What's special about bankers, bar their greed?

PUBLISHED : Wednesday, 18 March, 2009, 12:00am
UPDATED : Wednesday, 18 March, 2009, 12:00am

The US$165 million in bonuses American International Group has earmarked for some of its employees has, understandably, brought outrage across the United States and incomprehension around the world. What is even more absurd is that the money is being paid to staff of a derivatives unit which, almost single-handedly, brought AIG to its knees. The company has just reported the single largest quarterly loss in US corporate history. Without unprecedented government bailouts, it would have been wiped out months ago.

US President Barack Obama is surely right to argue that attempts by himself and state authorities to block the payments are not only about money but the values by which we want to define capitalism. The free market is supposed to reward people who succeed with enterprise and ingenuity, not those who make terrible mistakes and then expect taxpayers to keep them in business. Perhaps even more dangerous than moral hazard is the incentive for reckless and risky behaviour that lavish bonuses have created.

The ridiculously generous compensation at most western financial institutions has been a key factor in the global financial turmoil, for it is now clear that most financial firms that generated outsized - and illusionary - profits did not do so because of unique market insights. Rather, they used excessive leverage - by borrowing money or assets - to juice up profits. Many have not only blown themselves up but are threatening to bring down major economies with them. Their employees have been rewarded as if they had superior insights when all they had was a willingness to take on ever more dangerous risks. The absurd argument that such generous compensation is needed to attract or retain the best and brightest only highlights the reality that it often attracts only the greediest.

Engineers, physicists and doctors; teachers, nurses and police officers - these people do not usually enjoy bonus schemes that reward them handsomely regardless of failure. Yet most do their jobs to the best of their abilities. Why, then, do we single out bankers and traders as if they are a breed apart? It may be argued that we pay elite athletes astronomical sums, too - but their activities do not pose a systemic threat.

Swiss bank Credit Suisse has created an innovative blueprint for compensation reforms by paying its investment bankers toxic assets as bonuses, with 'clawback' provisions to make them return money they made for investments gone bad. If those AIG executives have any shame, they should forgo their bonuses or accept their own toxic derivatives as payment. It is time for the financial services sector to face the music like everyone else.