Bankers' pay is high because there's too much money in the finance sector

The EU's attempt to cap banker's bonuses trundles on. But it's misdirected, writes Alex Hern.

As predicted, George Osborne made a last-ditch attempt yesterday to prevent the EU's cap on banker's bonuses being institutedtelling the convention of finance ministers that he "cannot support the proposal on the table". Despite the suggestion from Germany of a minor tweak to the proposals, apparently to give Osborne the chance to claim he'd won concessions, the Chancellor continued with his opposition, and so Britain remains the only EU nation not in favour of the cap.

There is still some fine detail left to be negotiated over the next few weeks, so if Osborne doesn't want to make the politically significant choice of being explicitly out-voted by the EU for the first time on this issue he could change his stance; but, as the Guardian's Ian Traynor writes, "there was no doubt that the central decision, to clamp down on bonuses, was irreversible".

Now that victory is within their grasp, some in Europe are looking to the next battle. The Telegraph's Louise Armitstead and Bruno Waterfield report that Spain's finance minister, Luis de Guindos, is looking at applying the same rules to salaries overall:

“We are very much in favour of the limitation on variable remuneration but that’s not the only issue,” he said. “The question is also the entirety of remuneration, which is sometimes more important. And Spain’s position is that shareholders’ meetings must have a major involvement and should decide the overall remuneration of bankers.”

De Guindos' plan hints at the real aim of the bonus cap. As I wrote last week, there are a number of possible targets, and the cap is flawed at achieving any of them. It will do little to affect the balance of risk in the system; little to affect the overall remuneration of bankers; and, since bonuses are more of a historical artefact than a considered motivation to action, there's not really any reason to think that they actually have any effect from the start.

It's clear from de Guindos' words that at least some of the support for capping bonuses comes because it's seen as an easy way to reduce the pay of bankers; and that now that that's done, the salaries should be next in line.

But as the Guardian's Zoe Williams discovered, the money has to go somewhere. Tim Simons, "who works in operations for a government-owned investment bank", makes the point to her:

"When a bank makes money, it either pays to its employees; or it pays to its shareholders – the wealthy, I call them."
"But aren't the employees wealthy too?"
"No, traders aren't wealthy, they're just well-paid."

For similar reasons, I've heard bankers refer to their profession—with tongue firmly in cheek—as the ultimate victory of Marxism. It is, after all, an industry in which the workers have successfully captured nearly all the surplus value they create.

Simons seems correct that the trade-off the banks face is between handing money to employees or shareholders. Take this, from 2005 but still relevant:

During in the past four years, securities firms in the US paid $7bn more in bonuses than they made in profits, $3bn more in 2004 alone… And compensation stays high even when profits are down. When J.P. Morgan admitted to bad bets last month, it slashed its net income for the second quarter. But during the same period, it paid employees more than $4bn, as it has in each of the past four quarters. On average, shareholders got just one dollar $1 for every $4 paid to employees.

But what that highlights the real problem for people who feel that bankers' pay is inequitable, distortionary, or in some other way problematic: ultimately, the pay is just a symptom of the fact that banking is an extraordinarily profitable industry.

In the US, finance accounts for just 8 per cent of GDP, but almost 30 per cent of corporate profits:

Noah Smith, examining why that might be, suggests that banking as a sector has naturally enormous economies of scale, and very few diseconomies. Put them together, and the tendency toward monopoly in finance is even greater than it is in capitalism generally. And so banks gain monopoly (or, more accurately, oligopoly) status, and can extract monopoly profits.

That even fits with what Simons told Williams. His dichotomy— "money goes to the employees or the shareholders"—misses the fact that banks could use that money sloshing around to boost the amount they pay savers, lower the interest rate they charge on loans, or reduce the fees and charges they levy on customers. (That applies just as much to investment banking as conventional retail banking). In a competitive industry, that's what would happen; but finance isn't a competitive industry.

The vast sums of money floating around the system have to exit it somewhere. High pay—and high pay in the city particularly—has a corrosive effect on the nation, but to tackle it without addressing the anticompetitive nature of the finance sector overall is prescribing painkillers to heal a broken arm.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Jeremy Corbyn sat down on train he claimed was full, Virgin says

The train company has pushed back against a viral video starring the Labour leader, in which he sat on the floor.

Seats were available on the train where Jeremy Corbyn was filmed sitting on the floor, Virgin Trains has said.

On 16 August, a freelance film-maker who has been following the Labour leader released a video which showed Corbyn talking about the problems of overcrowded trains.

“This is a problem that many passengers face every day, commuters and long-distance travellers. Today this train is completely ram-packed,” he said. Is it fair that I should upgrade my ticket whilst others who might not be able to afford such a luxury should have to sit on the floor? It’s their money I would be spending after all.”

Commentators quickly pointed out that he would not have been able to claim for a first-class upgrade, as expenses rules only permit standard-class travel. Also, campaign expenses cannot be claimed back from the taxpayer. 

Today, Virgin Trains released footage of the Labour leader walking past empty unreserved seats to film his video, which took half an hour, before walking back to take another unreserved seat.

"CCTV footage taken from the train on August 11 shows Mr Corbyn and his team walked past empty, unreserved seats in coach H before walking through the rest of the train to the far end, where his team sat on the floor and started filming.

"The same footage then shows Mr Corbyn returning to coach H and taking a seat there, with the help of the onboard crew, around 45 minutes into the journey and over two hours before the train reached Newcastle.

"Mr Corbyn’s team carried out their filming around 30 minutes into the journey. There were also additional empty seats on the train (the 11am departure from King’s Cross) which appear from CCTV to have been reserved but not taken, so they were also available for other passengers to sit on."

A Virgin spokesperson commented: “We have to take issue with the idea that Mr Corbyn wasn’t able to be seated on the service, as this clearly wasn’t the case.

A spokesman for the Corbyn campaign told BuzzFeed News that the footage was a “lie”, and that Corbyn had given up his seat for a woman to take his place, and that “other people” had also sat in the aisles.

Owen Smith, Corbyn's leadership rival, tried a joke:

But a passenger on the train supported Corbyn's version of events.

Both Virgin Trains and the Corbyn campaign have been contacted for further comment.

UPDATE 17:07

A spokesperson for the Jeremy for Labour campaign commented:

“When Jeremy boarded the train he was unable to find unreserved seats, so he sat with other passengers in the corridor who were also unable to find a seat. 

"Later in the journey, seats became available after a family were upgraded to first class, and Jeremy and the team he was travelling with were offered the seats by a very helpful member of staff.

"Passengers across Britain will have been in similar situations on overcrowded, expensive trains. That is why our policy to bring the trains back into public ownership, as part of a plan to rebuild and transform Britain, is so popular with passengers and rail workers.”

A few testimonies from passengers who had their photos taken with Corbyn on the floor can be found here