President Obama is angry. Gordon Brown was angry and probably still is. Why all this angst? Because Financial Institutions are paying out bonuses despite clocking up losses which in the case of AIG are more than the Gross Domestic Product of many a developing nation.
In the great scheme of things the amount is trivial, just $165m although that is part of a total of over $400m of bonus being paid by AIG - it's just that this bit went to derivative traders, the people at the very heart of the cause of the financial mess the world is in. When measured against just the latest tranche of bail out money at $40bn from the Fed, this is no more than chicken feed, but it is the symbol and message it sends to a nation in a deep recession where nearly half a million people per month are losing their jobs, that President Obama is so enraged about.
Attaining The Status Quo
Any banking executive will tell you that if you want the financial system to work as before and get lending going again at similar levels, there has to be the incentives for earnings in place. The fact that the financial system had devised a way to keep trading a basic commodity such as debt so many times and take a commission each time was pretty hilarious as scams go, but that's the nature of finance - you don't get seemingly unlimited amounts of money to lend without a way of it paying incredible amounts of money back, far beyond the value of the assets it was being used to finance.
There has to be more to be had than that.
The status quo in the banking world is getting the show back on the road again and these executives would tell you that if you don't pay the bonuses then you will not get staff good enough to do the job. There is a perverse logic here. These are the very staff who actually caused the mess and these executives are proposing that rather than sack or even possibly jail them, we should in fact pay them bonuses even though their companies have lost billions using their gambles.
It is this loop of illogical ideas that fuel the finance system. At the heart of it though, it has to be understood by people like Obama and Brown, that if they really want to get the system back to the amazing cash making engine of before and give the consumers the cash they need to kick start the economies again to get people back to work, then there is an awesome price to pay and the bitterest of pills to swallow. You would have to agree to do what the banks say - which is precisely what these Politicians are doing as they are surrounded by advisers from the world of Investment banking and these fellows know a great deal about making more money per year than the rest of us will make in a single lifetime.
It goes with the territory.
Changing The System Will Mean Tackling The Underlying Problem
There are few banks who did not play the game. Everyone looks at Goldman Sachs as some kind of paragon of virtue but the reality was they often bet the right way but they are one of the largest beneficiaries of the AIG payouts made via the Fed. If Goldmans had not received the bail out on their derivative positions, they would have been in just as bigger mess as they rest of the sector.
So you have to agree there is a fundamental flaw in the system. The ability to pass on debt and insure it is fair enough but the derivatives, 'exotics' and other forms of clustering debt and assets and passing them onto a financial conveyor belt around the system like a never ending, lucrative game of 'pass the parcel' has to stop.
Warren Buffett always predicted that such financial instruments would be the downfall of the financial system and how right he was.
To stop this happening again, financial institutions have to fundamentally change their way of working, the money that can be made by themselves and their staff. It is as simple as that. In order to do that, Governments are going to have to step in and use legal powers to change what banks can do to make money. It will mean they will have to change the regulatory system and they it will mean that staff will have to change.
The days of the City Rocket Scientists should be over and finally, the safety net of Government bail outs should be removed.
The biggest mistake so far has been to bail out the current system - it is the problem. However angry Obama and Brown get, if you push more money in to save it you have to accept the consequences as it how the present system works. They should have changed the system and restructured it before they bailed it out and made sure they had not just the symptoms of the problem treated but the problem itself.
Out Of Work Bankers
This would mean, I suppose, that many of the current clever bankers would stamp their feet, shout out about how clever they are, how much money they 'created' and then threaten to leave their jobs. And yes, that would be the preferred outcome. Rather than cut bank tellers and back room staff or deny such people their bonuses for their hard work in producing the only real profits banks make, the whizz kids should be turned out on the streets to see if they can find jobs to create such fabulous wealth in the real world.
We should curb the way Hedge Funds work - we should stop the sale of any share that the seller does not legally own at the time of the bargain - we should change the staff at regulatory bodies to be accountants and non-industry professionals who have the financial forensic skills and no connections to the institutions past or present so that they are objective and have the integrity and skills to do the job properly.
We should fundamentally change the laws on Non Executive Directors and how they can easily evade such financial collapses. They say that NXDs have more onerous liabilities now - that's complete rubbish and it is still the most lucrative club in the world. There should be curbs on how money can be spent to influence others like doling out multi-million 'adviser' roles to former Prime Ministers for doing absolutely nothing - NXDs should be the mechanism that stops such idiot largess and actually be guardians of the remuneration policy with the public conscience in mind rather than their own deep pockets.
It would mean a very different banking system than today which would mean that economies are going to have to shrink back before they can move forward into growth in a more orderly and conservative fashion. And that's what Politicians do not like - as that does not win votes.
So they will pay out vast sums like $100bn plus to bail out AIG and then get really angry about a bonus payment of just 0.004% of the amount. The bankers would tell you it's trivial in order to keep their best people.
Obama and Brown have to have the fortitude and moral fibre to tell these banks, the bonanza days are over - if those staff want to leave, the door is open as they should never, ever get that kind of opportunity to earn such money again under a new system.
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