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The next few days will see a predictable outbreak of fury at the level of bankers' bonuses, and one hopes this will underline the futility of efforts to put curbs on them.
Deferred bonuses and payment of the money entirely in shares, which are two of the most commonly mooted restraints, were how they did things at Lehman Brothers, and we all know what happened there. The other ideas are similarly futile.
The new twist this week, conveniently planted in the Sunday papers by unidentified sources “close to the Chancellor and the Prime Minister” is that the Government will hit banks with a windfall tax.
Perhaps they will, but it is more likely that this is an idea dreamt up by the public relations spinners to make it appear the Government is doing something when the reality is it has no plans to do anything.
The appeal of a windfall tax on profits is that it is a simple idea voters can understand. But the reality is that it would do nothing about bonuses, and could be dangerous. First, it would come out of the residual profit that is left after bonuses have been paid so would have no effect on their size; second, an excess tax on profits at this time is completely at odds with the overarching need to have banks retain profits in order to build up their equity capital.
The Government will surely hope its huffing and puffing about a new tax will deflect public anger, but it would be insane actually to go down that road at this time.
Trying to press down on bonuses will never work because it addresses the problem from the wrong end. The real challenge should not be finding ways to stop bankers taking a significant slice of the profit they generate. It is working out why profits are so high in the first place, and then having the nerve to do something about it.
Why is there so much money around which allows these bonus levels in the first place? How can the banks make so much money from performing such mundane activities in what is supposed to be a competitive market?
And, as former Cazenove senior partner Robert Pickering recently wrote in a letter to the Financial Times, why do customers of the City pay so much for what in most cases is a fairly commoditised product routinely delivered?
The answer is threefold. Bankers overcharge massively for what they do, their sector is nowhere near as competitive as they pretend it to be, and most of the people paying the bills, be they investors or companies, are not doing so with their own money.
If bonuses are an outrage — which most non-bankers think they are — the Government and the institutions and the boards of directors have the answer in their own hands.
Let us look at each in turn. Government should turn loose the dogs of the competition authorities with terms of reference that will allow them to break open the banking cartels and complex monopolies which allow this overcharging in the first place.
But don't hold your breath. The Government is unlikely to do it now, just as it has seldom done it in the past because ministers, and to a lesser extent civil servants, are completely cowed by the investment banking community and will do nothing to upset it.
The last time it happened was in the late 1970s when there was an investigation into the stock-market jobbing system when two firms sought to merge, and the London Stock Exchange's pricing policy and membership rules were referred to the Office of Fair Trading.
Second, the boards of directors should refuse to pay the fees. The chief executive won't, however, because he doesn't want to make an enemy of the investment bank — perhaps because it helped him get the job in the first place and he has an “understanding” that these things have a price tag attached, and partly because he will pay what is necessary for success and if they do succeed he wants them on his side doing his next deal.
Finally, it's because the bank will be able to use its clout and connections to stop him getting his next job on the non-executives' and chairmen's circuit. In a nutshell, the chief executives are as intimidated by the bankers as the Government is.
The good news is that institutional shareholders are beginning to stir. Having watched the bonus payments from the sidelines as if it was not their money — including when Lehman, in the year before it folded, gave its employees the equivalent of a third of the firm's equity capital — some in the UK are about to put pressure on company boards.
The first targets are companies planning rights issues or other forms of capital-raising, an area where investment banking fees and charges for underwriting have been particularly egregious.
In an attempt to bring rights-issue costs back under control, shareholders operating under the umbrella of the Association of British Insurers plan to put as much pressure as they can on boards to resist the excessive demands of investment bankers and will write to companies urging them only to pay reasonable levels of fees. Companies will be well advised to listen and then to act.
