The problem with asking bankers to give up their bonuses is they've got one-track minds

Sunday, 16 January, 2011

889 words
16 January 2011
The Observer , Page: 48
© Copyright 2011. The Observer. All rights reserved.

There was, however, an enlightening exchange that is worth reproducing in full, because it goes to the heart of the gap in attitudes between bankers and the public. It began when David Ruffley, a Conservative MP, cited estimates from the Bank of England that the entire banking industry has benefited to the tune of pounds 100bn from a bailout of its weaker players.

"Are you grateful to the British taxpayer for subsidising you in this way?' Ruffley asked.

Diamond: "There are a couple of answers to this question. . ."

Ruffley: "No, are you grateful to the British taxpayer?"

Diamond: "We are very grateful to. . ."

Ruffley: "To the British taxpayer?"

Diamond: "May I answer? We are very grateful to the central banks around the world, to the governments around the world, for the actions they took."

Ruffley: "No, I'm talking about the British government, who stand in the shoes of the British public. They say, and this is accepted, that you're too big to fail. That makes you more credit-worthy; it means you can borrow much more cheaply than if you're a standalone organisation. Now are you grateful to the British public?"

Diamond: "Can I ask you one question?'

Ruffley: "I ask the questions, you give the answers. Are you grateful to the British public?"

Diamond: "We're very grateful to the central banks; we're very grateful to everybody that's helped the financial system get back. . ."

Ruffley: "The British taxpayer?"

Diamond: "We're thankful to everyone. But if I can just point out, last week we raised money at about 50 to 100 basis points lower yield than the government guaranteed banks in the UK."

Evidently, Diamond (who is known internally as RED after his initials) doesn't do humble and isn't going to toady to ordinary folk on the street. His view is that Barclays wasn't in trouble in the financial crisis, isn't a villain and has nothing to be ashamed of. Other banks, including RBS and HBOS, may have written rotten mortgages and handed out reckless loans. But not Barclays. So why on earth shouldn't his bank distribute pounds 2.5bn in bonuses to its staff? And as for an implied government backstop, Barclays can raise money on the private markets at a lower rate than its state-owned rivals - so, Diamond feels, it isn't in thrall to taxpayers at all.

The public disagrees. In the view of many, it wasn't mere individual banks that failed. It was the broader system of casino-like trading - of ever more opaque derivatives, of credit default swaps and of securitisation that big-brained analysts thought would minimise risk from toxic assets instead of broadening it to infect an ever widening circle of institutions. And, from the perspective of the industry's critics, a glaring question still hasn't been answered: why do bankers need such stratospheric pay cheques to motivate them, while surgeons, soldiers, teachers, airline pilots, even industrialists will do a decent day's work for so much less? Diamond's answer was that Barclays must pay top dollar because it competes for staff in a global market, aiming to wrestle talent away from the likes of Goldman Sachs, Deutsche Bank and JP Morgan. But that's just a way of saying "we're doing it because everybody else is doing it".

The real answer lies in Diamond's skilful, wilful evasiveness. Investment bankers' core skill is negotiation. They are paid to milk a tiny bit of extra margin, a sliver of yield, a little extra profit from a deal. They're encouraged to guard their cards fiercely, to spot the most fleeting of opportunities for arbitrage, to go an extra mile to make a few quid for every corporate client. Money is their working life and bargaining is their business.

Surgeons are motivated by at least a passing interest in medicine alongside their pay cheques. Soldiers may enlist because they relish action. The chief executive of Facebook has a passing interest in technology. But investment bankers are only interested in money - and if they didn't fight for the maximum conceivable bonus at all costs, they'd be as incongruous as a chain-smoking surgeon or a pacifist private. Calls for voluntary "restraint" are never, ever going to work