Thursday, October 01, 2009

Who Wants to be a Millionaire?

Bankers still don't get it.

We're in possibly the worst financial crisis of modern history and yet

  • Bankers are once again pulling in staggering bonuses
  • While simultaneously threatening (blackmailing?) governments that if any action is taken to change this culture of greed, banks will move elsewhere.

The implication is that we can't afford to do without them. Recent history shows the opposite: they have brought unprecedented hardship to the richest economies of the world by their excessive risk-taking, for which they rewarded themselves handsomely with our money.

Bob Diamond from Barclays Capital was interviewed on BBC Radio4 on 15th September and said "banking is a risk business ... there is no banking without risk". That's fine, Mr Diamond, when you are risking your money. It's not when you are risking our economy. In this area, governments should legislate to reduce the risk to the country if a bank, or a series of banks in the kind of mass hysteria that we saw in recent years, acts foolishly. If banking involves risk (and I think we have to accept it does) then that risk must be qualified and understood at all times.

What about pay packets for bankers or other employees?

I think there is a simple answer here and it doesn't involve changing the law.

Let's start with what a million pounds in annual income buys you. With that much money, you can buy a large house in the best part of the country. A Porsche or two, replaced every year or two. Send your children to the best public schools. Travel first class on holiday. Enough left over to build up a fat pension pot. In other words, you are Extremely Well Off.

So why would anyone want more than £1m a year? The only answer can be bragging rights: a second or third holiday home, which would be empty almost all year. A boat, similarly unused. Maybe a small jet, if first class travel isn't comfortable enough.

Yet most of the money bankers make is our money. A few pounds every time we buy a tax-protected investment. A few pounds every time we buy or sell shares. A few pounds when we use foreign currencies on our holidays. A few pounds with every transaction on our pension plans. Most of these are things over which we have little or no choice because of the business of finance is essentially an oligopoly.

So what should the government do?

Rather than bringing in laws, it could simply decline to do business or minimise business with any publicly-held company whose employees earn over £1m a year.

Which banks would this leave? The small ones. Putting government business through them would make the banking sector much more competitive.

What about things the government can't do without?

Mobile phones? Tell the key supplier that when next reviewed, business will either be moved to a smaller vendor with less plutocratic executives, or cut back or both.

Defence contractors? We'll sign for those planes / helicopters / guns / ships / supplies when your execs cut back their pay. Play one off against the other as part of the negotiating process. Our objective should be to buy security, not absurd levels of wealth for our suppliers.

The BBC? If it wants government support (ie the licence fee) then it better cut everyone's pay back below £1m.

Are there exceptions? Yes. If someone makes a great deal of money through his or her own endeavours with his or her own capital and is successful, then let them earn all they wish. James Dyson making a mint - well done: here's a real entrepreneur! We need more of them and fewer parasites.

Footnote: according to The Telegraph Steve Ballmer, the CEO of Microsoft, earned less than $1.3m (£800,000) last year.


Anthony said...

won't any companies end up pulling out of the uk with these regulations...?

Anonymous said...

Very thought provoking, and well-said, as always.

Sean Haffey said...


I think not but you may disagree.

These regulations wouldn't stop people from earning over £1m. It would simply mean that the government would reduce business done with companies which paid its executives such large amounts, and it would apply whether the company was based in the UK or not.

Craig said...

I assume, since you don't like the concept of profit by risking someone else's money, you want to abolish:

a) building societies, who risk saver's deposits by investing the money into mortgages.
b) private companies, which risk shareholders money in everything they do.
c) capitalism.

I could have done a fuller alphabet, but I think the above makes the point.

Sean Haffey said...

Reasonable profit, yes. Personal greed, no.

Taking your examples

a. Building societies (S&Ls in the USA) are mutual organisations where the profits go to the members of the society.

b. Private companies may do what they wish with their money. Public companies should be more circumspect. And any company that wishes to win government business (or even government support in times of trouble) should be careful that they are not seen to have been profligate in the good times.

c. Capitalism is fine. Gordon Gekko is not.