Category Archives: Bank Bonuses

The Real Worth of Co-operation

When all the dust has settled, it will be seen that the Co-operative Bank fiasco will have only added strength to co-operative governance and the co-operative ideal.

The origins of the co-operative movement go back to the industrial revolution and Robert Owen’s mill village at New Lanark. It was common practice then for mill owners to pay employees in funny money which was only exchangeable at the company shop where prices were fixed for the benefit of the owner. Owen’s employees at New Lanark were paid in real money and the company shop sold goods to employees at their cost price. That was the forerunner of the 1844 Rochdale Pioneers, the basic idea being to offer the common man an alternative to being fleeced by the mill owners.
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Banking Standards Apple Pie

The Parliamentary Commission on Banking Standards published its 571 pages and its chairman, Tory MP Andrew Tyrie, hopes ‘the higher standards it advocates will help revive the banking sector and the UK generally’. ‘This is not,’ he assures us, ‘a bank bashing report.’ Indeed so. It is as supportive of banking, the City and its financial activities as such a report could be, while talking the language of reproof and proper correction. Its disapproval of massive bonuses, especially those being paid for failure, is given full voice. But proposed substantive action is limited. The extension of deferred bonus payments with easier “clawback”, seems unlikely to make much difference.

A much repeated complaint in the report, especially of people at the top, is the lack of personal responsibility and accountability. Those responsible for the decisions and behaviour which led to the sector’s failure have continued to be rewarded with massive bonuses and pensions. To address this the report recommends top appointments having to be authorised by the regulator who will identify specific responsibilities. Would that make any difference? Would the regulator have rejected the appointment of Fred Goodwin or Bob Diamond. Or any other likely incompetent?
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The Culture of Irresponsibility

Just over a year after his arrest, Kweku Adoboli’s case has finally reached court. He is in the dock nominally for fraud and false accounting, but actually for losing his employer, Swiss bank UBS, around $2.3bn. Now at last, Adoboli’s defence lawyers have the opportunity to make his case. Which is: that the bank had turned a blind eye to Adoboli and fellow traders exceeding their risk limits so long as they continued to make money. That was the custom and practice at UBS, as it was at Société Générale when Jérôme Kerviel lost them over $6.5bn, and earlier at Barings when Nick Leeson lost them $1.3bn and their independent existence.

Trading in deliberately opaque securities is not based on detailed analysis of fundamental values for which the banks, having acquired special expertise, might be responsible. Decisions are made fast, on the basis of the trader’s personal conviction. If they get it right they are rewarded for their “talent”, if they get it wrong often enough, as Adoboli did, they are designated “rogues” and risk getting locked up. In an unregulated market, there’s no time for hierarchical control or responsibility to be exercised. If a trader had to get formal approval from on high before closing deals, they would quickly cease to compete. So the banks delegate responsibility to the front line, where the culture of irresponsibility rules. Much as it has among the Libor traders which Barclays and others enjoyed. The only reason there aren’t many more ‘rogue traders’ is because the vast majority of trades are now fully automated, and three quarters of them of the ultra-fast variety. Even if Adoboli isn’t locked up, he and many of his former colleagues are certainly redundant.

Investment banks (and many other intermediaries) have made massive profits out of the deliberately opaque swaps and derivative ‘products’, inevitably and deliberately creating speculative bubbles. While those bubbles are inflating, money is sucked out of the real economy of manufacturing and non-financial services, from which returns are relatively mundane and long term. The economy thus becomes unbalanced while the bubbles inflate, with the real being preyed on by the synthetic. And when the bubbles burst, the real economy suffers massive destruction. Under the current UK regime, it’s the banks which are bailed out at huge cost to the taxpayer, not the manufacturers. So real jobs are laid waste.

The Americans who share the ideology are, for all their wild Tea Party excesses, less naïvely committed to it in practice. Lehman Brothers was allowed to go to the wall, while General Motors was bailed out. Successive UK governments allowed its motor industry, among many others, to go to the wall, while bailing out its dodgy banks.

Investment banking’s culture of irresponsibility has gone viral, far beyond the financial sector. Neoclassical free market ideology dominates important parts of the academic, political and industrial nexus. Conservative Party treasurer, Lord Fink, is apparently not embarrassed to argue that Britain should aim to compete with tax havens so as to create more jobs in the City of London. Nor is he widely regarded as a total buffoon for making such a suggestion that would obviously speed up our race to the bottom, with ever more of UK manufacturing laid waste and the City accommodating ever more of the world’s financial parasites.

It really is time for a change of direction. The first necessary steps to rebalancing the economy are fairly obvious, though as noted a few weeks back, the madmen in authority may be reluctant. See http://www.gordonpearson.co.uk/06/our-madmen-in-authority-the-bullingdon-intellectuals/

Modifying the Capitalist System

Goldman’s Lloyd Blankfein, Citibank’s Vikram Pandit and, of course, Barclay’s Bob Diamond, all have something in common. Even their normally acquiescent shareholders have been moved to express concern about their latest round of excess, greed and thuggery. But they are only the tip of the ice-berg. It has become custom and practice for top people to take spectacularly from the businesses they command. Whether their take, largely for unacceptable performance, is £5m or £67m makes little difference. It obviously bears no relation to their true worth: their talent, or their hard work.

These are the unacceptable faces of capitalism, the reasons why people have so little trust in the integrity of corporate business. They are why people are demanding ‘new models of capitalism’, ‘ethical capitalism’, ‘capitalism with a conscience’, etc. And why Ed Milliband makes the clear distinction between what he refers to as ‘good capitalism’ and ‘bad capitalism’.

But capitalism with a conscience won’t work. We may all start out with a conscience, but if the system tempts us with untold riches for doing not a lot, then most of us are likely to fall for it. Our intrinsic good intentions will be crowded out by extrinsic incentives or greed. The problem is making the system proof against that simple human frailty. Continue reading Modifying the Capitalist System

Why Bankers’ Bonuses Matter

It is barely four months since Bob Diamond’s BBC lecture about how banks might restore public trust, which he acknowledged was then sadly lacking. He avoided discussion of excessive bonuses for doing not very much, and also the casino banking which got us into this trouble and for which he was responsible at Barclays. His lecture hardly revealed a man of super intellect, rather one who happened “to have been in the right place at the right time” (see http://www.gordonpearson.co.uk/06/talent-for-being-in-the-right-place-at-the-right-time/). Now, here we are again with bonuses being declared, but with Bob still being coyly reticent about his own take.

According to Peter Drucker, when bosses over indulge themselves at the corporate trough, they lose the respect of people within their organisation. Yet, while paying himself around £5.4m the previous year, Bob lectured that “if you can’t work well with your colleagues, with trust and integrity, you can’t be on the team.” Bob adopts the long discredited ‘rewarding success’ and ‘departure of talent’ defences of banker’s bonuses. He clearly doesn’t recognise Drucker’s ‘hatred, contempt and fury’ among his people at Barclays. Presumably that’s because he doesn’t see much of them, or because those he does see have their trotters in the same trough.
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Hatred, Contempt and Fury

A typically indecisive Will Hutton article in The Observer (29.1.12) was headed ‘Hester’s pay discredits bonus culture’. Did Will Hutton think, despite the works of Bob Diamond, Fred the Shred and the rest, that the bonus culture still had credit up to the time when Stephen Hester was awarded his relatively modest bonus of around £1m. Of course, Will labours under the considerable disability of being a neoclassical economist. Which unfortunate affliction led him, in the article, to assert that ‘It is true that well designed and proportional incentives work’. He offers no evidence. It is simply a bone deep belief, no doubt held in his mind since school days doing A level economics.

Much is understood about human motivation, intrinsic and extrinsic, which won’t be repeated here. But economists only deal in money and it is well understood how money incentives crowd out intrinsic motivation. In the case of the bonus culture, incentives are specifically aimed at doing just that, so that executives are converted into shareholders, thus aligning themselves with shareholder interests. That is the sole purpose of the bonus bribe: to destroy higher level, longer term motivations for the short term benefit of shareholders.
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Mr Cameron Doesn’t Understand

Mr Cameron really doesn’t understand what’s going on. When he talks of rebalancing the economy he appears not to have the faintest idea what has unbalanced it. He doesn’t understand the crucial difference between real markets and financial markets. Demand for real things is essentially finite – when you’ve had enough, you’ve had enough; demand for high yielding financial “products” is essentially infinite. An investment, such as a ‘carbon credit’ which would yield ‘up to 398% return’ (see: http://www.gordonpearson.co.uk/06/pity-the-poor-banker/), would attract anyone. Would you invest in a widget maker earning 10% a year at some risk, when you could be earning up to 398% risk free? Consequently, despite the sub-prime fiasco of 2008, money is still leaving the real economy to be bet on financial “products” which are high on promise, but low on substance. That’s the rebalancing that’s actually going on, with Mr Cameron’s approval.

The only rebalancing towards manufacturing and the job creating real economy results from the ingenuity and efforts of practical people achieving results on the ground, through co-operative rather than exploitative means (The Road to Co-operation is due out Gower in April). This achievement is despite Mr Cameron and his friends.
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