Now that the world is beginning to claw out of the financial crisis—perhaps less thanks to the West and more thanks to China, India and other emerging economies — the US and the UK are already beginning to forget the lessons of the debacle.
These two countries are leading the charge at the Group of Twenty’s (G-20) summit in Pittsburgh later this month against the move to cap bankers’ fat bonuses, dubbing the measures “unenforceable”. As France and Germany are countering the US-UK move, French President Nicolas Sarkozy’s threat to pull out of the summit—unless bonuses are capped—is laudable. Earlier in April, he had held out a similar threat at the London G-20 summit, when he was pushing for strong action against tax havens.
Economists such as Nobel Prize winner Joseph Stiglitz and Kamran Mofid, author of Globalisation for the Common Good (2003), have identified excessive greed as the major reasons for lack of prudence by most major banks that led to the financial crisis. Absurdly high bonuses are the manifestation of this greed.
To now argue against the need to curb bonuses sounds like weak-willed diabetics who, when hospitalized with hyperglycaemia, identify their craving for sweets as the problem and resolve to control themselves; but as soon as they are out of the hospital, they succumb to the craving again.
Consider this: Nine US banks, which received about $175 billion in government dole following the meltdown, paid out about $33 billion in bonuses last year, after registering a combined loss of nearly $100 billion. Or, take Andrew J. Hall, the UK-born commodities trader —commodities derivatives trader, to be precise—whose bets helped him make a personal killing of $250 million by betting on oil futures for Citigroup; these bets single-handedly accounted for 10% of Citigroup’s total profits in 2008. You know what his contractual bonus obligation this year—which Citigroup may not be able to avoid—is going to be? A cool $100 million.
But what if his bets were to go wrong? Who would carry the can? Well, the government.
Just as anti-emission laws are required for a greener planet, anti-greed laws may also be equally necessary for a morally cleaner planet. And just as industrial emissions are among the biggest polluters of atmosphere, industrial greed is also the biggest polluter of minds. Bonuses, before the crisis and now even after, skew bankers’ market incentives, not to mention distort their ethical standards—all of which lead to a fall in prudence.
The arguments now forwarded by the US and the UK are that, rather than cap bonuses, banks need to strengthen their capital base or link bonuses to long-term performance. But this reasoning cannot even convince a high school student of economics. True, capital adequacy may need strengthening; but that has nothing to do with the central issue of greed, which fuels imprudence, that the huge bonuses keep alive. And while bonuses need to be based on long-term performance, that doesn’t mean they need to be super-sized.
The issue of tax havens is also closely related. Tax havens are nothing but “legitimate” ways of fuelling the same greed even further. Opaque financial systems, such as that in Switzerland, fly in the face of the international move towards transparency.
If the Swiss have opened their door a crack as nations try hard to gain back clients’ names from their secretive banks, the gesture was hardly voluntary; as the US found out, prying any information from the Swiss is a painful, piecemeal process.
That is why more nations must put their weight behind Sarkozy’s recommendations.
V. Raghunathan is CEO of GMR Varalakshmi Foundation. These are his personal views. Comment at email@example.com