Debating Michel Barnier on Bank Bonuses

Today, Michel Barnier, EU's financial services commissioner proposed that "banks use moderation in setting bonuses while the economy suffers." The problem with this, as raised by The Economist, is that taxpayers now hold such a high stake in the banking system from bailouts. Retaining top talent to innovate our way out of this mess will provide a good return:

The right approach towards bonuses has three struts. First, the value of the state-owned stakes should be maximised. That means paying for good managers to clean up these firms: the boss of RBS, though pilloried for his pay packet, is making a decent fist of things. About a third of RBS’s value sits in its investment bank. To maintain its worth it must compete to retain staff against foreign banks that are not subject to pay limits. A ban on high pay would thus leave taxpayers poorer. -The Economist

 However, Barnier and others can argue that at this point, top talent is lucky to even have a job in finance; and with knowledge of job cuts, it makes sense for employees to step up anyway. In support of the contrary to bank bonuses, The Financial Times paints bankers as gamblers who operate in a system in which 'profits are privatized and losses are socialized':

High bonus payments are a symptom of a problem, not its cause. The banking settlement was deficient because it did little to address the asymmetries in the universal banking business model. This model causes investment banks to jeopardise global financial stability in bad times whilst allowing bankers to cream off film star compensation in the good times. The global reforms have done a bit to improve financial stability but almost nothing to constrain the profitability that produces the bonuses. That profitability arises from a business model that gives banks in general and investment banks in particular the best possible view of global economies and markets. They are able to use this information advantage to load the dice and generate super-profits. This is where the bonuses come from and this is why the banking lobby worked so hard and so successfully to defend the model. -FT

It's important to note that Barnier was just appointed by French President Sarkozy as the European Commissioner of the Internal Market - including the financial system. The UK and France have crammed down on bank bonuses the hardest in the EU with a tax on extra pay, and rhetoric supporting public distrust in the banking system.

Barnier is described by his previous colleagues as a lightweight, having the charisma of an oyster, and not well respected - perhaps some reasoning why Dantes Outlook features him on our first debate series.

What's your stance on bank bonuses? Leave a comment.

Source: Bloomberg