The banking bonus culture is on the way back

Opinion: Why we need to keep control over our banks

‘Ireland is the poster child of risk-free rewards.’ Photograph: Getty Images

‘Ireland is the poster child of risk-free rewards.’ Photograph: Getty Images

 

The huge fines imposed last week on six top banks for the rigging of foreign exchange dealings tells us little has changed in banking. The $4.3 billion fines on six banks, all of which have operations in Ireland, came on top of the $6 billion fine for the Libor rigging last year. At the same time, the bank bosses and dealers in the UK and US are back paying themselves vast bonuses.

It is inevitable that when the Irish banks are returned from the State to the private sector, it will be back to business as usual. The bonuses will make those in Irish Water look like a trickle.

So far this year fines on banks worldwide amount to $57 billion, the highest since 2007. Earlier this year, Lloyds and other UK banks set aside another £10 billion for mis-selling financial products. And the New York regulator pursued a dozen banks including Barclays, Deutsche, Goldman Sachs and RBS for manipulating foreign exchange rates. Jamie Dimon of JP Morgan Chase’s salary of $1.5 million was augmented with $18.5 million in stock options. Its profits fell last year as it paid out $13 billion in fines for mis-selling securities and manipulating key interest rates.

Morgan has a $23 billion war chest to pay fines and legal costs. Most banks have such war chests for fines. This surely tells us where their priorities lie.

It seems that the economic system we have is broken. There has been much welcome reform of bank regulation, but the behaviour of the bosses of UK and US banks demonstrates it is back to the old ways. For they know if, or rather when, they screw up again, the taxpayer will pick up the bill. This is the new model of capitalism.

Ireland is the poster child of risk-free rewards. For it was the Irish taxpayer who a) bailed out all the private banks, b) repaid all their creditors (bondholders) in full and with interest and c) rescued all the building speculators with Nama. If we got some return, it might have been worthwhile. The cost could have paid for a bridge to Europe.

Power of finance

Banks are so dominant that if they collapse once more, the State will have to rescue them again. They know it. But our leaders will not admit it. It is a new economic order.

Regulation has greatly improved. It will push the days of the next bank collapses further away. But the return of the obscene bonus culture and dealer riggings are clear indications that banks will collapse again.

Therefore regulation must now “interfere” in bank bosses’ remuneration and in detail. It is the least we can demand for the sums we have paid out in rescuing the banks.

There are two further steps to be taken. The first is to retain public ownership of key banks. The power of finance is now so big that key banks need to be treated as strategic public utilities and run, efficiently, in the wider public interest.

The second step is to hit the pay of top finance executives hard if there is any hint of wrongdoing by their corporations. Earlier this year the bosses of State-owned AIB were pleading to our Department of Finance about paying bigger bonuses and higher salaries to top executives. This demonstrates that this elite cannot wait to get back to the trough.

Remuneration

Finally, the pay of the CEO should never exceed, say, 20 times that of the lowest paid employee. That has the double effect of keeping down the top pay and encouraging the CEO to maintain an interest in the lowest paid workers.

If any bank is fined by the regulator (as JP Morgan Chase has been in US, UK and Switzerland), then the fine should first be levied, not on the bank, but on the bonuses, share options and excessive salaries of the top executives and finally on the institution’s “war chest”.

Remember, in 2006, the bosses of the Irish banks had enormous salaries, bonuses and share options, with David Drumm of Anglo Irish having options of €19 million. All Irish banks collapsed shortly after, demonstrating that such “rewards” are no guarantee of success. On the contrary, they drove the bank collapses.

The rush to return the banks to the private sector may soon see Ireland with no indigenous banks. Some say this does not matter in a globalised world, and besides, future bank failures will now be paid for by Europe. But the systemic banks have large headquarters, with many skilled employees, and control is vested in Ireland. The increased power of financialisation – the takeover of the real economy by finance – and the regular abuse of that power, means that a small country needs as much control over its own banks as possible.

Paul Sweeney has written several books on the economy and on privatisation.

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