Compensation claim

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: Watching an industry committing political suicide is ugly. That is what investment banks are doing by paying bumper bonuses a year after they were saved by state intervention. Goldman Sachs is set to award staff a near record $20 billion this year. Firms making losses for shareholders, such as Citigroup and Bank of America, are still paying hefty bonuses.

Such rewards, in the face of public protest, feed the impression that banks are victims of what some call “employee capture”. The top ten investment banks at the start of 2008 made an average return on equity of just 8% between 1999 and 2008. Four made cumulative losses. Staff got four times as much as shareholders did in profits. In 2008 Merrill Lynch paid cash to staff equivalent to over 100% of the capital left by the year-end.

Normally, for a liberal newspaper, that would be a problem for shareholders alone. But Merrill and many others got bailed out. The new bonuses make a mockery of banks’ claim that higher equity buffers are too expensive to contemplate. Some governments still own stakes in banks, so decisions on pay are directly theirs. Worst of all, bonuses are being paid in part from subsidies: this is not a free market, but a perversion of it.

Some banks deny this, so it is worth revisiting how much policy has been skewed in their favour. It is not just that they were saved from destruction. They got public capital (much of it now repaid), short-selling bans on their shares and rescues of counterparties, such as American International Group, which the public otherwise had no interest in saving. Today they enjoy laxer accounting, loose collateral rules at central banks, explicit debt guarantees and asset-purchasing schemes. And, critically, they can borrow cheaply because they are deemed too big to fail. All of them—from comparatively healthy Goldman to the nationalised weaklings—are being subsidised by the rest of us. As a way to keep cash flowing to the wider economy and help banks rebuild their capital, this subsidy made sense; nobody intended it to go to employees.