some value, when they are filled with crap which is all correlated, then the CDOs are toxic. The tragedy is that having created this toxic crap, the banks could not sell them and ended up holding them and so lost a ton of money. The investment banks also took far too much risk, borrowing loads to buy commercial real estate and other bad investments. That is what killed Lehman and caused the bubble to pop.

    Central Banks: These are the controllers of monetary policy. They should control the amount of money and credit in the economy. From 2001-2006 they lowered interest rates and allowed a massive expansion in credit. These guys are not paid much. But they are the ones who most clearly should have regulated the system and raised interest rates. However Gordon implemented a simple inflation targetting goal for the B of E and then choose an inflation index which did not include mortgage payments.

    Note that banks like Barclays is both a commercial banks and an investment bank (actually its investment banking arm is mostly the old Lehman Brothers). There is a good argument that Barclays should be split up so that the investment banking arm cannot infect the deposit taking arm.

  47. sm
    Posted August 21, 2011 at 1:01 pm | Permalink

    http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf

    IMHO required reading;- the exec summary is short, it addresses a lot of our concerns and solutions for the future.

    I worry the current solution will drive us into stagflation for decades or an inflationary depression ending in hyper inflation and much higher interest rates -with no fundamental changes to the system and where the debt (£) trumps democracy.

    NEF-Southampton-Positive-Money-ICB-Submission.pdf

  48. Derek Weston
    Posted August 21, 2011 at 2:31 pm | Permalink

    There will always be the politics of envy, it has been the ultmate weapon in athe arsenal of the Left.Those who live in the world of ‘Big Bucks’ have to fight their corner in that world.On a personal level ‘Big Bucks’ was to do with neo Martians and not to do with the European plebs.The most unfortunate aspect of today is the downright LIE that a degree gave a Socio-Economic-Advantage irrespective of ability.This perceived advantage could only be achieved by the collusion of academics to be in employment at pre-degree colleges. This will never change as some youngsters have recognised.SAD, SAD

  49. uanime5
    Posted August 21, 2011 at 4:55 pm | Permalink

    The Coalition doesn’t have to honour these contracts if they pass legislation that makes them illegal. For example requiring that the difference in pay between the lowest and highest paid employees is no more than 10 times, so if an employee earns minimum wage (£11,000 p.a.) the highest paid employee can only earn £110,000 p.a. (including base salary, shares, and bonuses).

  50. Javelin
    Posted August 22, 2011 at 11:45 pm | Permalink

    I dont have figure to hand but Allister Heath in City had them.

    The key figure is what percentage of cost, profit and revenue are salaries per industry. As it turns out banking is in the bottom quartile of industries. Something like 30-40%. If you look at stuff like catering or building then labour makes up 80% of the cost. So really it’s just about profit and not about costs.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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