Where are the real engineers?

Bankers were used to lucrative bonuses, but now everything has changed. Or did it? Old habits die hard.

Philip Stephens wrote the following excellent piece of how bankers should behave in a new financial order, published at FT.com:

"No, Britain’s bankers should not pay themselves extravagant bonuses. Not this year, not next, nor the years (plural) after that. That some of these erstwhile titans believe otherwise is depressing evidence of how remote they have become from the world that lies beyond the deflated bubble of the country’s financial services industry.

The rules have changed. Those who fondly imagine that success in banking can remain an uninterrupted path to untold riches should think again. The best and the brightest from the nation’s universities would be well advised to look elsewhere.

To quote George Osborne, the Conservative shadow chancellor, the days have gone when bankers could routinely pay themselves 20 times more than heart surgeons. Or as Lord Mandelson, the Labour business secretary, has put it, Britain has had its fill of financial engineering. The economy now would benefit from some real engineering.

What sort of banks do we want to emerge from the wreckage of the financial system?

The bankers, I suspect, think they can hang on to the casinos that, before last year’s crash, paid for their yachts and private jets. A little bit more regulation here, a tighter capital ratio or two there and the banks should be allowed to get back to business, and bonuses, as usual. Memories are short in markets.

Just about everyone else believes that banks should in future be, well, banks: the reliable, responsible and financially sound institutions needed to make the capitalist system work. Some even harbour the hope that they might start to rebuild decent relationships with their customers.

This is not a vision of the industry, I suspect, that appeals to the leading lights of British banking. To my mind, most of them have still to grasp the depth of the public rage, shared pretty much by politicians of all parties, at the misery inflicted on businesses and individuals by the financial crisis.

Bank executives too often sound as if they have convinced themselves that they too are victims – innocent bystanders at the scene of someone else’s crime. To help them escape this denial, it is worth spending a moment setting out how things look to those outside the steel and glass towers.

The directors of banks have destroyed, to a greater or lesser degree, the value of their institutions. All the while, they have been paying themselves bonuses beyond the imagination of the most senior executives in most other industries.

It would have been bad enough had the damage stopped there. But the consequence of the banks’ attempts to turn lead into gold by repackaging dodgy loans as triple A rated securities has been the freezing up of international credit markets and a slide into global economic recession.

Little wonder people are angry when they read of the tens of billions of pounds of their money that is being poured into these failed institutions. It is less surprising still that the anger turns to outrage at the thought that some of the very same bankers will soon pick up handsome bonuses.

It is tempting to dismiss all this as the politics of envy. That would be a mistake. It is true that some of the banks have contractual obligations to individuals. They should meet them. Most people will see nothing wrong either in the payment of modest incentives for employees lower down the income scale.

What will not do is the self-serving cant that says banks must be allowed to continue to pay out huge bonuses to retain and attract so-called “talent”: the traders and mathematicians who can generate “easy” profits. We have had enough of that sort of banking – of the seven-figure bonuses that rewarded the risk-taking that brought the financial system to its knees.

There is a place for gambling in financial markets; but if we have learnt anything it is that the banks are not that place. What Britain needs is a sober, efficient and transparent banking system – run by the sort of people who think that remuneration of, say, £500,000 a year is a very fair, not to say generous, reward."

"It is time for banks to behave like banks" by Philip Stephens, 9 February 2009