Jake's View
PUBLISHED : Tuesday, 21 May, 2013, 12:00am
UPDATED : Tuesday, 21 May, 2013, 5:46am

Bankers' high pay is governments' fault

BIO

Jake van der Kamp is a native of the Netherlands, a Canadian citizen, and a longtime Hong Kong resident. He started as a South China Morning Post business reporter in 1978, soon made a career change to investment analyst and returned to the newspaper in 1998 as a financial columnist.
 

Ten times as many London-based bankers as previously expected could be caught by Europe's cap on bonuses in a fresh sign that regulators are attempting to clamp down on City of London pay.

SCMP, May 19 Here is the relevant question to consider in this latest European Union tempest about bankers' salaries: How much rent would you pay for an asset that can earn you $10 million a year?

We shall put it in these impersonal terms because that is how they are couched in practice these days. People aren't people. They are human resources, sort of like plastic pellets are input resources and a line of credit is a financial resource.

The difference is that you cannot buy and sell this human resource asset. That would be slavery, which is a crime against humanity and has been eradicated from the world, except where it is politely called indentured labour and constitutes a significant proportion of employment in countries like Bangladesh and Pakistan.

But we are talking of London, where one can only (I hope) rent this asset and where it can always part company at short notice. How much would you pay for the (you hope) exclusive use for a year of this asset's time and efforts?

It wouldn't be the $10 million the asset can earn you. There would be costs involved in office space, desk, communications and lunch expenses and you also want to turn a profit on the asset's use. But it could easily be $5 million, if you have no other way of making this money, and you could easily justify paying that much if your shareholders ask.

That is why some bankers are paid huge salaries these days. They are worth it. They have spent years learning the detailed ways of whatever specific financial market they play and they can make buckets of money for a bank that wishes to put money at risk in these financial markets.

But this only leads to another question. Why should some banks wish to put so much money at risk in dicey financial markets? They can lose that money, too, and it is notable that these employees whom they pay so much spend their own money on cars and boats rather than risking it.

There is a simple answer: It is because you don't care that you have put your deposit money with a bank that takes big risks. You may say that you never knew you had done so, but the fact is that you also don't care. Every bank that has collapsed for many years has been rescued by government and the depositors have lost nothing. Why should you trouble yourself, then, with whether the bank that holds your deposits is a big risk-taker?

Your bank knows that this is how you think, too, which is what frees it to take big risks. Time was when you would be very careful about where you put your money, and then your bank was on guard to be careful, too, or it would lose you to a more careful bank. There was not much scope for big risk-takers back then. A bank could only take big risks with its own capital, and that was a small proportion of its total assets. You didn't hear complaints about outrageous salaries in deposit-taking banks back then. There were none, or very few.

But what we have now across the world is governments taking on the risk in the liabilities side of the balance sheet of the banks, while allowing private individuals to continue running the asset side, in other words to continue making the decisions on how that money will be invested.

It's a heads-I-win-tails-you-lose game for these people. If the risks they take make money, they keep that money, and if these risks lose money, government makes good the loss.

It's a perfect formula to encourage wild risk-taking. Bad idea as it may be for a government to nationalise a bank, it is utter madness to nationalise one side of a bank and leave the other side in private hands. Yet this is effectively what governments have done everywhere.

So now we have European bureaucrats bewailing high pay in banks while unable to see that they themselves have brought it about. What a superb irony.

jake.vanderkamp@scmp.com

Share

 

Send to a friend

To forward this article using your default email client (e.g. Outlook), click here.

Enter multiple addresses separated by commas(,)

For unlimited access to:

SCMP.com SCMP Tablet Edition SCMP Mobile Edition 10-year news archive