Bankers’ bonuses
Everyone else is commenting on this,
so I thought I would add my thoughts:
Bankers were allowed to over-stretch their
businesses, relying on too little capital to fund lending on a
prodigious scale. As they competed with each other they took less
and less consideration of the risk of the assets against which they
were lending. All this was compounded by the moral hazard of the
implicit government guarantee on depositors’ cash.
When the pack of cards came down it was right
to lend the enormous sums of money to prop the edifice up otherwise
everyone would have suffered much more (you don’t cut your nose off
to spite your face and this would have been more like cutting your
head off). What followed next was a massive reduction in the cost
of money with interest rates being dropped to practically zero.
Banks still had to borrow at much higher rates, but the margins
they started to make on lending money grew from 10 to 20 basis
points to 100 to 150 basis points overnight. This was an
intentional part of government policy around the world (not that
they talked about it) the idea being to allow the banks the
opportunity to re-capitalise their balance sheets with the extra
profits.
The problem is that you can’t re-capitalise
your balance sheet with profits if you pay it out in bonuses. Have
banks forgotten that they lost more money in 2007/2008 than they
made in the ten years prior to that? Making a profit in 2009 is
wonderful, but how about making up for the losses incurred the year
before? Tax-payer rescue has come in the shape of emergency loans
and cheap money and tax-payers want their money back.
So the problem is culture. Banks are run
(captured even) by employees, not owners. As employees they get to
be in the top jobs for a short period and the worst that can happen
to them is they get sacked (sach-ed) with bags of gold. There is
therefore little incentive for them to behave with altruism,
dignity, foresight and leadership. Lacking leadership, the motto is
“everybody for himself”.
If banks behaved in the interests of the
owners, they would not have risked everything on foolish loans, nor
would they pay out such vast proportions of their profits in
bonuses. Individually, most bankers know this (and in my experience
are decent people) but it is mob rule at the moment. Bankers at the
moment resemble nothing so much as a flock of sheep in golden
fleeces charging towards a cliff.
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