Archive for December, 2009

Bankers, bailouts and bonuses- How to repay the debt

December 4, 2009

Political posturing, regulatory threats and an outraged media have done nothing to address the real issues surrounding bankers’ bonuses. The unanswered question is how some of the world’s banks, firmly on the ropes a year ago, are back in the business of paying mega-bonuses for 2009, claimed by some to be at all time record levels.

Subject to regulatory necessities, how banks choose to spend their money should clearly be up to them. It is simply not realistic or sensible for governments or regulators to attempt to skew the market in terms of pay and reward, however tempting or politically expedient it may seem. Interference of this kind represents the tip of the iceberg, adding to the inexorable growth of the nanny state. It follows that we need to examine the issue from the other end- the income and profits of the banks- and how these have been achieved.

Firstly, it is worth pointing out that the vast majority of bankers and banking staff are good, honourable, hardworking people who did nothing to contribute to the crisis and who will not benefit – in terms of mega-bonuses, at least – from its resolution. On the contrary, many have seen their lifelong savings wiped out through the poor performance and lack of understanding of boards of directors who failed to control, or perhaps actively encouraged, the actions of a very small minority.

But let’s get back to income and profits. We all know that the banks were bailed out by governments and that governments are paid for by us- the general public. We also know that banks are now busy rebuilding their balance sheets through increased charges and margins on loans, many of which impact on those individuals and businesses that can least afford it. Not to mention, of course, the massive fees that are being generated to recapitalise the businesses that lost money through the crisis. So far this all seems to be a one way street, a win/ win/ win scenario for the banks. And so it is.

I have not yet mentioned the real debt owed by the banks to the community- the impact of the bailout itself. Had the banks and their counterparties not been bailed out, many would have ceased to exist. Far from getting mega-bonuses, many of these lucky recipients would not even have a job.

All of this has recently been highlighted by a report issued on 17th November 2009 by SIGTARP, The Office of the Special Inspector General for the Troubled Asset Relief Program in the US (See Note 1). It’s heady stuff, involving the Federal Reserve, the US Treasury and  Maiden Lane III, a special purpose vehicle that bought the underlying collateral of a portion of AIG’s credit default swaps from a number of AIG’s counterparties- the banks.

What might have happened without any intervention is anybody’s guess, but page 20 of the report shows that over $62 billion of funds were paid out to the banks, over $16 billion to Société Générale alone, plus a host of others in the $1-$15 billion range. It’s worth remembering that this was not a bailout of the banks, but of AIG itself!

In the section of the SIGTARP report that deals with ‘conclusions and lessons learned’ there are a couple of key points:

  • The Federal Reserve tried to pursue concessions from the banks in relation to the AIG bailout, but failed. This was because the banks knew that the government would not allow AIG to fail. The banks therefore received approximately par or face value for their assets.


  • The unintended but unavoidable consequence of the bailout of AIG, through loans and asset purchases in connection with Maiden Lane III, was the transfer of tens of billions of dollars of cash from the Government to AIG’s counterparties- the banks.

It is clear that banks all over the world have benefited both directly and indirectly from the bailouts and that these benefits, paid for by the public, are now being used to pay bonuses and, potentially at least, reboot the merry go round in terms of asset bubbles and irresponsibility.

The question is what can be done about it? Restricting the banks outflows in terms of bonuses will only happen if there is less income or profit available. Tax and regulation are possibilities but are generally regarded as blunt instruments. But is there a fairer, more fitting, solution?

It should not be beyond the wit of man to calculate the approximate trading benefits, both directly and indirectly, of the bailouts to individual banks. The SIGTARP report is effectively a part of this process. Where the benefits were unintended or transferred value, as in the case of the AIG bailout, the resultant ‘debts’ should be recognised by the banks and repaid over time.

Such a course of action would recognise and reverse part of the taxpayers’ loss, whilst easing global government deficits.

A global oversight body should be established to negotiate and reach agreement with the banks and determine sensible and affordable repayment schedules. After all, if it can be done with MPs expenses in the UK, why not with the banks? Obama and Brown should lead it, and it’s difficult to see how the banks could complain.

Oh, and it might also reduce those mega-bonuses for a while. What could be fairer than that?

Note 1. Link to SIGTARP report: