Ganging up on Bob Diamond

There\’s two distinct arguments going on about bank bonus payments at the moment: unfortunately, the possibly meritorious one is being used to bolster the case for the less so.

Think back a couple of years and we were being told that it was the chasing of bonuses that caused the crash. In essence, that if peeps could take a hugely risky trade, keep it together over the bonus qualifying year, then they\’d get millions. But if it then fell apart in the next bonus year then they didn\’t have to pay back those bonuses. One way bets in short, backed by bonuses being paid out in cash at the end of said bonus year.

Now quite how much weight we should put on that argument is, well, I don\’t know either but I wouldn\’t put too much on it. While I\’m absolutely certain that some did indeed do this I\’m also absolutely certain that being able to cut bankers\’ remuneration in the bad years by not paying bonuses was and is worth something to the banks. They\’re able to trim their wage bill much more easily than if everyone was simply on high salaries.

Note, please, that bonuses really did fall in those recent bad years: they varied sector by sector within the banks\’ businesses, even if the overall totals don\’t seem to have changed much. That the metals traders in a bank\’s LME unit made zillions for the shareholders and thus earned large bonuses could be (and was) true while those who had been playing with bundled mortgages lost zillions and got no bonuses.

As an aside, it\’s also rather difficult to attribute greater risk taking solely to bonus chasing. I think we\’d all agree that there has indeed been greater risk taking since, say, the early 1980s and Big Bang time, but can we really ascribe it all to bonus chasing?

Well, no, not really, we can\’t, for people have been studying risk taking. Yes, men are more likely to take risks than women (this is on average mind, there are some women just as risk taking as the most risk loving man and vice versa) but, and here\’s the most important point, in mixed sex environments both men and women take more risks than either do in single sex environments.

And what has happened since the early 80s? Yes, that\’s right, the women of my and the subsequent generation have been able, in a manner that really didn\’t exist before that, to enter the City to work at the trading desks (rather than the secretarial position for a few years while they decided which trader to marry). Standard observation of the human species would thus suggest that in such a mixed sex environment more risks will be taken.

So bonuses certainly aren\’t the be all and end all of it.

But, recall what we were being told a couple of years ago: it was the short-termism brought on by the bonuses that caused the problems. The solution was for bonuses to be paid over time, partly/mostly in share, with claw back provisions and so on. And this is now in place. Various EU and UK rules have meant that no one gets a large cheque in January to spend as they wish with no come back if last year\’s trades fall apart.

So we\’ve solved this short termism problem, haven\’t we?

Well, yes, but look what\’s happening to Bob Diamond:

Britain\’s best-paid banking boss, the Barclays chief executive Bob Diamond, will face intense pressure from MPs to waive his multimillion-pound bonus this week in recognition of the austere economic conditions and public intolerance of outsized City pay cheques.

An appearance by Diamond in front of the Treasury select committee on Tuesday is set to become a key clash between Westminster and the City as the coalition\’s efforts to tame bankers\’ pay falter.

Last night MP John Mann, a Labour member of the committee, said he and others would call on Diamond to forgo any bonus for 2010, when he was head of Barclays\’ investment banking arm.

Hmm. Of all the people you might want to pay a large bonus to Diamond is one of the top few. Firstly Barclays didn\’t go overboard into bankruptcy, unlike some others. Secondly, when the shit hit the fan they found (Diamond found) Middle Eastern sovereign wealth funds to shore up the capital and thirdly, he made the bank a fortune picking up bits of Lehman Briothers.

But there\’s more than this. Diamond is already paid long term, not short term bonuses. Back two years sure, he got a stonking great payout….from long term share based compensation schemes. He also lost £11 million on his restricted stock at the same time. Everyone\’s already got Diamond\’s nuts in a vice: his long term wealth is tied up in the value of Barclay\’s stock, just where everyone wants it to be.

So our story one, about short termism, simply doesn\’t work any more.

Which is where we switch to story two. \”Public intolerance of outsized City pay cheques\”.

Now forgive me, but I don\’t think there is widespread such intolerance. I think the intolerance is squarely based in those upper middles classes who aren\’t bankers. The MPs, top end journalists, editors, chatterati and so on who, for much of the past century or more would have made similar (ish) incomes to merchant and commercial bankers. In the past couple of decades a large gap has opened up between the two groups, City and non-City. And that\’s what hurts.

Not that bankers are getting huge sums but that those from the same sorts of backgrounds, families, schools and colleges who went into the City are now getting multiples of what those from those backgrounds are getting if they didn\’t go into the City.

If you like, it\’s the old English disdain of those in trade coming out.

Or to be more accurate, it\’s simply the Pollys, Johanns, of this world getting jealous.

19 comments on “Ganging up on Bob Diamond

  1. There is, though, a level of resentment within the mainstream population.

    Trying to stop my candidates (one of whom makes me look positively right wing, but is also very very liberal) from making populist unsustainable points on this sort of thing was at times hard work.

    I instead pointed out to them that running for election in the Halifax area, where RSA, Lloyds and a chunk of others all have large operations, it wasn’t necessarily politic for them to attack the pay arrangments of a large chunk of potential swing voters.

    But in the pubs and similar, even around here where most know people that work in banking in some way, there’s general muttering about overpaid bankers and similar.

    Not as much as there is about bloody politicians, but then, most of the regulars in the pubs I go in know I’ve run for the council so some of that is deliberate…

  2. You mean like Rachel Johnson’s appearance on Sky News’ newspaper-review a couple of nights ago, voice dripping with disdain, attributing the grotesque house prices in Kensington and Chelsea (where she lives) to City bonuses ‘spent of stucco houses and Filipino Maids’. She didn’t exactly say ‘Those vulgar people’, but it was there sure enough.

  3. What proportion of their rising pay, relative to other members of the bastard classes, is economic rent?
    I don’t know about Diamond but for the Barclay’s big-wigs collectively, luck rather than judgment is being rewarded. If they had managed to purchase ABN Ambro as they wished, Barclays would have been RBS.

  4. At the end of WW1 the German nationalists tried, with some success, to claim they didn’t really lose the war it was a “stab in the back” by the Jews. Labour’s defence for screwing up the economy is that they weren’t there it was all the fault of the bankers. Both stories are untrue but it is always useful to have a scapegoat.

    However both stories relied on nobody opposing them or in the media telling the truth. The fact is that the bankers were simply doing what the government’s regulators were encouraging them to do & that they have no responsibilty whatsoever for the government increasing spending by £200 bn in real terms or for their Ludditry which are the basic problems.

  5. MattGB said: “But in the pubs and similar, even around here where most know people that work in banking in some way, there’s general muttering about overpaid bankers and similar.”

    It certainly doesn’t occur to MPs and probably doesn’t often occur to the public that the means of dealing with things you disagree with are generally in your own hands. Don’t like bankers’ pay? Move your money (or debt!) to a building society.

    If you really wanted to restrain bank pay and perks you do it through competition not legislation. The Government didn’t mind the consolidating and gambling many of the banks were doing until it went wrong but the shit never seems to stick to the Government all that much.

    Mark said: “If they had managed to purchase ABN Ambro as they wished, Barclays would have been RBS.”

    They were prepared to buy it at a certain price and no more. RBS seemingly wanted it at almost any price. A canny competitor would attempt to drive up the price RBS needed to pay and RBS should have been wary of this.

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  7. The reason that the man in the street blames bankers’ bonuses is because (Labour) politicians told them to as a deflective measure.

    Anyone who has seen bankers at first hand will know that they are self serving egotists looking to make a fast buck. They are the oiliest of slick salesman, for that is all they are, who like to be rich.

    Instead of regulating them politicians of all parties spent their time rubbing shoulders and trying to live in the reflected glory. Remember Labour’s prawn cocktail offensive?

    The real culprits are the politicians who were charged with ensuring that banks were well regulated but became nothing more than cheerleaders, instead of reminding bankers that their cuff links were at risk if the banks failed.

  8. All good points.
    However, if you take the reward structure of a hedge fund: small management fee, huge success fee; then you can see that risk taking is encouraged.
    To be fair, most hedge funds seem to have been managed responsibly. But translate similar structures to banking, and even with multi-year calculations, risk is encouraged.
    It’s all about incentives, as you’ve pointed out many times, Tim. Reward risk taking, and more risk will be taken.
    Now as to whether bank rewards in general are due to a cartel structure… I haven’t a clue, but it does have a whiff of it, and the pong seems to have got up the noses of more people than you suppose.

  9. “but I don’t think there is widespread such intolerance. I think the intolerance is squarely based in those upper middles classes who aren’t bankers. ”

    I think you may have misjudged this – in my circles (upper-working and lower-middle, I guess, if pushed) anyone who ever mentions it, which is a large majority, is furious. My nice, normal, lower-middle-class at most, Nan – with whom I discuss politics perhaps once every half-decade – swore in front of me for the first time in her life the other day when talking unprompted about bankers bonuses. She then went onto rant for ten minutes about a conversation she had had in a queue somewhere with a few of her friends about how disgusted they were with people being so greedy. As she said, you can only tell us that “we are all in this together” some many times before we believe it – and are then angry when it is shown that we are not.

  10. The whole fact of the bail-out changed the score. Now that people are vaguely aware of the government back-stop to the industry, it’s like seeing a civil service mandarin or the head of Thames Water award themselves and their cronies shed-loads of cash. Unsurprisingly, people are unhappy with this.

  11. I’ve worked in several City banks. In leadership and strategy terms, Bob Diamond is an order of magnitude ahead of all the other senior bods I have been exposed to. People forget what a basket-case BZW was when he took over. We chase him out of London, we may as well give up…

  12. The wealth creators need to be insulated from the disdain of hoi polloi to a certain extent. The fact that the banks are bolstered by the State is obviously a troubling ingredient into quite how much slack they should be cut, but any attempt to legislate against bankers’ bonuses etc. is very likely going to throw the baby out with the bathwater. With all due respect to Bert’s grandmother, it’s not her money, and it’s not her call to make.

  13. “However, if you take the reward structure of a hedge fund: small management fee, huge success fee; then you can see that risk taking is encouraged.”

    Why do you care? It’s not your money in a hedge fund being recklessly gambled. Nor is it taxpayer money. It’s dumb investors who can’t see that the fee structure incentivised leveraged gambling.

  14. “With all due respect to Bert’s grandmother, it’s not her money, and it’s not her call to make.”

    But it’s her vote, and there you have the flaw in democracy.

  15. “With all due respect to Bert’s grandmother, it’s not her money, and it’s not her call to make.”

    Oh? Whose money is it then?
    Companies don’t pay tax, so presumably they don’t pay bonuses either. The bonus incidence must fall on either owners, customers, other workers or taxpayers.
    If owners have control of the company, there is an effective market operating and effective democratic controls are in place then these groups have no right to be angry.
    But those conditions clearly don’t exist in the financial system.
    Given that city bonuses represent a bit less than 0.5% of British GDP and that the system seems to be broken, why on earth would the commoners keep their mouths shut?

    The one complaint I have is that the peasants don’t get angry enough about other abuses of power/wastes of money.

  16. small management fee, huge success fee; then you can see that risk taking is encouraged.

    To be more precise, successful risk-taking is encouraged. Which is what we want to a certain extent. The underlying world keeps changing (eg some winters are warmer than expected, some colder), so it’s risky, so we want people to be trying to anticipate these changes and taking steps to mitigate the impact.

  17. MatGB has it absolutely right. Even among businessmen and women, though, I often encouter hostility towards the banking sector. Some of this is, I suppose, understandable when considering the massive bailouts, the issue of “too big to fail”, etc, but a lot of it was always bubbling under the surface long before the problems of the credit crunch.

    Envy is a sin. It says so in the Bible.

  18. FWIW, Question Time tonight had an interminably dull section on banker’s bonuses, and populist point scoring was all in favour of getting the bankers.

    Depressing amount of ignorance within botht he panel and the audience.

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