George Osborne Channels Bob Diamond; that won’t End Well

Posted: 09 Feb 2011 01:02 PM PST

Here’s Bob, on the 12th of January, thumbing his nose at the Treasury Select Committee:

The new boss of Barclays refused to bow to demands by the MPs that he waives his 2010 bonus, which could be as much as £8m. He said he had forgone his bonus in 2008 and 2009 and would decide “with family” whether to do so again.
He added: “There was a period of remorse and apology for banks and I think that period needs to be over.”

It was a very confident, punchy performance; the confidence was completely justified, given the usual bumbling grandstanders’ attempt to ‘grill’ Bob; and justified also, very possibly, because the fix that we now see was already in, three weeks ago. His performance looks like something of a sneak preview, in mirror image, of today’s not entirely unexpected, but still somewhat abject, climbdown by the UK Government, fronted, as unappealingly as ever, by the Chancellor of the Exchequer:

In a statement to the Commons, the chancellor said that it was time to move from “retribution to recovery” in the relationship with the banks, as he announced that directors’ pay would be linked to lending targets and insisted that no more than £2,000 could be paid in cash bonuses at the bailed-out banks.

At least Shadow Chancellor Ed Balls nailed it in one, in his response:

Shadow chancellor Ed Balls retorted that the government had “thrown in the towel” over bonuses and pointed to news today that half of the funding for the Conservative party comes from the City.

Let’s parse the mendacious Treasury press release that goes with the climbdown. The whole deal has been thrashed out (if that’s the phrase: it doesn’t appear to have been a very arduous process) between the government and banks, under the code name “Project Merlin”. It has three main elements:

Lending to small and medium sized businesses will be part of the performance metrics of each bank’s chief executive and those of the senior managers responsible for business lending.

Anyone wondering whether the UK’s suddenly got itself a command economy should probably calm down. If there’s one thing a modern banker’s good for, it’s gaming a bonus system. Expect some meaningless press releases about this for a year or so at most; by then everyone should have forgotten about it. Then we have:

The pay of the 5 highest paid ‘senior executive officers’ will be published annually on an unnamed basis, in addition to the pay of the Executive Directors already published on a named basis in annual accounts. This means that the salary details of at least 7 executives (5 + the minimum of 2 Executive Directors salaries based on current board representation) will be published for each of the banks involved in these discussions, compared to the maximum of five individuals required in the USA.

So take that, Yankees: instead of your laughably irrelevant bonus disclosure requirements, the UK now has slightly different laughably irrelevant bonus disclosure requirements. They are irrelevant because, in the words of those pinkoes at FT Westminster:

This is a slightly tougher version of the rules in New York. But it falls short of Hong Kong in one respect — it does not require the disclosure of the top five pay packages.
These senior executive officers — who will remain anonymous under Merlin — could well be corporate managers whose pay is relatively humble, at least when compared to the hot-shots on the trading floor.
This compromise is in the interests of Osborne, as well as the banks. Remember that there are around 200 state employees at Royal Bank of Scotland who will be awarded a bonus worth more than £1m this year. The more information the public is given, the more Osborne is put on the backfoot.
So these titans of the public sector, these public servants on the trading floor, will again have to remain anonymous this year. Their selfless work on behalf of the exchequer will go unrecognised by the nation.
Meanwhile the coalition is planning to name all 15,000 council managers earning £58,000 or more as part of a crackdown on waste.

Let’s remind ourselves of what this bonus kerfuffle  is about. Despite all the efforts of banks to spin it that way, it’s not the ragings of a clueless citizenry, lashed on by opportunistic demagogues. The FT gets to the nub of it:

the coming round of bonuses is more than a symbolic issue. They are a measure of the monopoly rents in the banking business. It does not take great talent to make a profit by taking excessive risk, safe from effective competition and sure of a bail-out if needed.
Neither the banking nor the political community should underestimate the extent of ongoing popular anger, especially when the Bank of England tells us that the big banks are receiving an annual funding subsidy worth £100bn.
The most sensible immediate action would be for politicians to stop senior bankers extracting these rents in their annual bonuses.

Well, that didn’t happen. Next we have:

…the banks will provide £200m of additional capital over two years to set up the Big Society Bank.

Don’t worry about the Big Society Bank. As you can see from the teentsy numbers, this is just a gimmick. Lastly there is some  marketing rah-rah about London’s pre-eminence as a financial centre; a run of yawno bullet points, from which I’d just like to tweezer out this one:

implementing and applying European and international rules to create a level playing field in both policy and practice whilst protecting and maintaining the particular strength of UK financial services, and without pre-judging the outcome of the Independent Commission on Banking (IBC)

Umm, not sure whether our competitors will deem the give-with-the-left-hand-take-with-the-right-tax-break that Yves posted about yesterday to be a contribution to a “level playing field”, but, whatever.
Bob wants bankers to move on from remorse; Osborne thinks it’s time to go from retribution to recovery. Seeing the attention now beginning to focus on the Independent Banking Commission, one can’t help suspecting that there will next be a determined push to ensure that those other r-words, reform and regulation, get left as far behind as possible.
But do you know, I think things might get sticky just there. Certainly, Osborne gets his bank policy marching orders from the banks, but it’s Mervyn King who tells Osborne what to think about the economy, and yet – King thinks radical restructuring of the banks and big changes to regulation are required; and he’s got plenty of backup (Yves and I went through all this yesterday). King will not be silent on the matter of bank reform, I am sure.
So I think Osborne is in a pickle now. If he wishes to clear the way for acceptance of minimal bank reform, as damp a squib as this miserable, cosy “Project Merlin”, he will have to make sure the Independent Banking Commission report by Vickers is as feeble as possible, then push his way past King, head of the independent Bank of England,  and then chew his way through the rest of the BoE hierarchy. I don’t think he is brave enough or well-enough backed for that.
So it could be that, even now, we are not quite done with genuine banking reform. Here’s hoping.
UPDATE: might as well add this, since I’m in here anyway sorting my style out: a little chink appears in the Coalition as the Lib-Dems’ Treasury spokesman calls this deal ‘pitiful’ and resigns. Good man!