Friday, 27 January 2012

The Great Bank Robbery

Let me make it clear before I start this I am not accusing Stephen Hester or any other Bank executive of any dishonesty. They are not gun totting robbers jumping into get away cars with bundles of cash leaving traumatised bank clerks in their wake. However their salaries and bonuses amount to pretty much the same thing, or rather a lower risk means of extracting wealth from a financial institution.

I would also stress that I do not write this blog from a socialist prospective, I am happy for people who take personal risks to create businesses to be rewarded for their endeavours provided they operate within the law are not subsidised and treat their customers, suppliers and employees fairly. I accept that the likes Sugar and Branson accumulate vast wealth because they act as the catalyst and for every succesful entrepreneur there are a hundred failures and those failures hurt. So to encourage the entrepreneurship which is vital to the working of a vibrant economy I am happy for those who create wealth to retain it good luck to them.

Banks and their executives are a completely different class of beast. Firstly it is debatable as to extent that modern casino banking creates wealth at best it moves it around, extracts fees and commissions at every turn  gambles with other peoples money but does it actually generates wealth for anyone other than it's executives? I have to say I am just a little bit sceptical.

Secondly the industry is massively subsididsed by the state. Having access to the state as lender of last resort makes casino banking sustainable. Whilst RBS was bailed out by the state all other banks would have failed had RBS been allowed to go the wall so therefore all banks benefit from  state intervention during a financial crisis.

Thirdly treating customers fairly? Payment Protection Insurance I rest my case.

So why are we rewarding mediocrity which is accompanied by zero personal risk taking? Stephen Hester has been an employee for all his working life with Credit Suisse, Abbey National (a company which I truly despise by the way) British Land and finally RBS (Stephen Hester's wikipedia entry). As far as I can make out he did not start up any of those organisations has enjoyed good salaries and benefits throughout and has been rewarded handsomely with bonuses and other benefits with very little of his own personal wealth ever being on the line.

Obviously he has been diligent, fortunate and demonstrated a talent for management, however he has not taken a personal risk if capital has been at risk it has been other people's money. So have his investors done as well? If one looks at British Land after presiding over the company's galloping share price during the property bubble from 2004 he left in 2008 with the share price back at it's 2004 level. So depending on when an investor bought shares either they broke even or lost a fortune. However during his tenure he was paid £2.7m in cash bonuses and his salary climbed by about 50% in the same period to a little under £1m a year.

He is now in charge of the state owned bank RBS Earning in excess of £1m a year and about to receive a bonus a little shy of £1m at the end of a year where RBS share price fell by 35%. The only saving grace is that it is to paid in shares and obviously last year's bonus of in excess of £1m was also paid in shares so RBS's ongoing share price slump hurts a little but what the heck with £100,000 a month to get by on he will be all right.

It is reported that one of the reasons why he has been given the bonus was that the shareholders were frightened he might resign if denied a bonus. Well if the government believes that shareholders will reign in executive pay then it might do well to start by calling Mr Hester's bluff. I am sure he is talented but equally the grave yard is full of indispensable people

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