The recent decision by Barclays Bank to increase the amounts paid in bonuses to their investment bankers has once more called into question the operations of banks and bank leaders.
It is generally acknowledged that the unprecedented world financial crisis of 2008 was the result of unprincipled and irresponsible behaviour in the banking and finance sectors culminating in the collapse of Lehmann Brothers in the USA and Northern Rock in the UK.
Bankers, who were once thought to be prudent and conservative figures in society, were discovered to be behaving like compulsive gamblers in Las Vegas while hooked on crystal meth. They traded bundles of financial products and sold them globally as triple AAA investments when, in reality, many consisted in dodgy mortgages and loans made to people who were either speculating wildly or who were simply not equipped to repay.
The financial products became so complicated that the investment bankers who put them together did not understand what they were selling and the bankers and others who bought them had no means of knowing how safe they were. Secure investment depends on a calculation of risk but if you cannot calculate the risk, there is no means of investing prudently. The consequence was that first credit and then investment dried up. But, apparently we still need banks to help us out of the mess they created.
This brings us to the vexed question of bankers’ bonuses. Bankers uniquely need special ‘incentivising’ which means bonuses. I do not mean the trivial sums awarded to bank clerks and the like but the ‘big money boys’. In 2013, for example, Barclays paid more than one million pounds each to 428 investment bankers!
This may seem like untold riches to mere mortals who work for a wage or salary but the most common justification for such large bonuses is that ‘they are worth it’ in terms of the profit they generate for Barclays bank. But when we look at their financial results we see that Barclay’s annual profit in the investment business actually fell by 37% while bonuses rose by 10%.
Paying for bonuses seems to require both short-changing shareholders in terms of distributed profits and in making several thousand much less well paid Barclay’s staff redundant.
The ‘explanation’ given by the chief executive is amusing. It seems that investment bankers get paid according to two criteria. Criterion A is ‘payment for performance’ while Criterion B is to ‘pay competitively’. Criterion B seems to mean matching what Goldman Sachs or J.P.Morgan pays somewhere in the world. When there is a conflict between the two criteria, paying competitively always trumps payment by performance.
The result is that poorly performing investment bankers can always get large bonuses. In other words, ‘they win and you lose’. Nice work if you can get it!