Monday, 17 August 2009

Where Will You Go To, My Lovelies?

Over the weekend some 100 public figures lobbied the Chancellor, Alistair Darling, to curb the 'excessive pay packages' of the few, elite high earners in the banking and financial system, describing them as 'Masters of the Universe'.

The Chancellor himself, in fairness, had already fired a few warning shots about curbing some of the bonuses and particularly guarantees, which is a perennial sore point, claiming he would give more teeth to the FSA to impose tighter rules. He has a problem here as the FSA is crammed full of ex-finance types who bear allegiance to their former colleagues - or worse still, they are the failed bankers who were not competent enough to dip their snouts into the trough effectively and so are not quick-witted enough to catch the banks out while harbouring petty grudges.

It boils down to what the rules are and how the FSA and Government allow banks to operate within them. We have already seen a spate of neat tax avoidance tricks announced by clever accountants on the web who will help anybody who earns above £150,000 next year to minimise their tax bills with some shabby tricks on paying into new companies, some of which are not imaginative enough to scare the HMRC. But it will be the banks who become the most devious as they are absolutely obsessed by the idea that if they limit the bonuses of their 'Top Talent' then they will have a mass exodus of the high-flying high earners to places where the pay is better.

And so where will these little darlings go?

Well first of all, do not underestimate the ability for banks to invent clever schemes to get round the issue or for us to forget the fact that the Government is currently paying around £11m a year in fees to investment banks for advice on the whole issue, let alone around £29m in legal fees. Certainly we may see more of their top traders become non-domiciled so at least more of their 'hard-earned' bonus is spirited away from the thieving hands of the Chancellor. More likely, we will get dummy companies set up and these will be paid lavish 'Consultancy Fees' - and these companies, like strange quantum particles, will exist but briefly to liquidate cash on a capital dispersal idea and avoid things like National Insurance. The fact is that there is nothing in the FSA or Government thinking about 'Consultancy Fees' and I dare say we shall see more of this flying around. In the short term there are stock options which are handy as the market gets back some of its old ground but that is likely to not appeal in the long term as traders like ready cash and they certainly don't want to be held accountable for any collapse in the bank's profits or share price - they have proved that conclusively already.

There will be plenty of 'Guns to Heads' at the moment as the profits clock up on the banks' bounces and traders will be dismissive of their employers' excuses. They will be playing the 'If you don't pay, I'll go to somewhere that will pay me what I'm worth' cards. Theoretically, they have a point as the problem will be that if Britain acts in isolation then they will lose these little mites to other banks who are out of reach of our 'punitive' bonus scheme allowances. This will mean that British banks will become uncompetitive in the 'New World Order' that Gordon Brown talked of.

As the Government wants to show the public it is curbing the excess and high risk strategies by banks, but they do not want Britain to lose out as so much of our economy depends on earnings from the City - there is a dilemma. One way would be to impose windfall taxes on every financial institution for the next 10 years in order to pay back what is generally owed. Of course, most banks would then put their HQs outside of the UK and thumb their noses at us which would be counter-productive but it may be a start that each of them pays exactly what tax they should do from now on and any scheme to avoid tax is fined double the tax owed. It still doesn't solve the problem.

Traders will depart for sunnier climates - to the US or Asia, wherever the banking system allows excessive bonuses to be still earned. This is where I see an advantage. Let them go.

Skimming Off The Highest Risks

You see, the whole system was brought to its knees by the actions of a comparatively small group of people employed in high finance. They say in Iceland you could identify just 6 people who actually nearly bankrupted the whole country and in the City you could draw up a similar but more extensive list. I would do so and I would say to those who think that they can get jobs in other countries, in banks who are willing to pay excessive sums - go. It may well produce a 'Premier League' of banks but frankly it will put all the risk into one area. UK banks can then recruit a new wave of traders who can be weaned on sensible, lower risk banking that never exposes Britain to the kinds of problems we have seen in the last two years.

By skimming off those with the highest risk-taking index and letting them go elsewhere, we make Britain a safer place. And we need it. Should we just lurch into another credit crunch and recession in the near future then we risk simply not having enough resources to bail ourselves out with. Already there are predictions from established sources that by 2014 that British Sovereign Debt could be almost 100% of GDP and we will be paying for every penny of that borrowing, roughly double what we pay were paying for last year.

So my solution would be to let the little blighters go to wherever they think will pay the money for them. Go exercise that egotistic point of view they have that they are 'Masters of the Universe' and far more more intelligent than the rest of us. At some point, I dare say that someone will realise that in order to keep the scam of their elaborate schemes going you need every bank in the world to be as bad at mathematics equally and hopefully one or two will find out how to use calculators and realise that all does not add. Perhaps it will be those banks who first realise that it may be better to trade things you know the value of who will break away from the schemes and focus on logic rather than hot air. Perhaps that is what will help heal the banking system and make it stronger for the future, and perhaps by having a few banks break away more will follow leaving only the very high risk banks in one place. And if they want to be the super-rich ones and pay incredible bonuses, then fine.

Let's just make sure it is the British banks that lead us out of the high risk zone and the first step will be to unequivocally stop high bonuses being paid on high risk business; the second will be to curb high risk business - full stop.

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