Tony Curzon Price (London, oD): Yvette Cooper says (Today, Radio4) that banks that need money from the taxpayer from now on will be subject to tight bonus and pay caps. The good news is that this is all the big British banks. The taxpayer has provided two types of capital to the banks in the last 18 months: cash in the form of share purchases (the "part nationalisations"), and there are some banks, like Barclays and HSBC who have avoided using this form of financing. But all of the banks have used and cannot survive without the second form: the swap of bad, illiquid assets for Treasury Bonds under the Special Liquidity Scheme. Under this facility, the taxpayer is taking on the risk represented by the bad assets. The banks would not today be standing without access to the liquidity we have underwritten. So, it would seem, those bonuses can be constrained from today according to Cooper's pronouncements.
Her next line of defense for doing nothing is that there are contracts, banks must respect the law and the obligations that they have entered into. If ministers are buying this kind of excuse from the bank lobby, we are in a worse spot than I imagined. Here is what happens when a financial institution extends credit to a risky company (I know, I've been there): they look at all the contracts that the company has; if the money being pumped in looks as if it will leak out to unproductive uses, the investor will say: "OK, I will put in the capital, but you have to go and renegotiate those contracts. I am not funding the sale-force bonus pool when you have come to me cap-in-hand." What then happens is that the CEO calls in those with the offending contracts and says: "I know you were expecting this. I know it is hard. But if you don't drop your demand---or swap it for this and that---the whole company will go down. You have until this evening to tell me you'll accept the hair-cut." The star trader or big-shot saleswoman then thinks it through: "I can have a claim on a bust company, and the animosity of many colleagues; or I can sacrifice my claim..."
All this is a business commonplace of raising money when you're in a tight pass. Now, it sounds as if the banks are going to Whitehall and saying: "look, we have these contractual obligations ... you're not asking us to break these, are you? That would be breaking the law!" Please can we get some tough ex-bankers in Whitehall. The golden rule of finance is "Whoever has the gold makes the rules." We the taxpayers have the gold right now, but we are being taken for a collective ride and our politics is failing us. This is the time to make the rules. There is no excuse.
