“Bankers’ reward for failure: a 36% pay rise

by Richard Murphy”

Ooh, no. It would be wrong for a wicked evil baby-eating Tory to spoil this one. Better leave it to those on the left who think he’s an innumerate liar too.

So what Richard is saying is that private companies shouldn’t be allowed to set their own pay levels?

And that the government should decide how much people are allowed to be paid? (I asume in Richard’s ideal world it would be a Labour government).

Sounds a lot like that failed experiment – Communism – to me.

Not to mention being another one of Murphy’s dribblings which if enacted would cost the UK tax revenue rather than increase it as companies move offshore.

Tyler,

You believe that the banks are private companies?

In my wilder moments, I wonder whether something like this isn’t the answer too. After all, one should still be able to find people willing to run companies (and not move abroad) for £240,000 salary. I do not believe the quality of management would fall too much. Presumably there are reasons why this wouldn’t be workable, though.

Small point – the banking sector survived in it’s current form because of the bailout. The subsidy Richard refers to is the estimated value of implicit state insurance, for future bailouts if needed. It is therefore quite wrong to convey the impression that if the subsidy was withdrawn the sector would not survive. that’s like saying your house will fall down the moment your hurricane insurance is withdrawn. It doesn’t. It falls down when the next hurricane hits, and if you know you no longer have insurance you may reinforce your home. See proposed ring fencing of bank retail operations for example.

Oh cock. Italics supposed to be closed after word ‘form’

Has anyone calculated yet how many billions the highstreet banks are paying out to their account holders in compensation for mis-selling Payment Protection Insurance?

“Sounds a lot like that failed experiment – Communism – to me.”

In case you hadn’t noticed unregulated free market capitalism has just proved to be a failed experiment too – a quite spectacular one.

Arthur,

Actually that happened in 1929. We’ve just had to repeat it to remind ourselves.

@7: “In case you hadn’t noticed unregulated free market capitalism has just proved to be a failed experiment too – a quite spectacular one.”

Great interview in the FT of Carmen Reinhart on recurring patterns in 800 years of financial crises:
http://video.ft.com/v/82349517001/May-3-800-years-of-financial-crises

She is co-author of a book with Kenneth Rogoff: This Time Is Different – 8oo years of financial crises (Princeton UP, 2009)
http://www.economics.harvard.edu/files/faculty/51_This_Time_Is_Different.pdf

Rogoff, now at Harvard, was previously a chief economist at the IMF. The current chief economist at the IMF is Olivier Blanchard. He is co-author of: Macroeconomics – A European Perspective (Financial Times, 2011) with Profs Giavazzi and Amighini. The front cover of the book has a strong endorsement from Charles Bean, deputy governor of the Bank of England and previously chief economist at the Bank.

The regulatory failings of the Financial Services Authority were analysed at length in 2009 in the Turner report:
http://www.fsa.gov.uk/pages/Library/Communication/PR/2009/037.shtml

Apart from being defamatory, Parasite’s comment at 1 is drowing in irony.

A rightwinger banging on abour innumeracy! LoL!

In case you hadn’t noticed unregulated free market capitalism has just proved to be a failed experiment too – a quite spectacular one.

“unregulated”?

Barclays is offering mere mortals 2.2% p.a. on its Golden ISA. However those senior staff who took deferred payments to avoid public opprobrium can look forward to 7% p.a.

For once, I agree with Richard’s characterisation of the problem if not his solution, which basically amounts to creaming a bit more cash for the Government off the top of a gigantic corruption scheme. We need to split up banks’ functions of lending and saving from their essentially public role of being engines of monetary policy.

I’m not sure how off-topic this is, but Richard Murphy raises the issue of a ratio of pay levels in relation to tax relief. Given that everyone in an organisation contributes to its success (or, at least, its functioning), what is the viability of a maximum ratio between the top earner’s remuneration and the lowest earner’s, with the ratio being legally enforceable along the lines of the equal pay legislation? We’d have to determine the ratio, the meaning of “remuneration”, how we would treat agency staff (who is their comparator?), and the mechanics (eg transparency rules) – but all of that is possible, surely. Those at the top could then pay themselves whatever they liked … given the size of the payment pot and provided the ratio wasn’t exceeded. “In-between” wages would be determined as now by collective bargaining. Just asking.

George, I don’t know about legal side, but you couldn’t do it on within-firm pay ratios because they’d just instantly outsource all low-paid jobs. They wouldn’t employ any low-paid staff, but purchase their services via contracts with cleaning companies etc.

@3 Cahal

Sorry – I was mixing my metaphors. Most Banks are publicly held (by shareholders), apart from RBS and Lloyds. Remember that most major international banks have large operations in London, and the nonsense Murphy suggests about pay would have to apply to them too.

I meant private in the sense of private enterprise and free from government control.

@4 Luis

Most of that “implicit insurance” is depositor gaurantees. This obviously helps banks, but is also protection for the government against bank runs etc. It’s not a one way street. The costs to banks/finance industry of placing government debt nver seems to be included either – being a GEMM (Gilt Edged Market Maker) is a costly business – especially when the government screws up and confidence in their bonds falls. Lack of this government backing would also seriously hurt the property market, as much of this “insurance” is in the form of short term money market lending to banks, which keeps them liquid whilst they lend moeny long term to businesses and for mortgages. Yes, the banks make the money, but also take the risk..

@7 Arthur

Still here though isn’t it. Central control and communism just impoverished the nations it was implemented in till they got rid of it.

@13 Nick

It’s just not as simple as splitting investment banking from retail banking. Without one the other would suffer and vice versa.

Without going into details, it looks like Osbourne is doing roughly the right thing and not splitting them totally, just ring fencing enough to spot too much contagion if part of one bank goes under. Which gets rid of the “too big to fail” problem.

@14/15 George/Luis

Equal pay legislation will never work. People do diffrent roles and it’s impossible to accurately determine how much those roles are worth in pay terms. Luis point that firms would outsource many lower paid jobs.

Or, in a total reversal, if I was a company owner and major shareholder, i’d simply cut my pay back to the bone, squeeing all my employees pay at the same time whilst making sure the company paid nice big dividends. Avoiding both the new law and minimzing my tax bill to boot….and with lower overheads my company’s share price would be doing well too! Richard Murphy himself uses this particular form of tax avoidance at his own company – after berating others for avoiding tax in the same manner.

Tyler,

“It’s just not as simple as splitting investment banking from retail banking. Without one the other would suffer and vice versa.”

The relationship is more of a zero-sum game. The retail bank funds the investment bank. If its cheaper for the investment bank to get funding from the retail bank than on the market then the retail bank is getting gouged.

It is quite worrying that an accountant can’t spot the problem of comparing pay between 2010 and 2009. I guess comparing pay 2010 and 2007 and seeing a pay cut would not convey the desired message. Moreover, if more of the pay is in the form of deferred shares and the shares rise in price what would one expect to happen with the numbers?

Re:low-pay – increase NMW?

*waits to be shot down in flames*

Tyler, it’s not only the ownership of banks which determines their levels of public accountability – banks are given an implicit government guarantee which artificially lowers their cost of capital and thus enhances their returns.

They get that implicit guarantee because they are systemically important to society. It’s a kind of social contract yeah, which in turn leads to a certain level of presumption on the part of government that they can request higher levels of interference. It’s how lots of societies work – there are very few types of ‘pure’ private enterprises…. well there are some, but they tend to be found in failed states like Somalia, pure private.

Thus, if the government has reason to believe pay levels might impact stability of banks, which in turn might jeapordise stability of society, they might feel worthwhile to make gentle recommendations, which is about as stringent as they get in the UK.

““unregulated”?”

It is in Somalia, and any other state without a functioning government.

….and so the circular argument begins.

“Sounds a lot like that failed experiment – Communism – to me”

Remember kids, you aren’t just downloading MP3s, your downloading communism…

The UK retail banks do not even fund the retail loan books never mind the investment bank. That is why they have a funding gap and are reliant on the wholesale interbank market. Retail depositors funding investment bank ‘casino banking’ is a myth. It goes without saying that populist politicians enjoy repeating the myth.

” There are not enough UK retail deposits to cover UK retail loans

A common misperception in media coverage on UK banking is that retail deposits are used to fund ‘casino’ investment banking, leaving depositors vulnerable. However, deposits alone are not enough to fund UK retail banking itself. The pertinent figures are shown in Figure 25: UK Retail represents 17% of group RWAs, 36% of group loans, and 40% of group deposits at the three listed domestic banks, Barclays, LBG and RBS. The banks listed below have a £150bn loan/deposit gap. The only UK retail division fully funded by deposits is HSBC. ”

http://ftalphaville.ft.com/blog/page/5/

Richard W: I saw that Alphaville piece as well, and of course retail deposits don’t fund the investment banks, but they lower the overall risk of the business and they thus can lower the overall cost of capital, especially where treasury functions are centralised.

The obvious question then is whether money raised by a banking group (lets say through a bond) gets steered in correct proportion to different parts of the business of whether it goes into building up riskier operations – in which case, the laws of corporate finance start to prevail and the overall business slowly gets riskier

It is in Somalia, and any other state without a functioning government.

The rise of parallel capital markets in Somalia is quite interesting (how do you think piracy ventures get funded?). And although there’s no direct equivalent of the FSA, effective regulation is quite stringent. There’s rules and everything, enforced through the barrel of a gun, naturally.

@ 15. Luis Enrique and 17. Tyler

Cor! Those crafty capitalists, eh? Always a loophole!

1) If jobs are outsourced to a UK organisation, and the “pay ratio” legislation were in place, that organisation would be bound by it. Does that mean the outsourcing organisation will end up employing only a few people, albeit remunerated well above the median; while the organisation taking the outsourced work will employ lots of people and pay them according to the ratio (using that organisation’s top earner as comparator)?

2) If the outsourcing organisation uses agency workers in-house, we would simply need to legislate for who the comparator is – the hirer’s top earner or the agency’s.

3) Clearly, there is a difficulty with outsourcing out of the “pay ratio” jurisdiction (but only for some jobs: some cannot go abroad), but those crafty capitalists can do this anyway now.

4) If the owner reduced her/his pay but simply replaced it with a higher dividend, wouldn’t this be caught under the transparency rules for “remuneration”?

5) Equal Pay legislation has made some inroads on closing the gender pay gap, so I don’t lightly dismiss it. It is, however, cumbersome but there’s no reason why that can’t be improved.

george – you may be right, but might be easier just to base anything on a statistic like the national median wage or indeed the statutory minimum wage

As Richard W @23 points out so well the myth of deposits funding investment banking…but given i’ve written out the below i’ll post it anyway.

@ 18 Geoff

I currently work in the investment bank arm of a large offshore bank which has a large retail prescence. I deal with the balance sheet management/ALCO guys every day, and have the money market guys sitting a few desks down. I’ll tell you for free that there are cheaaper sources of funding than the retail arm of the bank, not least because the retail arm tends to need funding itself (for mortgages). Money market and central bank windows both tend to be cheaper.

What retail deposits are though, is more sticky – they tend to stay on bank books a lot longer, and are less prone to moving if money market funding dries up. They also count for capital adequacy/tier one ratios in Basel III so the more you have the better essentially, as they provide the base for the (x10) leverage banks use for mortgage/business lending etc.

@21 Suitpossum

The IG does reduce the banks cost of capital for retail deposits. True. Not sure how much of a real effect it has though when banks can borrow cheaper at central bank windows or through money markets.

This situation does reverse though when money markets are stressed and deposits are now much cheaper – and that is where the gtee comes in; it makes it less likely that money markets simply cease to function like after Lehmans, and if/when they do it makes the gteed deposit money a much cheaper source of funding.

Basically deposits are a fallback and are good for capital adequcy ratios for banks. Most of the banks which went under in the crisis were pure retail houses – Northern Rock the famous one in the UK but hundreds went under in the US, thousands in Russia etc. Their business was ONLY taking deposits and lending them as small business loans or mortgages. No casino banking.

When money markets dried up though, their approx 10% deposit to loan ratio (which is normal btw, according to basel III rules) wasn’t enough to cover the combination of huge funding costs from the money markets combined with poor quality loans.

(Guaranteed) Deposits don’t lower the overall cost of business except in the extreme case above. It DOES allow greater leverage for the banks, which enables greater profits (through more lending).

“The rise of parallel capital markets in Somalia is quite interesting (how do you think piracy ventures get funded?). And although there’s no direct equivalent of the FSA, effective regulation is quite stringent. There’s rules and everything, enforced through the barrel of a gun, naturally.”

Yes it is interesting isn’t it Tim?

What do you think the experience of Somalia tells us about the possibility of a pure free market existing?

24. Suitpossum

” Richard W: I saw that Alphaville piece as well, and of course retail deposits don’t fund the investment banks, but they lower the overall risk of the business and they thus can lower the overall cost of capital, especially where treasury functions are centralised. ”

Have you ever heard a UK politician say that, Suitpossum? The impression the public have is their retail deposits are given to investment bankers to gamble and pay themselves large bonuses. It is the nature of our dumbed down media and politicians that they need pantomime villains rather than educate the public. I agree that treating the finances of a group as a whole will reduce the cost of capital for that group. However, retail depositors are in reality reducing the cost of capital for retail borrowers not directly funding investment banking.

“The obvious question then is whether money raised by a banking group (lets say through a bond) gets steered in correct proportion to different parts of the business of whether it goes into building up riskier operations – in which case, the laws of corporate finance start to prevail and the overall business slowly gets riskier. ”

Firewalls will not eliminate risk and in some scenarios it could be concentrating risk. I am not hostile to the idea of firewalls, but just a bit sceptical of how they will work in practice. However, in theory resolution of failure should be easier for the relevant authorities. I guess we will need to wait and see how that works out. All the ring-fencing in the world will not help if the group as a whole does not have enough capital. I would expect a lack of capital in one part of the group would spread contagion to other parts of the group regardless of ring-fencing. So well capitalised banks is what we should be aiming for rather than gimmicks.

@ 26 George

Dividends aren’t gauranteed renumeration, neither are the shares themselves.

Nor have you answered what happens if the business isn’t making money.

@ 26/27

It’s a bit scary that you people are seriously think that it’s a good idea to force private enterprise into regulating pay. What effect do you think that would have on entreprenuers, let alone existing businesses? The net effect would be to massively reduce the net tax take of the government and see jobs move offshore.

Planeshift, I didn’t realise Arthur Seaton @7 was talking about Somalia.

Tyler,

“What retail deposits are though, is more sticky – they tend to stay on bank books a lot longer, and are less prone to moving if money market funding dries up.”

Right. So the overnight funding market isn’t a good comparator because, de facto, retail bank funding has a longer duration. When you do use the right comparator it’s zero sum. Either the retail bank would be better off buying corporate bonds or the investment bank would be better off issuing them. Any benefit to one part is an arbitrage at the expense of the other.

The Basel III point is interesting. Doesn’t it imply that retail deposits are considered loss-absorbing in the same way as equity without paying anything like the sort of return that equity does? Who’s writing the put? The depositor or the tax payer who has to step in.

What do you think the experience of Somalia tells us about the possibility of a pure free market existing?

Very little.

Suitpossum outgunned by big complicated words from Tyler, Richard and Geoff, and retreats before getting drawn into arcane debate about capital adequacy ratios. Good luck with that guys. I need to get back to designing my Somalian pirate venture fund. Over and out

“Bankers’ reward for failure: a 36% pay rise”

Sigh. The 36% stat is for all banks; not all banks failed (or would have failed without state bailouts); ergo the text in front of the colon in this headline does not connect with the text after the colon.

Believe it or not, Sunny had a go at me the other day for pointing out that the headlines on this site are inaccurate to a suspicious degree. Further evidence for you, Sunny!

@16 Tyler,

I don’t think you understand. Even the banks that are not shareholder owned receive huge implicit public subsidies and have benefited indirectly from the bailouts. No large financial institution can be called private enterprise.

Whoops, I meant the banks that have shares owned by the public.

Oh well done!

“There is an answer, of course. That is to remove all tax releif for payments of salaries that exceed 10 times median pay in the country in which they’re settled. ”

Limit the workers pay but not what the capitalist can extract as profit from a corporation or partnership.

In fact, limit the workers pay exactly so as to increase what the capitalist can extract from the worker in profit.

My word Mr. Murphy, you really are so *progressive*!

And as to the quote from the FT, didn’t you keep reading? The pay in the UK is higher because last year the bosses didn’t take bonuses at all.

Richard Murphy is without doubt the No.1 Spokesperson for Humanitarian Taxation in the UK. He get’s ethical economics better than most of us, which I guess is why he attracts vitriol from ungentlemanly quarters to his right.

Aside from his obvious expertise in the area, he is also a gentleman so quite what the trolls hope to gain by throwing rocks, is beyond me.

Oh wait! I know: They wish to silence him.

fat chance!

“Oh wait! I know: They wish to silence him.”

Actually, no. I desire to debate him. Happy to do so in person, in front of an audience. I used to debate him in his comments section until I was banned, by him, from doing so.

I have no wish at all to even reduce Richard’s ability to express himself as he wishes.

I do wish to point out where I think he is wrong: you know, express myself in a similar manner.

Just as a tiny point: my comments at his blog have been redacted by Mr. Murphy. None of his comments at my blog have been.

The silencing is being done by whom?

I have changed my mind on banks. I now think we should have just let them all go bust. Every investment bank in the US would have gone under without govt backing. Ye it would have been a catastrophic meltdown, but they needed to be busted the lot of them. Fuck um!

The sheer arrogance of the bankers shows that they should have all lost their jobs and their pensions. We are now operating socialism for the rich.

As usual Tim is spinning for the failed capitalists.

Why is it that the Adam Smith dick head institution never condemns big business? Tim claims they do, and don’t support monopolies. But they are always attacking the public sector and unions but hardly a murmur about failed capitalists.

“Every investment bank in the US would have gone under without govt backing. Ye it would have been a catastrophic meltdown, but they needed to be busted the lot of them. Fuck um!”

Yes……

“Why is it that the Adam Smith dick head institution never condemns big business? Tim claims they do, and don’t support monopolies. But they are always attacking the public sector and unions but hardly a murmur about failed capitalists.”

That is why we at the ASI said let the banks all go bust. Fuck ‘em.

We need to keep having a banking system, sure: ATMs have to continue working and all that. But every shareholder in a bank should have lost all their money, their shares should have been worth nothing, before the government stepped in to do anything.

What is it Sally? Did you not know we were saying that? Quite, capitalism requires that those who screw up as capitalists get fucked. We’re the people who actually say this and mean it……

No I did not know, but then that is because you got very little publicity when attacking capitalists. Funny how when you attack unions you get wall to wall coverage, Did Newsnight not invite one of your bow tied nutters on to tell the world the banks should go bust, and every share holder should lose everything?

@42 Sally,

“I have changed my mind on banks. I now think we should have just let them all go bust. Every investment bank in the US would have gone under without govt backing. ”

You will probably never know how happy I am to read this from you, and you’re damn right.

“No I did not know, but then that is because you got very little publicity when attacking capitalists. Funny how when you attack unions you get wall to wall coverage, Did Newsnight not invite”

Amazingly, I’m not responsible for what the statists and socialists at the BBC decide to put on Newsnight.

I’m responsible solely for for my own arguments. One of which was and is that the whole point of capitalism is that if you guess right, you make money. If wrong, you lose it.

As an example, I’m just fine with the shareholders (note, please, the shareholders) of Southern Cross losing their entire investment. Nope, you guessed wrong, say bye bye to your money!

Yea, well I would not get too exited. I have not become a red in claw capitalist. However, I don’t like capitalism for the poor and socialism for the rich. Which it seems we are now operating.

As for the bankers, their unbelievable arrogance, despite the govt bail outs, is just too much. Maybe Tumbrels and Guillotines is what is needed.

“Amazingly, I’m not responsible for what the statists and socialists at the BBC decide to put on Newsnight. I’m responsible solely for for my own arguments.”

Not good enough I am afraid. If you are a spokesman for the Adam Smith institute you should push your views just as hard when it upsets capitalists as it does unions and workers. Other wise it appears that there is a double standard.

“Maybe Tumbrels and Guillotines is what is needed.”

Or whatever the Greek equivalent…

“If you are a spokesman for the Adam Smith institute”

I’m not. I get paid ( a small amount) to write occasional pieces for them, just like any freelance writer. I’m not their PR department, not an “official spokesman” or anything like that.

I’m a Fellow there, which is an honorary position.

7. Arthur Seaton – “In case you hadn’t noticed unregulated free market capitalism has just proved to be a failed experiment too – a quite spectacular one.”

I was down a local Shopping Centre the other day and I saw, well if you will forgive the crass Tory-style Marxism, the Proles at play. Great, big, massive members of the Working Class. Or perhaps non-Working Class. I mean enormous. When I were a lad some women, after eight or so children, were big, but these days have you seen the size of most people in Britain? They are huge.

Thanks to free market capitalism that has removed even the spectre of famine from the memory of the West. And made the Working Class so enormously fat that they must surely be slowing dying.

I don’t point this out as a needless sneer at my own class origins, but as a preface to ask in what frinkin’ sense has free market capitalism (or its distant Social Democratic regulated-to-hell cousin we have) has failed? In the sense that people are unbelievably well off by any sane standard? By the fact that the vast majority of British people are killing themselves with lard? Because there is no longer a problem with housing except what stupid regulation creates any more?

So the banks had a little problem with our money. We bailed the banks out but only because we would have lost our money otherwise. Maybe some banks would have failed. Good. They would have been replaced by others. And we would continue to enjoy the blessings of being the richest, best educated, best fed, least hard working population in the history of the human race. Capitalism has taken the West from the Realm of Necessity to the Realm of Freedom.

Unlike Communism.

“Nope, you guessed wrong, say bye bye to your money!”

Its more like this:

“nope, your fund managers guessed wrong, whilst still taking large fees, say bye bye to your money!”

11. ukliberty
“unregulated?”

Well of course markets were originally completely unregulated – take the meat market in London in the middle ages. The problem being that contrary to the diatribe of Friedman the businesses did not stay within moral expectations of the population and sold bad meat – the government of the day had to step in and lay down rules about selling meat (only in daylight for example) – to stop the people dying of food poisoning (and worse).

Free markets failed a very, very long time ago. When you finally cotton on to this you might also realise that a large part of Government spending is to do directly with regulation.
That’s how the transfer of wealth goes from state to private hands – the big problem being in a system of ‘capital accumulation’ the wealth ends up in a very small number of hands.

The free market believers (because that’s all it is) love to play the game of “it’s not free market capitalism” because governments interfere – forgetting of course that in 1913 the Federal reserve act was formed in order to stem the crises of the previous 20 years – of which there were many.

Trust me – Capitalism had crises – regulation was brought in to dampen it – which of course fails. But I don’ expect the idiots of the free market school to relaise that egg came before chicken in this case. I mean that would require some rational thought!

Simple Simon,

Well of course markets were originally completely unregulated – take the meat market in London in the middle ages.

I didn’t realise that when Arthur Seaton wrote, “In case you hadn’t noticed unregulated free market capitalism has just proved to be a failed experiment too – a quite spectacular one,” he was referring to the middle ages.