Banker remuneration

Banker remuneration

Banker remuneration

Introduction

Bankers' remuneration has been at the front of people's minds when examining why financial institutions took the excessive risks which dragged the global economy into a recession. It is an issue that continues to leave many people angry and disillusioned with the banking system.

Besides the domestic response, the UK Prime Minister will no doubt ask the G20 members at their meeting in April to support a package of principles for financial institutions to curb incentive pay structures which focus on the short term, at the expense of long-term company sustainability (Morck et al.,2008).

Mindful as ever of the significance to the British economy of a successful, global financial services industry, the British Government is also making clear that it will look at what other countries are doing to improve remuneration policies before deciding whether to go ahead with these plans. In other words, leading from the front is fine, but we are not going to lead if no-one follows.

While it makes sense for the FSA to apply regulation operationally to UK financial firms, the government has the ability to lead a macro movement for international amendment on this topic. 

As the Turner Review specifically addresses, the capital markets are global in nature and the agreement of standards, whether remuneration policies in banks or their liquidity ratios, is critical to repair the system and as a pre-emptive measure. From the US to Europe, countries have already proposed amendments to or enacted legislation or codes governing executive pay. Most countries have implemented changes to complement specific rescue packages aimed at financial institutions. In the UK, the changes as outlined in the Turner Review have generally been aimed at the UK-based financial sector. Additionally, the EU is formulating legislation with similar scope, to be passed during the summer of 2009.

Why Bank Failures and Corporate Meltdown

Construction companies routinely go bankrupt, but reopen under new names. Numerous corporations ignore their debts and fail to pay their taxes (in fact 66 percent of America's corporations pay no income tax.) Lenders now charge up to 24 percent for credit, but pay only 0.5 percent on savings accounts. Companies now buy out competitors to close them down and eliminate the competition. Mobil and Exxon somehow circumvented monopoly regulation. They joined for outrageous profits. Together, they made a net profit of $11.68 billion just in the second quarter of 2008, or a profit margin of $1,485.55 per second, even when gas consumption was falling.

The newest scam is the Credit Default Swap (CDS). This was a pseudo-insurance scheme that provided coverage to the banks in the event that the sub-prime mortgages went into default. But there really were no assets available to cover that insurance. Up to 60 trillion dollars of coverage was “lost” (Credit Default Swaps - the Next Crisis, F. William Engdahl, June 6, 2008.)

Why the Stock Market Crash

The economic collapse was bound to happen as corporate America became more and more greedy. “Greed is good” claimed Gorden Gekko (Michael Douglas) in the 1987 memorable movie ...