Bankers in Europe face tougher pay rules limiting cash payments to no more than 30 per cent of their bonus under revised laws to regulate banks' capital approved by the European Union Parliament. Bloomberg, July 7 Years ago when I was working for an American investment bank it happened one day that the firm was cut out of a multibillion-dollar deal in New York and decided it would cut itself back in. It put its top poker player, Eddie (not his real name), on the job and at the appointed time on the appointed day Eddie walked into the office of the top rival banker who was organising the deal, Harry (not his real name). 'Harry,' said Eddie. 'We want to advise on your deal.' 'Expletive deleted,' Harry said. 'How much?' 'Expletive deleted you too,' Eddie said. 'Fifty million.' 'Expletive deleted,' Harry said (they talk that way in New York). 'Okay.' I now have three small questions for you. How much did Eddie expect to help Harry on the deal? How much did Harry expect Eddie to help on the deal? How much did Eddie actually help on the deal? You're right. The answer in all three cases is nothing at all. What Eddie in effect said to Harry was: 'Harry, how do you know that we don't have someone to bid a little higher on your deal and take it away from you and give it to us? For fifty million we promise not to get in your way like that.' And Harry, who was as good as Eddie at weighing the odds of whether our firm had someone who could take the deal away and at what price this might happen, recognised that US$50 million was at least in the right ballpark as a blackmail fee. Eddie, poker-faced throughout, gave him no further clues and so Harry accepted. I now have my big question for you: how much do you pay an employee who can make you US$50 million in five minutes' work? It's a question I think the European Union did not properly consider when introducing its limitations on bonus payments to bankers. I'm sure Eddie's upfront cash bonus that year was way above these limits but if EU politicians are happy to cheer soccer players who are paid millions, what about a superb goalscorer like Eddie? And let's remember that no dinner was pulled out of the mouth of a starving child here. No one suffered. Eddie took his money from another robber baron as cynical as himself, a man who would just as readily practise blackmail and have as few qualms about it. That's how these bonuses work. In my view the EU has the cart before the horse. If it objects to the enormous profits that some banks report, it would do better to examine how those profits are made than how they are paid out. And if it examines the matter closely it might just find that it is looking at itself and its members. Just who in Europe has jumped into the financial fray again and again during the last financial crisis to rescue big banks while letting smaller ones go bust with the sanctimonious excuse that government cannot save every institution from its mistakes. What you get from this sort of practice is a financial system of big banks alone and, what is more, big banks that are encouraged to take big risks because, if these risks pay off, everyone in the dealing room gets rich and, if they go sour, the public purse will pick up the mess. Meanwhile, smaller firms that have learned to work on thinner margins are squeezed out and partnerships are scorned in favour of limited liability arrangements. What comfort is it to potential clients these days that the partners are at risk shoulder to shoulder with them when governments will unthinkingly provide even better security? Yes, I too have heard central bankers and finance ministers pronounce in weighty terms that they had to rescue big banks or otherwise the whole financial system would collapse. I don't buy it. These bureaucrats love to jump in as the white knight comes to the rescue. They do it these days even before the fair maiden clasps her hands (and she isn't much in the fair maiden line anyway). A market-based financial system is much more robust than they make out. If the EU wants stronger financial institutions with tighter profit margins less heavily concentrated in a few hands, it would do best to stop rescuing its fat and lazy banks and let a few of them go spectacularly bust. This would work wonders. It might even begin to squeeze bonuses back to their traditional something of a little extra at Christmas time.