Wednesday, March 18, 2009

The Bonuses - Claw Back Every Penny

So the RBS board pulled the wool - more wool than was already there, that is - over the eyes of Lord Myners to ensure Fred would have plenty of wonga to ease the pain of the searing guilt he must feel at running a bank while knowing full well he was the worst banker in the world. Meanwhile, AIG bonuses give Maureen Dowd another column, though Jim Manzi argues bonuses have become a distraction and, anyway, they are just the way these industries pay salaries. I sort of agreed with Manzi and then I didn't. I'm sure he's right about the distraction. Fred's pensions is plainly being used by government 'strategists' (Mandelson) as a useful populist issue to distract from their own rabid incompetence - as, for example, when they allowed the wool-pulling in the first place. But bonuses are not a minor aspect of this crisis, they are the heart of the matter. as Nassim says, 'The first thing we need to do is to get rid of the vicious bonus system that encourages you to take these hidden risks.' Bonuses made banks unstable because they were paid for short term gains and not taken back if these turned into longer term losses. This point also destroys the free market defence of the practice - since there was no downside, the bonus market was utterly unfree; it was, in fact, corruptly rigged. These bankers did everything in their power to avoid a free market. If this is not understood then we'll just end up in the middle of Nassim's worst case scenario - a resumption of business as usual and, in time, an even bigger crash.

6 comments:

  1. Sean The Kite SurferMarch 18, 2009 12:58 pm

    ....AND, the bonus culture is a product of the corportist culture that emerged over the last few years, from New Labour in the UK to the Paliament of Whores in Washington (lets hope Mr Gray is apologtic in stright forward terms?) That BIG TENT sure stinks of shit does it not Bryan.

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  2. As I have been convinced for years, it never pays to do business with an organisation that employs more than 100 people; barring the utilities where it is a necessary evil. Above that number managerial incompetence starts to run riot, no one really knows what everyone else is up to and momentum rather than doing a good job is what pays peoples salaries.

    Financial services needs to go back to the partnership model - where it was before Big Bang - for any business involved in financial advisory or investments. Or to the Captain Mainwaring model for boring old retail and businees lending.

    As ever, 'Back to the Future' is the answer.

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  3. Brian, only just seen that you were back, so I'll comment if I may both on this excellent post and the very profound In Two Minds.

    Yes, the market was unfree, corruptly rigged. Absolutely right. It's where the corruption goes back to that is really interesting. Who's at the inner core of that particular conspiracy (and that has to be the right word, however unfashionable). There is a systemic problem but within that there are individual human beings who are benefiting, gaining power. My strong hunch is that the fall guys so far (of whom the Shred is merely the most notorious in the UK) were never the real centre. I suspect that the way money itself has been constructed is at the heart of things. But not neglecting the human factor. And that does include all of us, at least in one sense.

    So, great stuff on the unfree market. The way you are in two minds on bankers and bonuses is for me exactly right. And that takes me back to Scruton and Gray. That is incredibly valuable, thanks. The funny thing is, although I've liked brief snippets of Scruton, I've only made the effort with Gray - Straw Dogs after Al-Qaeda and the Meaning of being Modern. It got a tad nihilistic for my taste from there. But I'm also left with some puzzles about Al-Qaeda and modern Islam. As it happens I was talking to a 25 year old Somali chap in a Camden internet cafe about some of that today.

    But there have been some things of great value in Gray. The summary is mighty helpful. I of course think we need a modified Christ-ian viewpoint, going back to the first century reality, with 21st century physics helping out. Pity my own brain's not up to the task. But I believe there is a brain - indeed a fully human personality - who is. One who is going to be around for ever. That's kinda where I left off last time, not a little burdened by the bad news from Burleigh. This was in turn a most helpful reading of contemporary thinking, thank you.

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  4. The bonus system is definitely at the core of the corruption. It shows why leaders lead these companies -- for their own enrichment, not for the company's employees, its product, or anything else. Happily, it also is a very tangible symbol for the poorer classes of just what's wrong with the financial system.

    Nassim is right on.

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  5. It strikes me that you can't have it both ways. Either the bonus culture supports short-termism, or it is "rigged". If the latter, then there is no incentive for any kind of behaviour, not even dangerous short-termism.

    Talk of bonuses is smoke and mirrors - not just for politicians seeking to deflect blame - but for the rest of us, who don't really know how to deal with the complex global financial system beyond our ken. - http://powertothecommentariat.blogspot.com/2009/03/bonus-mania.html

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  6. The bonuses aren’t a mark of corruption, greed or anything immoral. Read the op-ed “Dear AIG, I Quit!” (http://www.nytimes.com/2009/03/25/opinion/25desantis.html) if you want to read an honest account from inside AIG on the matter, not from people who were never a part of the organization.

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