24 Jan 2012

Mervyn King rails against ‘small elite’ of bonus-addicts

As I arrive in Davos, a gathering of the global 0.0001 per cent, I receive a copy of a well-timed speech from Sir Mervyn King.

It is the Bank of England governor’s piercing assault on bankers that sticks in the mind from today’s important speech in Brighton. He doesnt quite join Occupy the City, but he does suggest that British capitalism’s very legitimacy is up for grabs if bankers go too far on pay.

Sir Mervyn told an audience in Brighton: “The legitimacy of the market economy will inevitably be questioned if rewards go disproportionately to a small elite, especially one which benefited from the support of taxpayers”.

He said those now taking decisions on bonuses needed to understand that public confidence rests on “the acceptance that rewards are fair”.

This is stronger that we have heard from Sir Mervyn before. There is a reason. The BoE is in the process of acquiring new powers over the financial system. In the interim they have moral, not legal, authority to cajole banks over pay and business lending.

Late last year he released a report calling on the banks to limit bonuses and share dividends, and sit on a buffer of capital, or deploy that capital towards pumping business lending into the economy. Today’s speech is the words of a man who I fear is being ignored by the bankers.

Perhaps he is too pessimistic. I think the banking world, at least the City, is at another unique conjuncture where there could be a once-in-a-lifetime shift in banker remuneration. As I hear, the real story on dealing room floors is how low the bonuses are, and the absence of bargaining power from superstar traders pulling hissy-fits.

To be clear, the rewards are still six-figure, but there are plenty of bankers getting the dead duck – a zero bonus, and one less digit on their pay packet. For this to be a significant change, all the banks would have to go together.

It is a dynamic that should have kicked in in 2009, when the banks were bailed out, but US investment banks refused to play ball with City efforts to rein in banker pay. Angry US CEOs rang Alistair Darling making threatening noises over UK bond purchases.

Let’s see in the numbers, but as one big bank CEO told me during the failed 09 attempt to rein in bonuses, it’s in society and the shareholder’s interests to pay bankers less.

The dire outlook for the economy is outlined ahead of tomorrow’s GDP figures too. It’s not just the £1tr debt pile, or the 15-year-high in unemployment, or the fact that the IMF downgraded UK projected growth by a full percentage point (the UK will be slowest growing major economy outside the eurozone). In this speech, the BoE appear to be buying into the story of Britain’s painfully slow recovery as a result of a “balance sheet recession”.

George Osborne has used that phrase before too, and it’s most closely associated with the thinking of Japanese economist Richard Koo.  Koo is very down on quantitative easing, and blames premature deficit reduction for Japan’s malaise, pointing out that plans to halve the deficit in Japan collapsed the economy and doubled it instead.

Sir Mervyn does not follow that logic train. There’ll be some  relief that the public finance numbers show core Whitehall spending coming down. The question is just how much will spending on the automatic stabilisers: higher unemployment benefits etc, wreck that maths.

Read the speech, it’s only six pages long. More from Davos tomorrow. We have a big interview tomorrow too.

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