The bankers deserve to pay the price

By Alex Brummer, December 22, 2009

No area of business garnered as many headlines in 2009 as the banks.

As the global financial situation has steadied after the great panic of 2008, there has been a speedy bounce back to health of most financial groups — with the notable exception of RBS. This has resulted in an intense focus on the return of the bonus culture.

It is the re-emergence of hefty bonuses which resulted in the unveiling of a “supertax” on bank bonuses in Alistair Darling’s Pre-Budget Report.

As importantly, it has placed momentum behind the global drive for a “Tobin tax” on financial transactions as a longer term way of combatting excess in markets and the financial sector.

The public anger over bank bonuses has been palpable.

If there is a bank that has seen no public aid I would suggest they stand up and tell us

It has not been helped by the cackhanded way in which the issue has been handled. Reports of guaranteed bonuses being paid at RBS, in which the state has an economic holding of 84 per cent, was like a red rag to a bull for much of the public.

Matters were not helped by the sight of Goldman Sachs accumulating a bonus pot of $16.7 billion and a claim by its chairman/chief executive Lloyd Blankfein that the bank was “doing G-d’s work”.

His comments and the defensive tone adopted by representative groups — such as the British Bankers’ Association — suggest that the bankers simply do not recognise the depth of resentment of their actions.

Blankfein, the product of a working class Jewish family living in subsidised housing in Brooklyn, is actually a great example of social mobility and meritocracy within Goldman Sachs. But he had the misfortune to find himself at the top of Goldmans when all the focus has been on bank bonuses.

It is only under the glare of fierce publicity and some terrible media coverage — most notably the faintly antisemitic article in Rolling Stone magazine which accused the bank of being a “giant vampire squid” — that Goldmans announced this month that the top 30 executives at the bank would get all their bonuses in shares.

They would only be able to cash them in after five years and would seek shareholder approval for the bonus settlement.

This belated public relations exercise is seen as full of holes because it only includes 30 members of the thousands of staff. The source of the visceral dislike of bankers is not hard to fathom.

Bonuses were themselves at the heart of the great panic. It was the search of ever higher earnings which drove banks to turn sub-prime mortgages into structured debt, load up their balance sheets with it and to sell it on to unsuspecting investors.

The banks also took advantage of easy-money policies to throw credit at all and sundry from the Dubai World — now staving off bankruptcy — to children, students and even pets, offered credit cards in mail-outs by high street names.

It was these foolish practices which brought the industry to a halt a year ago and required the massive public bail-outs.

In Britain alone, some £1 trillion of public funds have been pumped into the banking system, threatening national prosperity for a generation. Even Goldmans took funds from the US government and investor Warren Buffett, and changed its status from broker dealer to bank holding company because Blankfein feared the worst.

Bankers now believe they deserve bonuses because they have so quickly returned to profits. The reality is that virtually no bank in this country or the US that has not benefited from taxpayer largesse in some form. If it has not been direct investment — as in the case of RBS or Lloyds Banking Group — it has been through special liquidity schemes, which have allowed them to replace sticky assets for cash, or through the Bank of England’s £200bn quantitative easing programme.

If there is a bank that has seen no public aid, I would suggest they stand up and tell us.

As a result, it is a combination of government subsidy and an imperfect wholesale market — where many banks, including Lehman and Bear Stearns, have vanished — which has made those left so profitable. They are able to achieve high margins and super normal profits and have began to take the same kind of risks — by speculating in commodities, for instance — as those that caused the crisis in the first place.

No one wants to see higher taxes on anyone. Yet if there was a group which deserves to pay the price, it is the bankers. They have contributed to the dole queues and the closure of businesses up and down the land. Even now, start-up companies seeking working capital find it all but impossible to obtain loans from the banking system. It is all of this which has made a “transactions tax” — on the wholesale dealings of banks — such a popular cause on Downing Street and in the chanceries of Europe. The money raised would be set aside as an insurance fund to be used in future crises, and there may even be some left over to assist with alleviating poverty. That must be a better cause than the bankers’ yachts.

Alex Brummer is City Editor of the Daily Mail

Last updated: 1:55pm, December 22 2009