In the last few weeks managers, executives and traders of again (at least partly) solvent investment banks have emerged with renewed self-confidence – and are getting paid well for it. The debate surrounding enormous bonus payments to managers in the financial world is once again causing the tempers of politicians and taxpayers to flare. The big question is: Where are the billions coming from? For many, the encouraging economic outlook which would justify such bonuses is just not there. The fact is that the hardest financial crisis since the end of the Second World War has still not been contained and, just like 80 years ago when the world’s economy collapsed shortly after the New York stock market crash of 1929, it will take years to build up the market again completely.
All around the world difficult discussions are made about the limits and rules that politicians could set in order to stop the offending payments. Although the maxim in liberal markets remains “as much freedom as possible”, it is often followed by the caveat: “as much control as necessary”. Exactly how much the state has had to intervene recently was shown by stimulus packages I and II, which, when compared to similar legislation in other countries, turned out to be rather minimal. Since then, the grand coalition in Germany has kept a sharp eye on bonus payments being made by German banks and has also passed a law stating that the compensation of board members should serve as an incentive to spur future development of the company.
The United States wants to institute such a policy as well. President Barack Obama recently severely criticised major banks, alleging that they hadn’t learned anything from the financial crisis. As an example, nine American banks gave more than $ 30 billion in additional payments to their staff in 2008. When you consider that these institutions were kept alive last year thanks to a $ 175 billion bailout by the government and still claimed over $ 80 billion of losses, the extra expenditures become simply indefensible. Company directors are aware of the absurdity of their actions, but they still manage to find excuses. They have to assure their best managers in advance that they will receive huge remunerations in order to ensure that they do not move to the competition. The big Wall Street banks, who can count themselves among those that have profited from the crisis, woo potential managers with ever-rising salaries which have no relation to their total revenue. Whether the financial statements add up in the end is of minimal concern.
Because they tend to lead to risky financial transactions, bonuses are in general considered to be one of the reasons for the recession we have been experiencing since 2007. Speculatively invested hedge funds often pushed companies into the red, which is why the G8 and G20 countries have decided to regulate this type of transaction. Exactly why these sums are being paid out in such high dimensions in the midst of a financial crisis is inexplicable. The greed of bankers is also being attacked in France and in the United Kingdom: Sarkozy lined up CEOs for a crisis talk at the Élysée Palace; the British government has announced harshly that losers should not be compensated for their failure.
To curb the willingness of companies to assume risk, administrations worldwide will have to formulate a stringent set of rules and regulations. If companies and banks on both sides of the Atlantic were to go back to the basics of the social market economy, employee compensation would begin to shift towards more moderate proportions. For the sake of our future we have to hope that companies will take some time to reflect and eventually self-regulate, because legislative measures setting absolute limits is the worst imaginable solution and would be contrary to the principles of our economic system.
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September 18, 2009
Brian McCarthy, independent consultant, Bronze Contributor (15)
The bankers have created a virtual world, completely disconnected from the actual adding of value to products/services which is measurable and reflected in the public's willingness to invest in these companies' activities in return for dividends.
These so-called financial instruments are so devious and convoluted that even the traders in these 'packages' do not have any means of knowing its value. In fact, they have no intrinsic value. They only have value if they can be sold on to yet another in the banking community.
This surreal situation needs to be recognised and understood for what it is - unadulterated gambling - before any meaningful regulation can be implemented. The closest model would be how various governments have tried to control the gambling businesses in their countries.
The article ends with a pious hope that the bankers would institute a form of self regulation acceptable to the larger community. When has gambling industry ever willingly controlled its activities? It has always required stringent laws to curtail the worst behaviour and to protect society from predatory actions.
There is, however, one possible way of introducing effective watchdog measures.
All of these banking companies have shareholders with a vested interest in maintaining the value of their investment and also in ensuring a solid dividend at year's end. True, many of the large shareholders are fellow bankers, doing the same risky trades, but if new legislation were to empower smaller shareholders to veto the agreements to pay excessive bonuses and even to change the bonus culture, it could be termed a kind of self regulation