Why we need more banker bashing

Banks are the biggest scroungers of public money – solutions will not simply materialise if we don't keep up the pressure

• 
• • Sunny Hundal
  • guardian.co.uk, Tuesday 7 February 2012 10.15 GMT

Bank-bashing is in its third year and has become even more vociferous. Photograph: Martin Godwin

 

I have a confession to make: I wanted to be a banker once. While arming myself with a degree in economics, I dreamed of working at an investment bank arranging mergers and acquisitions. The growing size of M&A activity got us budding economists excited and I wanted a part of the action. But the dotcom boom of the late 90s lured me in instead and I missed out on the opportunity to ruin the world's economy. In a sign of the times, when I asked a university mate recently where he worked now, he replied: "Goldm- *cough* -acks" rather haphazardly. It seems not many want to be associated with the "great vampire squid" any more.

Banker bashing has now entered its third year and become even more vociferous, spreading to bonus bashing thanks to Network Rail. Last week columnists at the Times and Financial Times wailed that all this a) was hurting UK's economic prospects and b) would have limited traction with the public. The second excuse is easy to dismiss: actually there is plenty of public appetite for banker bashing to continue. They want more and they don't think it damages our economic prospects. But is it right to continue this, ask critics? Who will think of the [privately educated] children? Let me offer several reasons to continue banker bashing.

First, banking reform has been pitifully weak. If the crash were to happen again tomorrow, the government would have to bail them out again. They remain leveraged up to their eyeballs; remain "too big to fail" and too inter-connected to each other so most can't be allowed to go bust. Without public anger there is no impetus to push banking reforms further, which the Conservatives are stridently resisting and Labour is still reluctant to push too far.

Secondly, the banker bashing begs a wider question – if finance has become the life-blood of modern economies, why can't we exercise more control over such a vital industry? Consider this: we pretend that banks are private businesses that should be allowed to run their own affairs. But they are the biggest scroungers of public money of our time. Banks are lent vast sums of money by central banks at near-zero interest. They lend that money to us or back to the government at higher rates and rake in the difference by the billion. They don't even have to make clever investments to make huge profits.
At the height of the crash, US banks were simply given $13bn overnight. No repayment needed. We don't know what happened, because the details are kept secret. The entire industry is underwritten by guarantees from central banks. If threatened with systematic failure, which is becoming increasingly common, governments have no option but to bail them out. The financial system rules over our lives too, through our credit history. Everything could be choked off at a whim, through administrative error or for political reasons, and we wouldn't have democratic recourse. Organisations such as WikiLeaks were simply frozen out of the global financial system at the click of a button. Banks get special preferences like no other industry, and yet we don't even ask why these publicly subsidised yacht owners have so much control over our lives. Why not?

Far from being the pinnacle of free market capitalism, banking is full of sorry executives who keep asking for more handouts to protect their deliberately bloated businesses. The solutions won't materialise if we go back to how things were. Public anger has grown because it is starting to dawn on middle England that while the rest of us are paying for the crisis, the people who caused the crash want to go back to 2007. Even the Daily Mail is starting to reflect this impatience. This recession is already longer than the 1930s and the stagnation will continue for maybe a decade. For from being over, the nightmare for the Goodwins and Hesters is just getting started. And quite rightly too.

Who came up with the model for excessive pay? No, it wasn't the bankers – it was academics

All the focus has been on bankers' bonuses, yet no one has looked at the economists who argued for rewarding bosses by giving them a bigger financial stake in their companies



Take a big step back. Ignore those sterile debates about how Dave screwed up over Stephen Hester's pay and where this leaves Ed. Instead, ask this: which profession has done most to justify the millions handed over to the boss of RBS, his colleagues and counterparts? Which group has been most influential in making the argument that top people deserve top pay? Not the executives themselves – at least, not directly. Nor the headhunters. Try the economists.




The ground rules for the system by which City bankers, Westminster MPs and ordinary taxpayers live today were set by two US economists just a couple of decades ago. In 1990, Michael Jensen and Kevin Murphy published one of the most famous papers in economics, which first appeared in the Journal of Political Economy and then in the Harvard Business Review. Its argument is well summed up by the latter's title: "CEO Incentives: It's Not How Much You Pay, But How."



The way to get better performance out of bosses, argued the economists, was by giving them a bigger financial stake in their company's performance. You couldn't have asked for a better codification of bonus culture had you stuck a mortar board on Gordon Gekko's head. So popular, so influential was Jensen and Murphy's work that it opened the door to a new corporate culture: one where executives routinely scooped millions in stock options, apparently justified by top research that they were worth it.



The usual criticism of economists is that they missed the crisis: they preferred their models to reality, and those models took no account of the mischief that could be caused by bankers running wild. Of all explanations, this is the most comforting; all academics need to do next time, presumably, is look a little harder – ideally with a grant from the taxpayer.



But economists didn't just fail to spot the financial crisis – they helped create it. They provided the intellectual framework and drew up the policies that helped caused the boom – and the bust. Yet rather than a full-blown investigation, their active involvement in this crisis and their motivations have barely got a look-in. As Philip Mirowski, one of the world's leading historians of economic thought, puts it: "The bankers have got off the hook, and gone back to business as usual – and so too have the economists." It's the same discipline that spoke all that nonsense about markets always being efficient that is now deciding how to reform the economy.



A few weeks ago, I described the current economic system as a bankocracy run by the banks, for the banks. Mainstream economists play the role of a secularised priesthood, explaining to the laity just how and why the markets' will must be done. Why are they doing this? Luigi Zingales, an economist at Chicago, calls it "economists' capture". Much of the blame for the financial crisis has fallen on regulators for being captured by the bankers, and seeing the world from their point of view. The same thing, he believes, has happened to academics. When Zingales looked at the 150 most downloaded academic papers on executive pay he found that those arguing that bosses should get more (à la Jensen and Murphy) were 55% more likely to get published in the top journals.



Anyone who saw the film Inside Job will recall the scene in which leading economists are shown puffing financial deregulation, or the outlook for Icelandic capital markets, or whatever – and then revealed to have taken hundreds of thousands, sometimes millions, from the very interests they are advocating. But this goes wider than direct payment; many academics also believe those arguments about how markets work best when they are left alone. As the economist Steve Keen puts it: "Most economists are deluded."



Maybe, but it also pays to be deluded. Think about the rewards for toeing the mainstream economic line. Publication in prestigious journals. Early professorships at top universities. The conferences, the consultancies at big banks, the speaking fees. And then: the solicitations of the press, the book contracts. On it goes.



Rob Johnson, director of the Institute of New Economic Thinking, quotes a dictum he was once given by a leading west coast economist. "If you got behind Wall Street," he remembers the professor telling him, "you went to Lake Como every summer. If you left finance alone, you took a nice vacation in California. And if you took on the bankers, you drove a secondhand car."



Were this corruption of analytical philosophy, say, this might not matter so much. But economics shapes our policy and our public debates – and it warps both. Yesterday, I listened to a discussion of Hester's bonus (what else?) on the Today programme. Defending Hester, a journalist quoted some American finding that CEO pay had actually halved since 2001.



Chicago economist Steve Kaplan does indeed argue that "CEO pay in 2006 remained below CEO pay in 2000 and 2001". What's missing there is that 2001 was the height of the US dotcom boom, when bosses were getting crazy money. Kaplan also writes papers about how hard it is to be a chief executive. According to his CV, his consulting clients have included Accenture, Goldman Sachs and a bunch of other Wall Street banks. This is the way such arguments are prosecuted: without full disclosure of either evidence or interests. And in such arguments, it's you that loses.

Bankers are the dictators of the West

Robert Fisk in The Independent

Saturday, 10 December 2011

Writing from the very region that produces more clichés per square foot than any other "story" – the Middle East – I should perhaps pause before I say I have never read so much garbage, so much utter drivel, as I have about the world financial crisis.

But I will not hold my fire. It seems to me that the reporting of the collapse of capitalism has reached a new low which even the Middle East cannot surpass for sheer unadulterated obedience to the very institutions and Harvard "experts" who have helped to bring about the whole criminal disaster.

Let's kick off with the "Arab Spring" – in itself a grotesque verbal distortion of the great Arab/Muslim awakening which is shaking the Middle East – and the trashy parallels with the social protests in Western capitals. We've been deluged with reports of how the poor or the disadvantaged in the West have "taken a leaf" out of the "Arab spring" book, how demonstrators in America, Canada, Britain, Spain and Greece have been "inspired" by the huge demonstrations that brought down the regimes in Egypt, Tunisia and – up to a point – Libya. But this is nonsense.

The real comparison, needless to say, has been dodged by Western reporters, so keen to extol the anti-dictator rebellions of the Arabs, so anxious to ignore protests against "democratic" Western governments, so desperate to disparage these demonstrations, to suggest that they are merely picking up on the latest fad in the Arab world. The truth is somewhat different. What drove the Arabs in their tens of thousands and then their millions on to the streets of Middle East capitals was a demand for dignity and a refusal to accept that the local family-ruled dictators actually owned their countries. The Mubaraks and the Ben Alis and the Gaddafis and the kings and emirs of the Gulf (and Jordan) and the Assads all believed that they had property rights to their entire nations. Egypt belonged to Mubarak Inc, Tunisia to Ben Ali Inc (and the Traboulsi family), Libya to Gaddafi Inc. And so on. The Arab martyrs against dictatorship died to prove that their countries belonged to their own people.

And that is the true parallel in the West. The protest movements are indeed against Big Business – a perfectly justified cause – and against "governments". What they have really divined, however, albeit a bit late in the day, is that they have for decades bought into a fraudulent democracy: they dutifully vote for political parties – which then hand their democratic mandate and people's power to the banks and the derivative traders and the rating agencies, all three backed up by the slovenly and dishonest coterie of "experts" from America's top universities and "think tanks", who maintain the fiction that this is a crisis of globalisation rather than a massive financial con trick foisted on the voters.

The banks and the rating agencies have become the dictators of the West. Like the Mubaraks and Ben Alis, the banks believed – and still believe – they are owners of their countries. The elections which give them power have – through the gutlessness and collusion of governments – become as false as the polls to which the Arabs were forced to troop decade after decade to anoint their own national property owners. Goldman Sachs and the Royal Bank of Scotland became the Mubaraks and Ben Alis of the US and the UK, each gobbling up the people's wealth in bogus rewards and bonuses for their vicious bosses on a scale infinitely more rapacious than their greedy Arab dictator-brothers could imagine.

I didn't need Charles Ferguson's Inside Job on BBC2 this week – though it helped – to teach me that the ratings agencies and the US banks are interchangeable, that their personnel move seamlessly between agency, bank and US government. The ratings lads (almost always lads, of course) who AAA-rated sub-prime loans and derivatives in America are now – via their poisonous influence on the markets – clawing down the people of Europe by threatening to lower or withdraw the very same ratings from European nations which they lavished upon criminals before the financial crash in the US. I believe that understatement tends to win arguments. But, forgive me, who are these creatures whose ratings agencies now put more fear into the French than Rommel did in 1940?

Why don't my journalist mates in Wall Street tell me? How come the BBC and CNN and – oh, dear, even al-Jazeera – treat these criminal communities as unquestionable institutions of power? Why no investigations – Inside Job started along the path – into these scandalous double-dealers? It reminds me so much of the equally craven way that so many American reporters cover the Middle East, eerily avoiding any direct criticism of Israel, abetted by an army of pro-Likud lobbyists to explain to viewers why American "peacemaking" in the Israeli-Palestinian conflict can be trusted, why the good guys are "moderates", the bad guys "terrorists".

The Arabs have at least begun to shrug off this nonsense. But when the Wall Street protesters do the same, they become "anarchists", the social "terrorists" of American streets who dare to demand that the Bernankes and Geithners should face the same kind of trial as Hosni Mubarak. We in the West – our governments – have created our dictators. But, unlike the Arabs, we can't touch them.

The Irish Taoiseach, Enda Kenny, solemnly informed his people this week that they were not responsible for the crisis in which they found themselves. They already knew that, of course. What he did not tell them was who was to blame. Isn't it time he and his fellow EU prime ministers did tell us? And our reporters, too?

In the UK 2,800 bankers earn over £1m. The claim that rare skills command a premium does not apply to them

Jonathan Freedland in The Guardian, 23/11/2011

Here's a game you can play at home. Ask your friends how much they reckon the head of human resources at Cadbury, the chocolate company, pocketed for the last year for which we have figures. In my experience, the guessing will open at around the £100,000 or £150,000 mark. Then, realising that the answer must be stunning or else you wouldn't be asking the question, people go higher, suggesting £300,000 or even £500,000.

Those who place their bet at that very top end tend to smile at the absurdity of it, acknowledging in advance the madness of such a high salary. So far, in two years of playing this game, I have never seen anyone get the right answer. Which is that in 2008 Bob Stack, then head of HR for Cadbury, was rewarded with a package totalling £3.8m, including £2m in exercised share options. The aptly named Stack retired with all that and an £8m pension pot, paying him £700,000 this year and every year.

It's a choice example, even if Cadbury, gobbled up by Kraft, is, like Stack, no longer part of the British corporate scene. No matter how inured you think you are to runaway executive salaries, laid bare by this week's report of the High Pay Commission, that one makes the jaw drop. For Stack was not some master of the universe CEO, heading up a global financial behemoth. He ran the personnel department at a chocolate company. That's not a trivial job. But a basic package of nearly £2m a year? It makes no sense.
Ask people to pinpoint the problem and they might struggle to be specific. They just find it appalling that, as the commission found, today's CEO is often paid 70, 80 or over 100 times the salary of their average worker, when three decades ago the ratio usually stood at 13 to 1. A gap has turned into a vast, ever widening chasm.

Why does this matter exactly? You can't simply whine that it's unfair, insisted the executive recruiter Heather McGregor on the Today programme. "Anyone over the age of seven who complains that things are not fair needs a reality check," she said.

Deborah Hargreaves, the High Pay Commission chair, is ready with grown-up, hard-headed arguments for why runaway pay is bad for business. When those at the top are getting so much more than their subordinates, workers get demoralised, Hargreaves told me; absenteeism increases, and staff refuse to engage with management or support the corporate mission. When the average salary has increased just threefold over the last 30 years, it makes workers sullen and resentful to note that, say, the head of Barclays has seen his pay rise by nearly 5,000% over the same period.

Free-wheeling capitalists should be particularly alarmed, says the commission. Gargantuan executive pay is sapping enterprise: people who might have been risk-taking entrepreneurs have no reason to start their own businesses when they are so comfortably looked after at corporate HQ. And of course such winner-takes-all rewards warp the wider economy. Housing in London is just one example. The bonus boys have driven up prices at the top end, pulling the whole housing market out of reach of would-be first-time buyers at the other end. It's trickle-down economics at its worst: the wealth of the rich doesn't cascade downwards, but its corrosive consequences do.

Defenders of the wealthy brush aside such talk, certain their critics' real beef resides elsewhere, in envy or a retro-communist desire for uniformity. "Move to Cuba" was McGregor's most succinct soundbite.
In one way she's right: concerns over worker demoralisation and reduced entrepreneurial spirit do not lie at the heart of the matter. Our objection to telephone-number salaries goes deeper. What it comes down to is desert – a notion so deeply ingrained that, yes, even a seven-year-old can grasp it: the belief that people should deserve the rewards they get.

That's why the "move to Cuba" remark was so off beam. Most people have long accepted that there will be a differential in pay that, in the hoary example, the brain surgeon will earn more than the dustman. People understand that some skills are rare and therefore command a greater premium. They even accept that this can result in extreme outcomes, with the likes of Wayne Rooney trousering £250,000 a week. But none of that logic applies to the current state of corporate pay.

Rooney is truly a one in a hundred million talent; there might be just two dozen people in the world who could match his skills. But with all due respect to Bob Stack, that is not true of him. Nor can it possibly be true of the 2,800 staff in 27 UK-based banks who, according to the Financial Services Authority, received more than £1m each in 2009. Whatever these people are able to do, it's clearly not rare.

Jonathan Freedland in The Guardian 23/11/2011

Ah, comes the reply, but these are the cream of the international crop, among the very best bankers in the world. The commission report blows a hole in that tired argument, revealing there's hardly any cross-border poaching of corporate talent. Not many of our monolingual high earners could work abroad and even fewer would want to. They like it here and do not have to be paid lottery jackpot money to stay.

So rarity and competition can't justify these rates, and nor can any old-fashioned notion of desert: there is no society-wide consensus that says these people do such valuable, critical work they deserve their riches. On the contrary, we lament that the City lures maths and science graduates who might otherwise have become great engineers or scientists, paying them instead to move digits on a screen producing nothing of any discernible value whatsoever.

When reward slips its moorings from merit, this surely poses a danger that goes beyond our economic prospects. What message are we sending the next generation of Britons? Why should they aspire to become a surgeon or a headteacher or a judge, when those once top-paid jobs now earn a tiny fraction of the salary attached to a relatively cushy, low-risk seat in the boardroom or on the trading floor?

Strikingly, the commission found that even the mega-earners do not kid themselves they deserve their pay. They admitted that they had got lucky, that they worked no harder and risked no more than those earning much less. But they did think they were "entitled" to what they got. Hargreaves draws no parallel with the August rioters, except that they "showed that same sense of entitlement, that they could take trainers or a TV, as those bankers who thought they could take a bonus, even if they had brought a bank to its knees".
The commission has plenty of bright ideas for change. Ignore the City bleats that meaningful action has to be international, which sadly is impossible: action has only been impossible up till now because the UK, batting for the City, has blocked any EU attempt to tackle high pay. But the larger change will be cultural. We need to revive the lost notion of merit and desert, to make those bagging huge, undeserved salaries feel a sense of shame or at least loss of reputation at such unwarranted rewards. We have the Fairtrade scheme, so why not a Fair Pay kitemark granted only to products made by companies who pay defensible rates? Such a seal of approval should be given only sparingly – only to those who have really earned it.