I could see he was grumpy as soon we starting talking. I thought it was just the restaurant’s delay bringing the beer, but it turned out to be bonuses. How unfair, he said, that the British government was imposing a bonus tax.
“It wasn’t me. I didn’t bring down the financial system. My bank [foreign, but bailed out by its own government] didn’t even take money from Alistair Darling. Why should I lose half my bonus?”
Because, I said, amazed that he didn’t get it, the whole financial system would have collapsed – including his bank – if the government hadn’t stepped in with taxpayers’ money.
“But what about the hedge funds? What about the accountants, the lawyers? They’re only still going because of the bail-outs.”
This is true. But they don’t pose a systemic risk. When Arthur Andersen collapsed, the government didn’t have to step in and rescue PwC or Ernst & Young. The hedge funds would have failed, it is true, but again the government would not have rescued them – none, in London at least, is big enough to threaten the system if it failed.
The banks are only paying out fat bonuses because of the government cash – not only would they have failed without it, but the liquidity sloshing round the markets is there because central banks provide it virtually for free to banks, and they are making big profits because of it. How bad is it for the government to take some of that back?
“But that applies to the hedge funds too. Why me? I had nothing to do with mortgages, I’m not even a trader. And where’s the beer?”
It is just politics. You can’t exclude every bit of a bank that had nothing to do with dodgy mortgage lending – although the banks are trying to do just this.
And you earn too much, I say, trying to move the discussion on to something which goes better with dinner.
“Yes,” he says, as his beer arrives at last. “Just politics.”
It isn’t really “just” politics. There is populism, certainly, the effort by Gordon Brown to draw a line between Labour and the Conservatives, or the effort by Nicolas Sarkozy to draw a line between Europe’s corporatist culture and “Anglo-Saxon” capitalism.
But there is also something deeper. Bank bonuses are causing outrage, in part, because they are being prepared while unemployment has become the new boom industry. Even more, people are annoyed because it looks as though government money goes in at one end of the bank, and bonuses pour out the other. This view is not wrong, either.
To fix this, all we have to do is make the banks pay their true cost of capital, by bringing in structures which demonstrate to investors that they will not be bailed out in a crisis (actually pretty hard to design, but CoCos are one possibility). The banks pay a lot more to borrow, profits go down – and bonuses will follow them downwards.