Bankers and their Conduct Issues

“The vast income accumulated by the narrow slice of super-elite at the top of the wealth pyramid has created a kind of global ‘canopy economy’ that has lost its connections to the nations and people they sprang from.”[1]

Here in the UK two too big to fail banks have announced increases in their annual bonus pay-outs. Lloyds Bank, still partially owned by the public – which makes not a damn bit of difference – announced a 8% to 10% (depending upon what news story you read) increase of bonuses to £395milion. At least Lloyds made a profit last year.

Barclays Bank has announced it is increasing its bonus pay-out by 10% to £2.4billion, even though it reported a 32% fall in annual profits and that it will be cutting 12,000 jobs. Anthony Jenkins, Barclays’ chief executive, waived his bonus for this year which would have been £2.7million.Yes, a goodwill jester, but he still shocked even The City when he announced the 10% increase for other top players. Unfortunately, his commendable decision to refuse his bonus didn’t impress his financial director, Tushar Morzaria, or his executive management team, all of whom are taking their bonuses after “tapped shareholders for £5.8bn of fresh cash.” 

Mark Carney, governor of the Bank of England, has suggested that a large portion of bankers’ bonuses should be held back. He said:

"Compensation of bankers should be held back and deferred for a very long time. There should be an ability and an expectation that a firm takes back compensation if an individual is found to have taken risks or if there are conduct issues. More pay should be deferred for a longer period." 

Since the public bailed out the banks in 2008 politicians have been very politely asking bankers to hold back on the bonus payments, to no avail. Sometimes the word “demand” is used, but we all learned quickly that it meant nothing. Even the state owned banks ignored the politicians and us, which was easy to do. The politicians are still talking about legislation to restructure the bank and we the people got angry but didn’t occupy The City, demanding change or revolution. The politicians talk and we stayed home.

Carney’s words are interesting because the Bank of England does have the power to limit bonuses “if a bank was deemed to have inadequate levels of capital.” I won’t hold my breath. However, Carney mentions two things in regard to banker compensation: taking risks and conduct issues. On the risk issue, I can’t help but quote Charles Ferguson from his book Inside Job:

“...the single most powerful driver of risk taking and fraud was clearly the fact that all the benefits were appropriated by those running the financial system, while costs were borne by everyone else.[2]

People in finance who can make obscene amounts of money are not going to stop taking risks out of a sense of moral obligation to the public who will covers their losses. Why should they? The only way to stop unreasonable risk is through the restructuring of the banks and new legislation. Both depend on the government to act.

Conduct issues can be translated as immoral and/or illegal activities. There is often a dislocation between what we the public see as immoral behaviour and what is considered illegal. The laws do not fit our common sense notion of morality in finance. And again, assuming that bankers will voluntarily take note of our concerns and act accordingly is utter nonsense. Even Epicurus recognised that desires for wealth and status can never be satisfied. Such desires have no limits.[3]

Given the announcements by Lloyds and Barclay, politicians may once again begin taking about "the need to change the banking culture.” Suggestion on how to do this  will vary but most will be a nudge nudge policy.[4] The nudge approach assumes that after some 30 years of greed, illegality, defrauding their customers, cheating their own banking system and giving themselves obscene amounts of money, bankers will be transformed into reasonable, responsible and law abiding people if only we ask them really nicely to do so. Other policies may be more firm, but personally I don’t think that taking away their knighthoods will be enough. So, here’s my idea of how to change the banking culture.

First, change the laws so that unreasonable risk and conduct issues become illegal.

Second, actually arrest those who break the law. Fining the bank alone will not do it. In a recent case of a bank illegally selling their customers insurance they didn’t need or know about, when officials were asked why no one was arrested, the answer was simply that the bank, not individuals, was at fault and was fined. Such a claim is dumbfounding and insulting. We are told that huge sums of money are given to individuals to reward them for their contributions to the bank, while at the same time we are expected to accept that immoral and illegal activities in the bank are not the responsibility of any individual. As Ferguson said:

“Tolerance of overtly criminal behaviour has now become broadly, structurally embedded in the financial sector, and has played a major role in financial sector profitability and incomes since the late 1990’s.”[5]

Fourth, if found guilty, fine the criminals amounts of money that will actually have a negative impact on their wealth and throw them in jail. While the threats of losing substantial amounts of money and imprisonment can focus the mind, nothing will change if bankers continue to believe they can get away with anything. They certainly have until now. Governments have to stop protecting them at the expense of the public.

Change the laws, arrest people, jail them. That will change the banking culture.

Copyright © 2014 Dale Rominger

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[1] Ferguson, Charles. Inside Job: The Financiers Who Pulled Off the Heist of the Century. London: Oneworld Publications Limited, 2012, p. 12.
[2] Ibid., p. 228.
[3] Ferguson Smith, Martin. Lucretius: on The Nature of Things. Indianapolis/Cambridge: Hackett Publishing Company, Inc. 1969, Loc 515-519 (Kindle Edition).
[4] The Tory/Lib Dem government’s Nudge Unit, formally called the Behavioural Insight Team is being privatised. Well, of course it is!
[5] Ferguson, Charles. Inside Job: The Financiers Who Pulled Off the Heist of the Century. London: Oneworld Publications Limited, 2012, p. 186.