The UK is providing a lesson the US badly needs to learn, that push comes to shove, regulators hold the whip, and have to be willing to use it when necessary. Given how intransigent the financial services industry has become, the time for discipline has come.
Maybe some of them even want it secretly....
In response to a 50% bonus supertax, bankers in the UK are threatening to decamp, as if that will move the authorities to relent. They are not blinking. And with good reason. The idea that everyone ensconced in a large financial firm can decamp to a hedge fund or a private equity fund, or start their own boutique is wildly exaggerated. Even though many traders like to cast themselves as solo producers, they have tremendous advantages by operating in a large firm, namely, access to concentrated capital and information flows, and in many cases leverage that either cannot be obtained at all in a smaller firm format or would be far more costly. Similarly, a lot of supposed "talent" in other businesses depends on the firm franchise to a greater degree than they fancy.
No less than a former co-chairman of Goldman, John Whitehead, disputed the idea that lofty pay levels were necessary (and he was criticizing 2006 bonuses, which were trumped by 2007 pay levels):
"I'm appalled at the salaries," the retired co-chairman of the securities industry's most profitable firm said in an interview this week. At Goldman, which paid Chairman and Chief Executive Officer Lloyd Blankfein $54 million last year, compensation levels are "shocking," Whitehead said. "They're the leaders in this outrageous increase."
Whitehead went even further, recommending the unthinkable, that Goldman cut pay:
Whitehead, who left the firm in 1984 and now chairs its charitable foundation, said Goldman should be courageous enough to curb bonuses, even if the effort to return a sense of restraint to Wall Street costs it some valued employees. No securities firm can match the pay available in a good year at the top hedge funds. "I would take the chance of losing a lot of them and let them see what happens when the hedge fund bubble, as I see it, ends."
The Guardian tells us that Bank of England officials are telling unhappy bankers that they are free to take a hike, and England may well be better off without them. By contrast, every time US banks have gotten themselves all worked up (the list seems endless, plain vanilla products, mortgage cramdowns, usury ceilings, exiting the TARP so they can pay high bonuses) the US officialdom has caved. And this behavior simply encourages the banks to escalate their demands.
A senior bank of England official said that bankers moving overseas to avoid the bonus supertax could be price worth paying to achieve lasting reform of the sector.
Andy Haldane, the bank's head of financial stability, also said that banks had become too big and was sharply critical of a culture where bankers could take huge risks in the knowledge that the taxpayer would bail them out.
In an interview with the BBC World Service, Haldane said: "Some of the downsides of carrying around a big financial system are now evident to all. If some of that were to migrate overseas that would be unfortunate but given the costs of carrying that financial system around, it may be a price worth paying."
The Telegraph provides more commentary:
Haldane, as regular readers will know, stands out as one of the heroes of the crisis. In 2006 he was one of the lead authors of a Bank report which was among the first to warn of the impending crisis that could face the City as a result of the ballooning gap between what banks had in their vaults and what they were lending out to customers. In the past year or so he has given a number of speeches and papers which, among other things, have warned that the relationship between banks and the state is a "doom loop" in which banks continually try to "game" the regulators, and pointed out that the vast majority of banks' apparent earnings over the past century have been based not on actual performance but on leverage.
In the BBC interview, he goes one step further, making the point (which echoes one from BIS chief economist Steve Cecchetti) that regulators will face a "battle" with banks over the next year since, in effect, they are telling the banks to make less money. He also dismisses the notion that if some bankers move overseas (as they are currently threatening to do following the bonus tax), it would be a complete disaster for the UK economy...
The comments are bound to infuriate bankers, but they should not be blown out of proportion. Haldane is merely attempting to appeal to people not to assume regulation will have an apocalyptic effect - as is the message being dispensed by the banking lobby. Clearly neither he nor the Bank wants to trigger a genuine exodus from the City. But they want the debate to be rather more realistic than it currently is.
Quelle horreur! The Bank of England has said it is more beneficial to have a financial services industry that respects rules than one that is a dominant competitor. They have just rejected the industry's biggest threat, that London might lose its standing as a financial center. It is pathetic to see that no one in authority in the US is willing to tell the banksters no.
Now admittedly the Telegraph tries to play down the confrontational aspects of Haldane's remarks, but it fails to follow through on the implications of Haldane's earlier work: that bank profits have been exaggerated for a very long time, and by implication, most of the earnings-based compensation was looting. Much lower pay levels are therefore very much in order. Haldane's line of inquiry is a fundamental threat to fat banker bonuses.