The Anonymous Widower

The RBS Dilemma

The Royal Bank of Scotland is now 70% owned by the taxpayer.  Note the word taxpayer and that means you and me.  Well, I suppose it might not mean you, as you might be in New York, New South Wales, New Zealand or New Caledonia.

But the dilemma will hit us all in the next few years as we struggle to get the economy under control.

In the red corner you have the public and the government, who for all sorts of reasons find million pound bonuses obscene.  And in the blue corner you have the Banks, who say that they need to pay these bonuses to attract the best talent, so that they make higher profits in complex and difficult to understand markets.

This excellent article in The Times sums it all up well.  The government wants to veto the bonuses and if they do, then the board of RBS will resign. 

The Treasury signalled last night that it was prepared to veto a £1.5 billion bonus pool at Royal Bank of Scotland in a move that could trigger the resignation of the bank’s board.

RBS directors have been advised by the bank’s lawyers to resign if a Treasury bonus veto means they are unable to run the bank commercially and in the best interests of all shareholders.

People close to the Treasury signalled last night that Alistair Darling would throw out any bonus plan at RBS that was much higher than last year’s £1 billion. “We would not expect to see any significant increases in bonus payments. I think most people would see 50 per cent as a major increase,” one Treasury insider said.

RBS is expected to make £6 billion in profits this year from investment banking, implying a bonus pool 50 per cent higher than last year.

Is this blackmail? Yes!  But is it sound business?  Yes!

It’s actually more complex than you think.

Take total tax.  Corporation tax on companies is lower than that for individuals.  So am I right in thinking that high bonuses might actually return more money to the government?  But that is a practical not an emotional response.

How true is RBS’s assertion that they need to pay the bonuses to get the right people to manage their investments? In my business life, I have often found that you have a lot more talent in a company than you think you have, but those in charge like to keep the minions down, as they see them as a threat.  So perhaps, a little bit of intelligent management might improve matters.  I don’t know!  But I have worked with people at the highest level in a clearing bank and know that there is a lot of nonsense there.  I suspect there still is!

Now let’s suppose that to get round the bonuses, RBS got some other company to manage their investments.  I don’t know whether this is possible, but I suspect that it would probably cost them an arm and a leg to make the same six billion pounds.  Probably one and a half billions of arms and legs.  And most of that would probably never see a British tax authority again, so we, the tax payers, would lose.

So it’s difficult!

What we actually need is a change of culture.

Banks, no matter what we think, are a short-term business.  For instance, a main board director of a major clearing bank, once told me that a third of their profits came from overnight money and the interest on money that had not been cleared.  That’s why banks don’t transfer money instantly!

So how can we make things better?

Economists have talked of a transaction tax on banks, to move them away from short-term thinking, but that would only move the business to somewhere that doesn’t charge.  So as with anything we need global standards and a level playing field.

So it will be a difficult and long uphill struggle to make the banks appear ethical in everybody’s eyes.

For my personal banking, I don’t use a bank, but a building society through the Internet and Zopa, the peer-to-peer lender. The former transfers my money efficiently and manages my credit cards.  And the latter pays me around five percent on savings, with the ability to withdraw the money gradually if I need it.  To get the same rate with a bank, I’d have to lock the money in for ever.

This is a model that many others will follow, leaving the global fruit machine to the so-called professionals.  Unfortunately, banks will probably do their utmost to strangle innovative competitors like Zopa.

So we must educate everybody in the Internet and personal finance, so that they can make reasonable decisions for themselves.  Many web sites do this very successfully.

But to return to the original dilemma.

Should the government limit bonuses for banks in which we have the major shareholding?

In my view they should not!

Why?

It will heap more bad publicity on the banks and hopefully push most of us to look for better and more ethical ways of handling our money.

December 3, 2009 - Posted by AnonW | Business, Finance | Banks, Zopa