Last 5 posts

Archive

06 August 2014

Banker Bonus Clawback - Why so Selective?



I normally steer well clear of issues related to politics on this site, but I thought it may be interesting to look at the latest round in that well-publicised bout, The World versus The Bankers. Where we have now reached in the UK are proposals to claw back bonus payments, with a seven year window. Now, I’m no apologist for the excesses of global banking remuneration over the last decade or so, and I don’t go along with Bob Diamond’s plaintive cry of “enough is enough, please leave us alone now to carry on our business’. The egregious behaviour the world witnessed deserves to be highlighted and the culprits pilloried for what they did.

Reckless Behaviour

The new regulations would allow bonuses to be clawed back from senior personnel if there was evidence of reckless behaviour. That actually sounds perfectly reasonable, since we all know that short-term actions may well appear to produce profits - and thus generate bonus payments - while sitting hiding in the balance sheet like a time bomb for the future. So why not make a provision that those responsible for such trades or investments should be able to be held liable? Let them take responsibility for their actions. I’m not sure how the law will behave if someone simply refuses to repay, and there is definitely an issue to resolve around the question of tax which has already been paid, but the principle seems fine; bring in a regime which prevents short-termism playing havoc with the future.

Making Mistakes

Where I have a bit of a problem, though, is in the selectivity of the scheme, and here I see an extremely mucky political paw print. Clawback is to be restricted to bankers; it is true that the activities of bankers and the particular position banks hold in our economic system make them a special case in regards to their potential effect on the world as a whole, but surely they can’t be the only ones? Think, for a moment, of the origins of the 2007 financial crisis. Many, including me, would argue that one of the major changes that fuelled the frenzy of pre-crash financial engineering was a change in US law. The Glass-Steagall Act, a fine piece of legislation, was repealed in 1999 by Bill Clinton. Think of the UK reserves, which in 1999 included something around 700 tonnes of gold; over fifty percent of that was sold by Chancellor Gordon Brown at recent market lows. Well, anybody can make mistakes, can’t they? Maybe Clinton didn’t understand that those who were urging the repeal of the Act would then run amok as they sought to profit from its demise. Brown, of course, compounded his error by telling the market in advance exactly how much he was going to sell and on what days; some may call that lack of market savvy, others may say it was a basic misunderstanding of simple economic rules. Still, despite all his posturing, Brown was never really an economist - his economics always had more to do with political expediency. I could point to countless other instances of mistakes by politicians which have resulted in big hits to the public finances (another way of describing what Governments regard as ‘their money’, but is in reality the taxpayers’) but those two suffice for the point. Everybody can make mistakes; and it’s good and moral and makes for a decent society that we can accept fallibility as a human characteristic. But where we seem to be heading is that we can accept mistakes from all classes bar one - bankers. If they make mistakes, clawback is invoked. If, say, a politician makes a mistake, ah, well, you can’t expect them to be right all the time. Ah, you may say, but the bankers are profiting out of things that later prove to be detrimental to the economy and therefore the population as a whole. Well, actually, that’s the point; both bankers and politicians have the wherewithal to screw up the economy by their actions. Bankers allow quants to develop and then market derivative securities, for example, whose long-term effects they don’t correctly understand or accurately predict; politicians legislate without always understanding the future effects of their legislation. It’s the old story of unexpected or unintended consequences.

Who's Pointing the Finger?

As I said above, the idea of making people responsible is a good one; what sticks in the throat is seeing how those most eager to point the finger are themselves guilty of some pretty ill-judged actions. After all, let’s face it: it’s not often that you see a poor politician. If we are to have clawback, let’s have it applied a bit more evenly. It's not just one group of people who have the potential to cause havoc.

comments powered by Disqus