LONDON LETTER:City bonuses, and the fury about them, have become part of the traditional British Christmas
“OH YES we will,” the bankers have cried. “Oh no you won’t,” say the politicians, or some of them at any rate, as the perennial controversy about bonuses for the City bankers has erupted again.
Much of the debate, spurred in recent days by Liberal Democrats desperately seeking cover after the tuition fees debacle, is little more advanced than the pantomimes taking place the length and breadth of the UK.
Talking tough before his humiliation on Tuesday, Vince Cable said bankers would have to “show restraint” this year, or else they would face determined, unspecified government action.
In truth, the bankers’ bonuses will be more restrained this year; but only because of lower profits during the year rather than any acknowledgement on their part that they should be more sensitive to public opinion.
Chancellor George Osborne is wary, not just because of the Conservatives’ traditional links with high finance. He fears a flight from the City that would cost the exchequer billions in lost tax revenue. London, one of world’s great financial centres, has more to lose than, say, Dublin from being regarded as a cold house by the world of finance.
A National Audit Office report this week threw some fascinating light on the help that the British taxpayer has provided to banks since the financial crisis began. In all, £850 billion (€999 billion) worth of guarantees, shares and loans, including £124 billion in cash, has been given.
In addition, Northern Rock was given £16 billion, with a further £24 billion worth of guarantees, while another £8.5 billion was put into it this year to cover the costs of winding up its mortgage book and selling everything else. Bradford Bingley cost the treasury £10 billion.
During the year, the worst-case liability for the taxpayer has fallen from £955 billion to £512 billion as some guarantees matured, while others were closed off to new entrants and some loans were repaid.
The National Audit Office now believes that the most the banking crisis will cost the treasury is £20-30 billion and the whole affair could even lead to profits.
But the treasury should have charged more for offering the banks guarantees, the auditors believe.
Lloyds paid £2.5 billion for cover on £260 billion worth of assets, though it should have been charged £4.4 billion. A fee of £4.4 billion on RBS, too, would have been “justified”.
So far, the treasury has received £9.91 billion in such fees. But the crisis is costing it £5 billion a year in interest on the money it borrowed. In 2010, this amounted to 11 per cent of the total interest bill that the UK will pay, but it is a small part of the UK’s £149 billion deficit forecast for the year.
However, the net costs for the taxpayer will rise in time, as the fee income from the guarantees declines, while the interest bill will remain for as long as the loans are in place and until the treasury can sell off its stakes in RBS and Lloyds.
Currently, the treasury is looking at a £12.5 billion paper loss on its shareholdings in the two. Describing the value of shareholdings as “inherently volatile”, the auditors said the eventual outcome will be “highly dependent” on the treasury’s ability to extricate itself successfully.
However, the treasury is now trying to ride two horses, since it both wants to get the best price that it can for its shareholdings and at the same time to reform banking in such a way to be sure that it is never again faced with such a crisis.
The Independent Commission on Banking report, due in September 2011, could well recommend a split-up of the major banks, dividing retail banking from the more profitable, but, as we have seen, high-risk investment banking.
If so, and if followed through by the government, the value of the treasury’s holdings in the two banks will be lessened, while such a division might also require it to come up with further capital injections before the new institutions were formed.
Meanwhile, politics will be dominated by demands for actions against bankers’ bonuses, with calls for higher taxation if they do not behave. Even Osborne has talked about increasing the £2.5 billion “bankers’ levy”.
However, the levy has been matched by a four-year plan to cut corporation tax, so the treasury is taking with one hand and giving back with another. Some institutions will, it seems, be better-off as a result.
In the meantime, those who believe that talk of “bankers’ flight” is a myth will point to this week’s decision by JP Morgan to buy Lehman Brothers’ Canary Wharf headquarters for nearly £500 million to house its new European headquarters.
JP Morgan chief executive Jamie Dimon was one of those most annoyed by the Labour government’s decision to create a 50p tax rate for those earning over £150,000, threatening Alistair Darling at one stage that he would scrap the plans.
However, the fine detail of the bank’s final decision leaves it with options, since it will vacate some existing offices and become a landlord to competitors in others. Talk of “bankers’ flight” will remain around for some time yet.
