When the Daily Mail front page shouts at “Goldman Fat Cats” at their “breathtaking arrogance for handing a £367m pay bonanza to its London staff” you sense the political ground shifting. In the Mail’s City Comment Ruth Sunderland criticises the “warped logic of investment banking pay” rewarded for “transactions that are sometimes of dubious social value. Casino bankers have caused untold damage to the UK and world economies, but this year, as before, they will carry on cashing in.” The Mail attacks salary packages of nearly £60,000 a week, more than 120 times the £474 average wage.
Bankers’ bonuses are symptoms of deeper issues such as:
- • moral blindness in some business communities;
- • the ability of big players to take reckless risks underwritten by tax-payers; and
- • fundamental flaws in the monetary system and mainstream economic thinking.
As former Chairman of the US Federal Reserve Alan Greenspan admitted to Congress in 2008, there was a “flaw in the model”. Andy Haldane, Chief Economist at the Bank of England also recognised that the “model was false” and “analytical failures of the economics profession lead to the impoverishment of millions.” Each of these three issues highlights the democratic deficit in finance which enables the banks to create money with almost no oversight or accountability and run roughshod over everyone else. But until we address the moral flaws in the system “fat cat” bankers will always put the economy at risk.
Big banks are like 17th century slave traders
We are unlikely to see effective action on excess pay until political and business leaders recognise that bankers’ behaviour is morally wrong, the result of a corrupt and broken system – as the Daily Mail has done – and act decisively to end it. Defenders of bankers’ bonuses are like apologists for the slave trade, who supported the industry on legal, economic, historic and biblical grounds. Slavery was a respectable, legitimate, highly profitable businesses. They argued that living in slavery was more secure than waged labour or extreme poverty, and bad practices could be fixed by changing the conduct and culture of slave owners. One day we will look back at todays’ bankers like those slave owners, who profited from an immoral system and did nothing to stop it. Apartheid in South Africa was another immoral system upheld by banks until the tide of public opinion created commercial pressures to pull out, as Barclays did in 1986, eventually forcing the minority government to suspend repayment of debt and negotiate a transition to democracy from 1990.
All major religions had limits or bans on charging interest, for good social and economic reasons. Usury was condemned in India’s ancient Vedic texts, in Buddhism, Judaism, Christianity and Islam. But for a few, particularly since 1979, high pay, ‘passive income’ and greed became articles of faith in the board room, public policy and political economy. The key question is whether the financial sector is capable of transforming itself or whether, like the abolition of slavery and apartheid, it needs more sustained public pressure.
Speaking out against excessive pay
Since the financial crash of 2008, prominent figures have spoken out against the cult of extreme pay at the top, particularly among banks. Simon Walker, head of the Institute of Directors, has repeatedly spoken out about excessive executive pay, backed by his members, the bosses of business who earn an average of £90,000 to £100,000 a year (See interview in This is Money). He recognises that reckless bankers could wreck the free enterprise system. Sir Michael Darrington, managing director of Greggs for 20 years, started Pro Business Against Greed to “reduce the growing gap in net pay, between the highest paid and the majority”. Michael Izza, head of the Institute of Chartered Accountants (ICAEW), the IMF and World Economic Forum have all warned about the dangers of extreme inequality and excessive executive pay.
Archbishop Justin Welby has criticized bankers who do not see the need to change their culture and pay packets following the 2008 banking crisis. A year ago he said senior some members of the City “were very clearly still absolutely in denial about what happened in 2008.” In November 2014 he said that fines for forex rigging by banks showed “the length of the journey of culture change that still needs to be travelled”.
Switzerland, that citadel of capitalism, voted overwhelmingly in March 2013 for a “fat cat initiative” to control executive pay, led by businessman turned politician Thomas Minder. This will give shareholders a veto over top salaries, ban golden handshakes and send managers to prison if they flout this law.
Even the CBI recognises there may be a a problem. In Making Britain Work for Everyone it notes that average pay is 7% lower than before the recession and 20% behind where it would have been if the economy had grown in line with trends, and that the low paid are hardest hit. But is coy about excessive executive pay: “high pay must be justified by performance”. Goldman Sachs is of course a member of the CBI and justifies its vast pay because its returns on equity are four times that of its competitors since 2007. All this means is that it is better at looting than the rest – and benefited from political protection in high places, largely as a result of well-placed alumni: “Goldman graduates populate the uppermost reaches of government and business” (Forbes. See also Wikipedia and William Cohan’s Money and Power: How Goldman Sachs Came to Rule the World (2012). Many of the CBI’s big corporate members, like Tesco, operate like specialist financial institutions with retail arms, using their vast revenues to coerce suppliers, contractors and staff.
Productive businesses are beginning to recognise that the financial sector does not have their interests at heart and excessive pay harms business, markets and the country. Entrepreneurs and their staff have a shared interest in the long term success of their firm, unlike banks who are more interested in the biggest, most secure returns in the shortest possible time and can move their money anywhere in the world at the click of a mouse. The sooner they stand up to bankers’ excess the better for business and their staff, as well as society.
Bankers’ incomes are not due to merit
“What makes bankers rich is not their personality, their intellect, or their talent but the capital and reputation of the institutions for which they work” writes Anatole Kaletsky in Capitalism 4.0. Before the crash “bank employees were looting their companies at the expense of shareholders.” In Masters of Nothing, Tory MPs Matthew Hancock and Nadim Zahawi agree that “Compared with most organisations, banks pay a huge proportion of their profits to senior management rather than their owners, the shareholders.”
Since the crash, banks like Goldman Sachs have benefited enormously from reduced competition, government bail-outs for banks (£124bn in the UK alone, costing tax-payers £4 – 5bn a year in interest), and over $3tr pumped into the global financial system through quantitative easing. This may have saved the financial system, but it has cost pensioners and all savers. The “capital and reputation” of banks is underwritten by numerous guarantees and subsidies by governments, “all of which encourage borrowing and risk” by banks, eloquently described in The Bankers New Clothes by Professors Anat Admati & Martin Hellwig.
How bankers get their loot
For decades bankers have been showered with windfall profits as a result of political decisions, technological change and entrepreneurs rather than merit. These windfall factors include
- • Globalisation of the world economy, which dramatically increased demand for credit from enterprises and a rapidly growing middle class worldwide;
- • Financial deregulation in the West, gangster capitalism in Russia, freebooting state capitalism in China, tax evaders, drug-runners, arms-traders and corrupt rulers looting poor countries, as well as irresponsible monetary policies by the US which stoked the sub-prime mortgage crisis;
- • The combination of more productive technologies, lower trade barriers, weaker unions and migration which depressed wages, particularly for lower skilled workers, and increased profits and rents, sucking more funds into the financial system;
- • Public policies such as privatisation of public sector assets, the Public Finance Initiative and tax-payer subsidies for low pay such as Working Tax Credit and Housing Benefit;
- • Implicit subsidies as a result of government guarantees for banks too big to fail, calculated by the IMF as worth between $150 and $590 billion in the West 2013. The Bank of England estimated its value in the UK as £109bn in 2009, about £1750 per person (read Professor Simon Wren-Lewis’s blog);
- • Rising asset values, particularly housing but also in stock exchanges, as a result of the flood of money from pension savings, insurance premiums, profits, rents and inflated incomes in finance; • Financial bubbles from internet technology stocks;
- • Compound interest which means that the return on debt grows exponentially and is inherently unstable if above the growth rate of the economy;
- • And the fact that banks create and lend money into the economy through credit.
Banks take a slice from every successful business which borrows for investment, they have the first take of anything that’s left when a business goes bust, and they take a chunk of everyone’s income through mortgages, rents and pensions, profiting from inflated house prices and asset values.
Big banks unlikely to change from within
Bankers flourished in a culture that turned a blind eye or ever encouraged lax compliance with the law. Even without breaking the law, they are like opportunists stampeding after gold scattered by looters making a getaway in a town where the rule of law has broken down, rewarded for aggressive risk taking and trampling over everyone else, leaving others to clear up the wreckage. They can even cash in on cleaning up with social impact bonds. Bankers’ bad behaviour and greed has not been deterred by public criticism or fines. Since 2009 the ten biggest banks have been hit by over £166bn in fines, settlement fees and other provisions (see Guardian 12/11/14). The Financial Conduct Authority lists £1.5bn in fines last year, following half a billion in 2013.
Bankers have treated the issue as one of public relations rather than morality. Barclays’ new boss Antony Jenkins launched a high profile programme to clean up the bank while profiting £1.4bn from tax-haven in Luxembourg, facing serious fraud charges for ‘dark pool’ trading in the US and paying top staff an average of £1.4m last year, almost 50 times the average UK salary. Barclays are like the wealthy Quaker slave owners who claimed to treat their slaves well but resisted setting them free. It took almost a century until American Quakers expelled slave owners in 1774, but the Quakers did not wait for legal abolition in 1865 or plead for more time to reform. Barclays only left apartheid South Africa after sustained pressure threatened its lucrative commercial business there.
The New City Agenda brings together the “Financial Services industry, the consumer world, politicians, regulators and other stakeholders” to help “Britain’s financial sector realise its enormous social and economic potential.” Fronted by Labour’s Lord McFall, Conservative MP David Davis and Liberal Democrat Lord Sharkey, and funded by Which?, Prudential, HSBC, Berenberg UK, London Stock Exchange Group and the City of London Corporation, it is clearly in the ‘better treatment of slaves’ side of the moral argument. It report on retail banking acknowledges that “One of the many tragedies of the financial crisis was seeing so much hard work, talent, and ingenuity directed towards such selfish and often immoral ends.” It says that banks’ toxic culture “will take a generation to clean up”, and pleas for policy makers to give banks time to change their cultures – in other words, delay until the pressures go away. Those who suddenly lost their jobs, their businesses or their services as a result of bankers’ selfish ingenuity get little recognition. The ‘enormous social and economic potential’ of the rest of the country who would benefit from responsible banking are ignored. The report is almost certainly right that you “can’t regulate your way to a better culture” and change is the responsibility of banks’ senior leadership, but the bonus bonanza at Goldman Sachs, Barclays et al shows the immoral system holds sway, banks’ leadership has failed and the New City Agenda is window dressing.
The cost of bankers
Although the blame for the financial crash of 2008 can be shared between politicians, regulators, borrowers, economic commentators and others, the fault lies with bankers. Bankers used their insider influence to manipulate the rules, buy politicians and capture light-touch regulators to seize the biggest share of rising productivity in the global cash economy. Responsible banking, based on trust and sound judgment, is vital for the economy, but the ‘greed is good’ fat cat culture has squeezed responsible banking into the margins. The ‘Masters of the Universe’ have feigned humility, scattered charity gold dust, kowtowed to corporate citizenship – and buy political protection to carry on looting, as these big bonuses show.
It is hard to underestimate the cost of the wreckage caused by bankers. A study by the US Government Accountability Office in 2013 put the cost to the U.S. economy alone at over $22 trillion. Household net worth dropped $16 trillion, 24 percent, from third quarter 2007 to first quarter 2009. It also wiped out a huge amount of “human capital,” including current and future wage income, permanently damaging earning power. (Source: Federal Reserve Bank of Dallas) Public spending cuts, bankruptcy and unemployment have wrecked the life chances and infrastructure for many of the poorest. Middle incomes have also been squeezed and the gap between the 1% of households earning over £150,000 a year and the majority has grown. Extreme income inequality damages society in many ways, from infant mortality to mental well-being, social cohesion and crime rates, as shown by The Spirit Level. Much of this happened as a result of policies pursued by governments across the world, but it was driven by the behaviour of bankers and the financial sector, behaviour which has so far only superficially changed.
Democratic deficits in banking
Since 2008 political leaders have mobilised to save the banking system, while bankers have mobilised to save themselves and their fortunes. The bankers are winning and the politicians lost. The UK Parliament, European Union, Bank of England, Bank of International Settlement, IMF and G20 have all tinkered with reforms, but the multi-million bonus heist by Goldman Sachs and other bankesters shows who is winning. The MPs expenses scandal broke shortly after the banking crisis. The total amount (£500,000) was less than one banker’s bonus from rigging Libor, but led to numerous resignations. Five MPs and three Peers were sent to jail. Meanwhile the billions in fine for wrong-doing by banks was paid for by shareholders and customers rather than the wrong-doers. A few bankers lost their jobs, some had their bonus clipped, but they kept their ill-gotten gains and lavish pensions. Those who paid the price were thousands of middle and lower level staff who lost their jobs, not the fat cats at the top. Greater democratic oversight is needed at every level – within banks, at a regional, national and European level, and globally. The failures of the Coop Bank shows that this is not easy, but there are other models of successful democratic oversight and ethical conduct in finance.
Moral pressure for better banking
Ending the excesses of modern finance is one of the most important challenges for democracy. Like the abolition of slavery or apartheid it could take several generations. Change is happening, but bankers’ financial clout will resist, subvert and pervert change to continue their damaging domination of the global economy. As economics professor Simon Wren-Lewis writes “The power of the banking lobby (and the financial industry more generally) is immense, from campaign contributions to regulatory capture of various kinds. It would be nice to imagine that the UK was less vulnerable than the US in this respect, but there are good reasons to think otherwise. As a result, the power and influence of banks and bankers within government has hardly suffered as a result of the Great Recession that they played a large part in creating.”
Effective reform of the financial system is unlikely until its immoral excesses are widely recognised and condemned, particularly by the established church, business leaders, the professions and the press. Campaigns like the Swiss referendums, Occupy or the earlier anti-apartheid movement can push the issue up the agenda, but it also needs systematic persuasion of those in leadership positions across society to speak out. It will take more than culture change to put the financial system on a sound moral basis. It needs a fundamental change of heart by those in charge, including shareholders, and deep changes to the structure and accountability of the system itself. Bankers also need to be persuaded that on ethical grounds the system of excess rewards is unacceptable and they should end it or to exit, just as Quakers did when they recognised slavery was immoral in the mid-1600s. But political action is also needed, as well as credible alternative models of finance. But without a powerful moral message and social condemnation, structural reform will be resisted, subverted or deflected by cosy initiatives like the New City Agenda.
More checks and balances in the financial system
The most effective way to end the dominance and abuse of power by big banks is to have a wide range of better and cheaper financial services – challenger banks, crowd-funding, peer-to-peer lending, credit unions, business-to-business credit exchanges and other disruptive innovations. In many cases these also need changes in legislation to remove the subsidies and privileges of big banks and encourage ethical alternatives. Other measures needed include stakeholder representation on boards, a financial transaction (Robin Hood) tax and higher capital ratios: in The Bankers New Clothes Admati and Hellwig suggest the proportion of the balance sheet that is backed by equity should be 25%, and other estimates come up with similar numbers. We also need to challenge the City Corporation which, as The Daily Mail noted, “it’s a hugely powerful organisation, both politically and in real estate. The Mrs Merton question arises: Why have the billionaires of the City been allowed to get away with it?”