As the smell of fear ebbs, will anything actually be done about the colossal bonuses that precipitated the recklessness and then the crash? You might think so from Gordon Brown’s proclaiming on GMTV a week ago: “where there is excessive and irresponsible risk-taking, that has got to be punished”. Indeed, the banks that accept chunks of the Government’s £50bn recapitalisation funding have been told there will be no bonuses this year and three bank bosses – Goodwin and McKillop of RBS and Hornby of HBOS – have been forced to resign.
Is that as far as it goes? What about all the other captains of finance who had no idea what was going on in the engine room below (as the former chairman of Barclays frankly admitted on the Today programme a couple of days ago) when arcane and incomprehensible derivatives were being cooked up, mortgage-based assets were being securitised in their billions, and speculative trading was rife? In any other area they would be out on their ear, or worse – in court on charges of extreme negligence, gross incompetence, malfeasance, or even perhaps corruption. So what will Gordon Brown do about the City fraternity he courted so cravenly for so long? Not much, if anything, I suspect, once the smoke clears- not surprisingly perhaps when he presided for a decade over this free-wheeling City capitalism, indeed vigorously promoted it, without so much as a quibble.
So what ought the Government to do? City bonuses for several years totalled some £13bn annually, and even in the year when the financial collapse began they still reached £8bn, on top of basic pay of up to £ 1/2 million a head. Last year some 4,000 City managers and traders got bonuses of over £1million each. Such largesse cannot be justified on the grounds that the profits were colossal too. What it shows rather is that if the City bubble had been allowed to inflate to the point where it could pay such stratospheric salaries, there must be something dreadfully wrong with the financial system itself when it had lost all touch with a reality that paid hard-working people in the real economy just £24,000 a year on average.
So what is being done to reform it? The FSA, asleep on the job when the financial crash began, has been tasked to examine how bonuses can reward innovation but discourage reckless risk-taking. Don’t hold your breath for that. Either bonuses should be abolished (on grounds that high pay should be enough in its own right) or at least capped at a modest level, but don’t expect the FSA to contemplate anything radical. Their latest proposal, to demand higher capital ratios if top executives are granted excessive pay, is hardly likely to cause much fluttering in the dovecotes.
Several reforms are needed here. The FSA should be thoroughly revamped, both in its remit and composition. Its members, usually chosen by the Treasury, should be ratified, not by Ministers, but by the Treasury Committee and it should be accountable to Parliament. It should stringently regulate the use of derivatives, securitisation and speculative trading. Exorbitant bonuses and remuneration packages, if permitted at all beyond modest limits, should require FSA approval in accordance with a framework agreed with Parliament. And such requirements should of course apply, not only to banks obliged to seek Government subsidy, but across the whole financial sector in order to prevent any further collapses in future due to recklessness driven by pay excesses.

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