There are a swathe of articles in the press today, concerning RBS:
This is the way The Times puts it:
The Treasury signalled last night that it was prepared to veto a £1.5 billion bonus pool at Royal Bank of Scotland in a move that could trigger the resignation of the bank’s board.
RBS directors have been advised by the bank’s lawyers to resign if a Treasury bonus veto means they are unable to run the bank commercially and in the best interests of all shareholders.......
Ronnie Fox, principal of Fox Lawyers, said: “If you are put in a position where you can no longer do the job you are paid to do then I cannot see how you can remain in place as a director. I would advise the board of RBS to resign in this situation.”
Vince Cable, the Liberal Democrats Shadow Chancellor, said: “I would welcome their resignations. The bank cannot hold the taxpayer to ransom.”
The Treasury has intervened directly to demand the right of veto over this year’s bonus payments at the bank, which is 70 per cent controlled by the taxpayer.
Institutional shareholders have raised concerns that restricting RBS’s ability to make reasonable bonus payments this year will impede the bank’s ability to compete commercially and retain top bankers next year. Investors have urged Stephen Hester, the chief executive, to drive a hard bargain with the Treasury over the final size of the bonus pool.
RBS said last night: “Our agreed business plan requires us to operate commercially in competitive markets and this plan underpins the prospects of recovering value for taxpayers and other shareholders alike. We understand and embrace the need to ensure pay meets the new G20 and Financial Service Authority requirements and will continue to advocate this and other ways to address public concerns relating to banks and always pay on the principle of no rewards for failure.”
One shouldn't underestimate the seriousness of this situation. This is a potential LOSE-LOSE of massive proportions! The Government is applying pressure because of the expectations they have been wrongly stoking in the public.....all the populist rhetoric about "greedy bankers" is now on the verge of revealing some very serious consequences - and even the otherwise pretty reliable Vince Cable seems not to have grasped the problem this time!
Peston puts the situation well:
The board believes that up to half the intrinsic value of the bank is in its investment bank. So if the chancellor were to veto bonuses which the directors believe to be essential to preserving that value, they would be under a legal obligation to quit - because they would be prevented from taking actions they perceive to be in the interests of shareholders.
It is understood that Royal Bank's chairman, Sir Philip Hampton, argued to the chancellor that he was playing with fire by insisting on the final say over bonuses.
Mr Darling now has the appalling choice of either approving bonuses that will be described as grotesquely unfair by opposition parties and by many voters, or of sparking a crisis at RBS by prompting the mass resignation of directors.
I am in no doubt at all that the RBS board is right to take the view it is reported as taking! The board has a responsibility to look after the interests of shareholders - and it seems very clear to me that encouraging the most successful staff to walk out of the door will be very destructive - not least because it would demonstrate that governments cannot be trusted to act responsibly when they own banks!
There is, of course, a very neat finesse available to the government.......
.....and that is to impose a one-off windfall tax on the profits of ALL banks for 2009.
I would argue that 2009 has been an extremely exceptional year and, whilst I am opposed in principal to the idea of windfall taxes on banks (or any other businesses which happen to take the eye of Governments), I think there is a real case in logic for saying that global banking profits in 2009 have derived almost entirely from the actions of governments in bailing out the failing banks .....ie from the liquidity pumped into the financial system and from the record low interest rates. Bankers simply COULDN'T FAIL to make money in that environment! Anyone in banking who has made money has been able to do so directly because of the taxpayers' efforts to prevent a failure of the banking system.
Therefore the great majority of profits booked in the profitable parts of banking industry in 2009 have been paid for (in a VERY direct and unprecedented way) by the losses racked up in other parts of the banking industry - for which taxpayers have been footing the bill.
So - my solution to this would be a one-off (and it MUST be a genuine one-off!) windfall tax of about 50% of the profits of all banks in 2009......
....and if the Government doesn't go down this route, then it surely faces the choice between looking politically inept (not difficult - especially as they've unnecessarily ramped up the anti-banker rhetoric!) or directly causing further multi-billions value destruction in the state-owned banks!